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The UAE’s Macroeconomics

Free Essays of Economics
The UAE’s Macroeconomic Background

Macroeconomic principles involve the study of the indicators that have the potential to influence the economic growth of a country. Unlike microeconomics, which focuses on price, demand, and supply, macroeconomics concentrates on the national parameters of gross domestic product (GDP) and its sub-measures, inflation and unemployment rates, fiscal and monetary policies such as interest rates and household incomes as well as national investments and savings (Case, Fair, & Oster, 2012). The United Arab Emirates (UAE) is a country with an economy that experiences the forces of macroeconomic parameters, which makes it suitable for this study. Although the measures of macroeconomic indicators are numerous, this analysis of the UAE as a case study focuses on inflation versus unemployment rates, fiscal and monetary policies, national income and production, and business cycle in relation to economic growth.

The UAE is predominantly an oil-producing country, thereby a fairly positive GDP per capita is registered here. However, the growth of GDP is mainly attributed to the increased diversification to other sectors of production such as manufacturing and service industries. Moreover, the country increasingly diversifies its energy sources to renewable types to reduce its overreliance on the oil and gas alone. With about only 10 million people, the UAE experienced a GDP growth of 2.85% in 2016, with the increase to 3.10% in 2017 and the projection of 3.60% in 2018 (Team KT, 2017). Trade provided the majority of the national income (28%) in 2016, followed by warehousing and transport and financial services at nearly equal levels of 12% and 11% respectively (Team KT, 2017). Nevertheless, others sectors of the economy, such as local tourism, real estate, and manufacturing, would increase by 5%, 4.3%, and 3.3% in 2017 respectively (Team KT, 2017). Therefore, these data justify the country’s economic diversification from oil and gas as the move appears to bring positive consequences eventually.

Even in the immediate earlier years, the economy of the UAE was promisingly good. According to Focus Economics (2017), for instance, the 2015 results were encouraging. Firstly, the country’s GDP per capita stood at $37,743 even though this was a decline from the better figure of 2014 at $42,336 (Focus Economics, 2017). In fact, the annual economic growth rate by GDP percentage moved from 3.1 to 3.8 from 2014 to 2015 (Focus Economics, 2017). Secondly, a negative consumption to -13.1% was registered, and this was enough to boost investments to 4.3% (Focus Economics, 2017). However, the rate of investment reduced by nearly half (from 8.3% in 2014 top only 4.3% in 2015) (Focus Economics, 2017). Nevertheless, during the same period, manufacturing growth rate nearly doubled, from 2.9% in 2014 to 4.4% in 2015 (Focus Economics, 2017). Despite the growth in manufacturing, unemployment rate remained steady at 3.8% in 2015 from 4.0% in 2014 (Focus Economics, 2017). Thirdly, inflation rate increased slightly from 3.1% in 2014 to 3.6% in 2015 (Focus Economics, 2017). Lastly, the balance of trade remained positive in between 2014 and 2015 at $28 billion and $76.6 billion, thereby signaling a nearly halved production in 2015 (Focus Economics, 2017). Moreover, other fiscal policy parameters, such as interest rates, remained stable at 1.0% for the last four years (between 2011 and 2015) (Focus Economics, 2017). These figures show the situation in the UAE’s economy over the last couple of years.

Main Objectives of Macroeconomic Policies

Macroeconomic policies are mainly aimed at fostering the economic growth of a country. This growth is achieved by preventing financial crises through the stabilization of the economy by enabling improvement in productivity. An economy is stabilized against financial crises through sound monetary and fiscal policies such as bank interest rates as well as currency exchange rates (Case et al., 2012). However, the productivity policies, such as savings and investment, enable a country to grow economically. Investments focusing on production or national output usually lead to improved balance of trade that consequently leads to increased national income (Case et al., 2012). Sometimes, these factors would appear antagonistic in realizing given economic outcomes. For instance, an increase in bank interest rates can reduce the ability of local commercial banks to borrow from the central bank and lead to businesses and individual traders reducing the ability to invest and create jobs (Case et al., 2012). On the contrary, a low central bank interest rate can influence high profits by the commercial banks, amid no law to regulate consumer lending rates, thus leading to a lowered business borrowing and investments, which decreases job creation (Case et al., 2012). As a result, a critical balance in applying any macroeconomic policy must always be availed to ensure that only positive economic outcomes occur.

In the UAE, the main focus of macroeconomic policies is to support the economic diversification from oil and gas, especially into the manufacturing and service industries. Therefore, bank interest rates for the projects that deal with manufacturing and alternative fuels have preferences over those going into oil and gas (Dubai Chamber of Commerce, 2017). However, the country balances its interest in the emerging economic sectors and its primary source of income of oil and gas to ensure a smooth transition and stable economy. Hence, while wind and solar energy have preferences, the oil and has trade is still under strict monitoring to ensure maintained supply of the foreign exchange needed for local production for export in manufacturing (Dubai Chamber of Commerce, 2017). In fact, the UAE has focused on the growing industries, namely local tourism, real estate, and manufacturing. Nevertheless, the country realizes that it has to overlie in foreign direct investment that has moved its external debt to nearly non-sustainable levels of over 60% of the GDP as of 2018 (Dubai Chamber of Commerce, 2017). As it can be seen, a stable economy requires balance between its traditional and emerging sectors.

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The UAE’s National Outputs, National Income, Inflation, and Unemployment

Productivity in the UAE has been nearly steady for the past 10 years. According to The World Bank (2017) data, the level of national production has increased since a slight slump between 2009 and 2012 to date, as seen in Figure 1. In fact, the period of this slump follows the famous global financial downturn of 2008-2012. This economic crisis may have influenced the UAE in two ways. Thus, the value of its primary produce, namely oil and gas, reduced so much that the income from the products declined in line with the expenditure of the country, and the exchange rates for its currency devaluated due to the reduced demand for the oil and gas in monetary amounts (Case et al., 2012). Hence, the level of production before the global financial crises between 2006 and 2008 also steadily improves, as seen in Figure 1. Nevertheless, the economic outputs of the UAE have seen a constant improvement on average, as shown by the best line of fit in Figure 1, thereby promising improved output levels in the near future if the same trend continues uninterrupted. Indeed, the World Bank (2017) indicates that the increase in production between 2015 and 2016 alone is over $23 billion, while that between the preceding pair of years is over $31 billion, which shows an interrupted rise in production over the years.

The pattern of the UAE’s national income appears to follow that of production. However, the end is slightly different. Although the values for 2016 are missing from the World Bank (2017) data, the last nine years since 2007 show that the income of the country has had two occasions of reduction in 2009 and 2015 respectively. Interestingly, the income levels increased steadily since the slump in 2009, as seen in Figure 2. Therefore, this fact proves the nation’s resilience to the global economic recession of 2008-2012 in regards to revenue generation. The long-run increase in national income occurred between 2009 and 2014 before another slight reduction in 2015, as seen in Figure 2. In fact, the 2015 reduction may have followed the global fluctuation in oil prices due to the rampant humanitarian crises in the Middle East. Nevertheless, this is a mere speculation as the UAE could also have regulated its oil production to monitor price fluctuations regionally or globally. However, alternative economic sectors, such as the international tourism, grew in the UAE by 5%, above the global mean of 4% and against an average in the Middle East that declined by 4% (Team KT, 2017). Evidently, the growth of secondary sectors of the economy, namely trade (28%), warehousing and transport (12%), and financial services (11%), as given by Team KT (2017), could have influenced the increase in production between 2009 and 2014. The realization of production in 2016, remains unknown due to lack of data from the World bank (2017), which makes future projections also difficult.

The inflation rate in the UAE has seen fluctuation since 2006. From 2006, it increased until 2007 before reducing drastically to 2009, as per Figure 3. However, it skyrocketed afterwards until 2010 and remained steady to 2011 before reducing significantly to 2.5% in 2013, as per Figure 3. The rate only saw a slight increase to 2014 before moving to negative values in 2015. In 2016, the rate of inflation in the UAE was nearly -5.0%, as given in Figure 3. The implication of fluctuation of inflation rate is that there is less value for money since supply in the economy surpasses demand. The value for money may be too low as the result of higher than necessary levels of fluctuation. As a result, the central bank needs to increase its lending rates to tame the amount of money in fluctuation (Case et al., 2012). Similarly, the prices of consumer goods usually rise during inflation as the result of the lower value of money as traders try to adjust prices upwards to compensate for the lost value of money. However, eventually, the situation merely raises the cost of living for citizens instead of solving the problem (Case et al., 2012). The UAE, evidently, requires strict monetary policies and government investment plans that stabilize the amount of money in supply to tame inflation rates.

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Despite the UAE’s fluctuating inflation rate, its unemployment rate has remained stable at less than 5% for the last 10 years, as seen in Figure 3 above. Therefore, unemployment is one of the lowest in the world as the number of workers is less than the job market requires (Case et al., 2012). Nevertheless, the country needs to move to zero unemployment through increased local investment by the government and the private sector players in the manufacturing and service industries. An increase in government investment instead of savings, as Case et al., (2012) explain, leads to increased job opportunities through the creation of new activities. The latter require various experts to introduce them in the industries linked to the sectors where local investments are made.

The UAE’s Macroeconomics, Business Cycle, and Economic Growth

The UAE’s macroeconomics has mixed fortunes for the local businesses and the economy. While businesses might have to rely on imported raw materials for the manufacturing, the macroeconomic aspects of foreign exchange rates, the global prices of materials, and the ability of the local economy to afford them might influence businesses (Dubai Chamber of Commerce, 2017). In the end, the secondary production, such as financial services, would thrive better than the primary production of minerals oil and gas. Hence, further investment must be channeled to the secondary sectors of the economy, such as service businesses of hotel and restaurant, real estate, and banking, to ensure a faster business turnover that benefits the economy through rapid reinvestments for economic growth (Case et al., 2012; Dubai Chamber of Commerce, 2017). Otherwise, the country will be stuck in the stagnant economic sectors, such as the production of oil and gas, while these are, in fact, non-sustainable.

Two key macroeconomic indicators raise alarm for the UAE’s ability to manage its business cycles properly. The first indicator is highly fluctuating inflation rates. These inflation rates mean that the economy of the country is quite unpredictable, which negatively affects possible increase in foreign direct investments, needed to spur the local manufacturing sector (Case et al., 2012; The Prospect Group, 2012). Secondly, its GDP appears to follow the global economic downturns, which implies that an external financial crisis is likely to influence the economy of the country. As a result, even local investors may find the country too risky to invest in due to the high vulnerability to external economic shocks (Case et al., 2012; The Prospect Group, 2012). Consequently, the country needs to impliement proper monetary and fiscal measures to stabilize the economy against fluctuations in inflation as well as the influence of global recessions (Case et al., 2012). The inability to follow the suggestion would mean a reduced chance of realizing economic growth.

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The Impact of Fiscal and Monetary Policies on the UAE

The UAE has main fiscal policies that influence it economy, namely a high appetite for foreign direct investments and external debts. Foreign direct investment has helps the UAE expand its manufacturing and other alternative sectors of the economy to diversify from the mainstream oil and gas industries (Dubai Chamber of Commerce, 2017). However, the negative implication of the foreign direct investments remains as they drain the profits made in the local investments to the foreign nations of origin, which causes an unfavorable situation with foreign currency reserves locally (Case et al., 2012). The UAE can counter this negative effect of foreign direct investments by having moderate legislation that ensures that a significant amount of the proceeds from foreign businesses is reinvested locally. The 60% external debt in the UAE is another issue for the macroeconomic and its economic growth (Dubai Chamber of Commerce, 2017; The Prospect Group, 2012). The implications of large external debts are twofold. The first problem is that they are repaid with interests that drain the local government’s revenues. Then, they are given and repaid in foreign currencies, which leads to their further withdrawal from the local reserves (Case et al., 2012; The Prospect Group, 2012). Therefore, the country must follow prudent foreign reserve policies that ensure that it remains with sufficient foreign currencies for its import needs in the short and long term. Finally, the monetary policies, as Case et al. (2012) explain, of base lending rates should remain low to facilitate the lending by the commercial banks to business in the retail and wholesale sectors and manufacturing.

Conclusion and Recommendations

Macroeconomic parameters are vital to any country’s economy in realizing stable positive outcomes that support its growth. In the UAE, the macroeconomics of GDP growth rate, unemployment rate, inflation, foreign direct investments, government investments, and national income show positive economic outcomes. However, inflation rates, external debts, and the business cycle are unfavorable as they show an unstable economy. As a result, the UAE must practice sound monetary and fiscal policies that include the restriction of external debt to utmost 50% of real GDP, restricting foreign direct investment that repatriates all profits, and reviewing base lending rate by its central bank to stabilize cash float in the economy against inflation (Case et al., 2012). Ultimately, the country’s economy would grow when these measures are enacted amid maintaining other positive macroeconomic indicators.

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