Economic Policies in UAE ‘s Domestic and International Setting

Economic Policies in the UAE

Executive Summary

The aim of this report is to examine the impacts of economic policies in the domestic and international setting in UAE. These economic policies are broadly categorized into fiscal and monetary. The paper also captured the different strategies the UAE has adopted to boost its economy amid the global COVID-19 pandemic. The report’s analysis indicates that expansionary fiscal policies in the UAE have contributed to its economic growth through optimal government funds allocation. The UAE adopted fiscal policy tool by increasing government expenditure to boost its economy. Additional report results indicate that the occurrence of a natural disaster such as COVID-19 negatively affects the economy and appropriate fiscal and monetary policy mix to cushion the economy from adversities. Lastly, the UAE can attain a competitive advantage in the international setting by improving its domestic condition economically, politically, and socially. This is because there is a link between domestic economic growth and global economic growth of a country.

Introduction and Background

Countries have the responsibility of monitoring and aiding their respective economies by use of appropriate financial policies. These policies are set by the countries’ governments independently or jointly with the help of monetary institutions. These policies aim at giving countries a competitive advantage in the global market through remarkable economic performance (Farahani, 2019). Globalization has been a wake-up call to numerous countries to improve their economies through different economic policies. Economic policies are divided into monetary policies and fiscal policies (Sloman et al., 2018). These policies affect international trade by acting as control variables for global trade volume and benefits obtained from trade (Harris and Kulkarni, 2004). For instance, expansionary monetary policies such as reduced interest rates promote borrowing, stimulating investment and production for export.  Such policies make production cheaper hence on a large scale. The country can specialize in producing a commodity that it has a comparative advantage in and import costly products in terms of production (Carbaugh, 2018). By adopting such monetary policies, a country can obtain the benefits of trade.

This report aims to analyze the various economic policies used by the UAE to boost its economy. The UAE is one of the countries in the world with emerging and growing economies. The country’s success is attributed to the availability of numerous resources, high levels of education, and high level of income (Schiliro, 2013). The country has also maintained strong relationships with other countries (Weal et al., 2018), thus enjoying the fruits of globalization in the form of an increased volume of trade among themselves. The country has attained these economic growth levels and development on account of suitable monetary and fiscal policies. These are the diagnostic tools for measuring the health of a country’s economy. The paper will assess the nexus between economic policies and volume of trade in the UAE and provide policy recommendations to help the country attain further success.

UAE’S Fiscal Policy 2020

Fiscal policies are government-associated economic tools that directly impact the gross domestic production of a country because they contract or expand the gross domestic product, consequently affecting the volume of trade in a country (Gondor and Ozpence, 2014). The primary fiscal policies used by governments of different countries are; increase or reduction in taxes and government spending (Sloman et al. 2018). Fiscal policies significantly help a country evade the adversities of unfavorable global economic conditions such as the global financial crisis in 2008. This particular economic crisis led to a recession in the UAE. According to Ibrahim (2019), an increase in government spending positively affected the economy and helped shield the country from the effects of the recession.

In the UAE, as of the year 2020, according to data provided by the United Arab Emirates Ministry of Finance (2020), the country made legal approvals of a zero-deficit budget of AED 61.35 billion. A zero-deficit budget indicates that the government would finance its budgetary needs primarily on its resources and depend on no borrowing. The significance of such a strategy is that the adverse budget deficits account for an economically strong country with vast resources allocated optimally. The country avoids domestic and external borrowing, which would eventually cost its economic growth and development because of huge costs incurred in servicing debt. The federal budget of the UAE in 2020 indicated an increase by close to 2% compared to the fiscal year of 2019. The budget was later allocated to various parts of the economy to improve the country’s social-economic and political sectors. All these sectors are interlinked and require proper management to create an appropriate driving force for the country’s success and prosperity. A third of the budget was allocated to social development, the other third allocated to government affairs. Lastly, the remainder allocated infrastructural development, economic resources boost, and social benefits (United Arab Emirates Ministry of Finance, 2020). Optimal budget allocation in a country is dependent on substantial financial analysis and decision making to create balanced economic and social development in a country (Mansour,2010). Basing on the budget allocation of the UAE, various integral tenets of the country have been covered by the budget; hence the UAE is likely to experience balanced economic growth and development.

The UAE government has adopted the singular fiscal policy of increasing government expenditure to strengthen its economy based on its allocation and the increased federal budget. This particular section of the report will analyze and appraise this fiscal policy tool to determine the benefits to UAE’s economy. Budgetary allocation towards social development entails the UAE government increasing its expenditure towards improving components that directly impact citizens’ welfare and living standards in the UAE. These components are developing human capital such as health and education; and investing in improving both the environment’s natural and physical elements (UAE, 2021). Increased spending on human capital plays an integral role in promoting remarkable economic growth levels in a country (Shafuda and De, 2020). Human capital is composed of essential products that contribute to a country’s productivity when adequately managed. Increased education expenditure and training in the UAE lead to improved quality of labor force needed for production. The UAE has experienced growth levels in employment in various sectors of the economy based on the quality education provided in the country. According to UAE’s Human Development Report, citizens’ mean life expectancy has increased due to investment in the healthcare sector to promote good health and well-being (UAE, 2021). These are integral components that guarantee the economy’s economic growth measured in terms of productivity. A fiscal policy tool aimed at promoting environmental sustainability is explained by the government’s environmental subsidies in terms of funds and resources to promote innovation and conservation of the environment (Elshamy and Ahmed, 2017). The UAE increased its expenditure on environmental conservation in 2020 to AED 329.175 million to create a balance between production and conservation (UAE, 2020). The country’s future strategy is to promote green energy in the country by the year 2021. Consumption and production influence environmental sustainability; hence there is a need to create an equilibrium between consumption, production, and natural resources to attain economic growth (Cumming et al., 2018). Therefore, expansionary fiscal policies towards social development significantly affect economic growth.

Secondly, to determine the benefits of increasing government expenditure towards government activities can be explained by creating a link between institutions and economic growth. Government institutions under different ministries are important in pushing growth and developmental activities in the country. Expenditure on government institutions provides the incentive for innovation for proper service delivery, increased integrity of the law, improved policy-making for a country’s internal and domestic performance, and political stability (Yildirim and Gokalp, 2016). Budget expenditure on government affairs in the UAE would help the new country services to the society characterized by innovation and technological development and achieve justice for all citizens (Waheed, 2020). Based on the literature review, the country will attain economic prosperity based on increased government institutions’ increased productivity.

Lastly, expenditure on infrastructure development, economic resource boost, and social benefits would positively impact on UAE’s economy in various ways. The components allocated funds to by the UAE government can be categorized into social overhead and economic overhead investments. The economic overhead investments are infrastructure development and economic resource boost, while social overhead investments are the social benefits. Economic overhead costs directly impact the productivity of the country (Shadmanov, 2015). Infrastructural development enhances proper transport and communication necessary for trade, investment, and less costly production. These benefits contribute to economic growth through increased national productivity in the UAE. Economic resource boost enhances optimal use of resources for production to meet growing demand and surplus exported to earn the country revenue. Availability of resources promotes investment necessary for capital formation and high levels of income among the UAE citizens. Providing social benefits such as incentives and subsidies on education and health encourages the well-being of UAE citizens. Literacy levels among citizens will grow hence the development of essential skills for employment and entrepreneurial activities. The fiscal policy structure adopted by the UAE indicates that the country will attain desirable economic growth. However, policymakers and the government need to balance the fiscal policy implemented to eliminate economic disequilibria.

UAE Government and Economic Revival during COVID-19 Pandemic

There is a relationship between the occurrence of a disaster and the economic performance of a country. Global and domestic disasters affect economic growth and development by distorting supply and demand. In the long run, persisting global and domestic disasters beyond human control that leads to recession (Panwar and Sen, 2018). For instance, the global pandemic Covid-19 has negatively affected critical sectors of the UAE’s economy. The country’s success has been attributed to its constant economic prosperity. A natural calamity such as Covid-19 would prompt countries to revive the economy and cushion it from a looming recession. The Covid-19 pandemic has signified the importance of health in contributing to economic growth. The relationship is explained by the effects of a disease on the productivity of a country. The global pandemic has claimed lives, and its prevalence reduced productivity among countries’ labour force.  The disease has greatly hindered further globalization due to strict government rules against movement and national borders’ closure. The results have been delayed supplies and shortages in production. Unemployment has increased amid the pandemic due to the closure of businesses and reduced demand. Capital formation has been a problem due to unemployment.  The UAE is dependent on international trade, especially outsourcing factors of production such as labor and raw materials. The country exports oil and other products to trading partners. Oil prices have been seen to plummet with the occurrence of Covid-19. This particular economic setback reduces the country’s benefits and creates imbalances in the balance of payments of the UAE.

This particular section analyses various ways the UAE government can revive the economy and shield it from further adversities of the disaster. The country would adopt an appropriate fiscal and monetary policy mix to safeguard the economy during such global calamities. The UAE is heavily dependent on oil as a fuel source and a traded commodity in the global market. The pandemic has rendered this particular commodity valueless due to strict movement measures globally to help curb the spread of the disease. To counter such adversities, the UAE has started investing in green renewable energy to diversify its fuel sources and export commodity (Alshamsi, 2020).  The fiscal policy plays an important role by increasing government expenditure towards innovation to establish green energy products and economic resource boost. The diverse product portfolio for trade increase revenue for the country and eliminate the balance of payments deficit. The country has invested in digitalization in the labour sector by creating artificial intelligence aided work and encouraging knowledge-based education to sharpen its citizens’ skills and help curb unemployment (Alshamsi, 2020). Digitalization of labour has enhanced flexibility at work where individuals conveniently work from home amid the pandemic. An opportunity manifests itself to the country in massive technological evolution to solve economic problems and prepare for any future setbacks. Technological advancements and innovation attract foreign direct investment in the UAE, thus increasing its revenue. The UAE has adopted a 0% interest rate on borrowing by commercial banks to encourage lending in the economy. This particular monetary policy encourages borrowing for consumption and investing, thus boosting the economy from low productivity and consumption. Interest rates influence savings and investment (Mushtaq and Saddiqui, 2016). These factors are integral components of a country’s gross domestic product and represent positive injections into a country’s economy.

Lastly, the Covid-19 pandemic started by negatively affecting the health sector, causing intensive pressure and health resources stress. Consequentially, the disease burden has been transferred to the UAE government. However, the global pandemic has provided the UAE an opportunity to invest in its healthcare sector by increasing expenditure to provide social benefits and promote social development. The country has allocated resources and funds to develop healthcare infrastructures such as hospitals’ construction and digitalizing medical procedures. UAE has further invested in research to establish cures and treatment of various diseases. The UAE has adopted a monetary, fiscal policy mix to help its economy recover amid the Covid-19 pandemic. Based on the arguments discussed in the analysis, it is evident that a country, through various institutions and bodies, must correct various economic adversities and ensure economic prosperity. The Covid-19 pandemic should be an opportunity for various countries to shut economic loopholes and be ready to handle any adversities originating from future global or domestic shocks.

Economic Policies in the UAE and Economic Growth in the International Setting

A country’s economy in the global arena is determined by the level of strength and success in its domestic economy to form a base for leveraging globalization’s benefits. A country will add value and gain from globalization when it has the necessary software and hardware for international economic activities. The hardware and software are a combination of good policies and essential resources. The UAE is a country that plays an integral role in the global market by being a consumer and supplier of goods and services. To fully experience economic growth in the international setting, the country will require remarkable economic policies. First, the country is required to strengthen its foreign policies towards trade enabling policies. Creating lasting relationships between countries is a sure way of engaging in beneficial trade (Spohr and Da Silva, 2017). UAE can have trade promoting policies such as reducing quotas and tariffs to encourage international trade. However, this particular should be used optimally to eliminate the balance of payment deficit. Secondly, the UAE should have economic policies such as government expenditure on import substitution products. The country could use the comparative advantage theory to determine the cost of producing the products it imports to sourcing these products from other countries (Pugel, 2019). Economically viable import substitution projects would benefit the country by first creating local employment and boosting production. The country would have surplus products to export and earn foreign revenue. Eventually, UAE’s balance of payments would be favorable, thus promoting economic growth.

Thirdly, the UAE can use monetary policies that influence its currency exchange rate to favor foreign direct investments and domestic exporters. The country should create a balance while influencing monetary policies directly related to the exchange rate. An appreciating domestic currency against other trading partners reduces exports and increase imports; on the flip side, a depreciating domestic currency reduces foreign direct investment. Therefore, policymakers need to use an optimal monetary policy to create an exchange rate that would benefit the country and trading partners.

The UAE can also create product and service diversification to have numerous products and services for export in its portfolio. Diversification is dependent on the availability of unique natural resources not available in other countries and the level of technological innovation used to improve the quality of services and products. The availability of unique resources gives the country an incentive to manufacture products for local and international use. Technology aided production encourages foreign direct investment and export of technological resources to other countries. These are multiple sources of revenue for the UAE hence increasing capital inflow necessary to attain economic growth. These particular policies indicate that international and domestic economic growth are linked, and improving one creates a spillover effect.

Conclusion and Recommendations

The UAE is soon becoming an economic superpower and is required to attain great success levels due to its economic growth driven policies. The country used an expansionary monetary policy as of the year 2020 to boost its economy and allocate resources evenly to all country sectors. Amid the COVID-19 pandemic, the country has experienced setbacks in various economic sectors. However, the country has used this to further create policies to shield its economy from a looming recession. The country heavily engages in international trade, making exports a major contributor to income inflow in the UAE. Based on the report analysis, the following recommendations are outlined to help the country attain domestic and global economic growth. First, the country should adopt a two-way fiscal or monetary policy that creates an internal and external balance. These policies could be either contractionary or expansionary fiscal and monetary policies. Secondly, to obtain trade growth, the country should use the comparative advantage theory to determine the products it can export, import, or decide to establish industries to produce imports (import substitution). Lastly, UAE should invest in quality education and health to promote human capital. This will reduce its overdependence on importing skilled labor into the country and external shocks that would distort its labor market.

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