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UAE becomes second largest Arab economy

posted on 01/12/2005: 2280 views

When the UAE was founded nearly 34 years ago, its economy was negligible and its non-oil sector was just taking shape as it was heavily reliant on oil sales. The country is now the second economic power in the Arab world after Saudi Arabia.

Four years after the federation, the country's economy ranked 11th in the Arab region and in 1990 it leaped to the fifth rank.

In 2000, the UAE had the third largest economy after Saudi Arabia and Egypt and in 2004, it was second only to Saudi Arabia. This year, the UAE's gross domestic product is expected to swell by another 10 percent to a record level in nominal terms and this will enable the country to maintain its status as the second economic power in the region.

Such achievement were a result of several factors, including a surge in oil prices and the country's crude and gas production, a steady growth in the non-oil sector, mainly services and manufacturing, and a massive government economic diversification drive that was spearheaded by its late leader Sheikh Zayed bin Sultan Al Nahyan and is now led by President His Highness Sheikh Khalifa bin Zayed Al Nahyan.

The UAE's economic achievements have won acclaim from many global institutions, mainly the International Monetary Fund, which is urging the emirates to push ahead with reforms to minimize the impact of oil on the economy and further widen the non-oil sector in the GDP. While it believes the UAE has made substantial progress in its diversification drive as some non-oil sectors have become large contributors to the GDP, the IMF notes that oil still provides most of the income and this should prompt the country to focus more on export-oriented sectors.

In 2004, the UAE's GDP hit a record Dh328.7 billion, a staggering nominal increase of nearly 19.7 percent over the 2003 GDP of Dh274.8 billion. Real GDP growth was put at around 10 percent and officials project similar real growth in 2005.

The surge in the country's income has resulted in a steady increase in investment, which grew to a record Dh81.2 billion in 2004 from Dh73.1 billion in 2003 and Dh62.4 billion in 2002, according to the Central Bank.

Exports also peaked at Dh303 billion last year while the balance of payment recorded one of its highest surpluses of around Dh12.8 billion in 2004 compared with Dh4.7 billion in 2003. Higher oil income also had a strong positive impact on the budget, with the consolidated financial account (covering the federal budget and spending by each emirate) recording a minimal deficit of around Dh855 million, one of its lowest levels in the UAE's history.

This compares with a staggering shortfall of Dh29.3 billion in 2002 and a record deficit of Dh29.5 billion in 1999. But experts believe such deficits are only nominal since they are financed through return from the country's overseas assets rather than borrowing.

This year could be even better. According to the Energy Information Agency (EIA) of the US Department of Energy, the UAE is poised to net its highest ever oil revenues of nearly US$40 billion compared with around US$30 billion in 2004. In 2006, the income could even be better as oil prices are projected to remain high, with the EIA projecting the country's revenues at a record US$42.7 billion.

When the UAE's economy made a big leap and its income hit a record in 2004, officials and experts described it as just an exceptional year caused mainly by an exceptional surge in crude prices.

Now they are talking about even a better year in 2005 and probably 2006. Income this year will swell by nearly US$10 billion over the 2004 revenues, the economy will massively in surplus, growing again by nearly 10 percent in real terms, and the fiscal balance is projected to climb to its highest ever level.

UAE officials themselves expect better years in 2005 and 2006 while the International Monetary Fund, known for its pragmatism and conservatism, is even more optimistic, depicting a rosy picture for many more years to come.

Another institution is slightly more pragmatic but remains optimistic.

The Economist Intelligence Unit (EIU), one of the most credible and authentic private economic evaluators, saw a record economic and fiscal year for the UAE in 2005 but expected a slight retreat in 2006 albeit one of the best financial years.

EIU released its projections around mid 2005 and it is expected to issue revised estimates later this year or early 2006 as its outlook for oil prices through 2005 has far lagged behind actual average prices of nearly US$50 a barrel.

That was the case with the EIA, which was prompted by a surge in crude prices to sharply revise up its outlook for the oil export revenues of the UAE and other producers.

But it is not only oil that has pushed the UAE into a new era of high growth and financial bonanza and resurrected the oil boom period 25 years ago. Non-oil sectors are also growing fast and investors are stampeding some sectors, mainly real estate.

Again, the IMF acknowledged such a fact.

"An outward-oriented development strategy, a good record in macroeconomic management, and a business friendly environment have resulted in impressive economic growth in the UAE. over the years. Economic diversification has advanced rapidly, supported by an increasing role of the private sector, which has laid the foundation for further economic and social progress in the period ahead," IMF said.

"Reflecting sharply higher oil prices and increased oil production, strong investor confidence, and a significant increase in foreign direct investment (FDI), economic growth in the UAE. is estimated to have been very strong in 2004 and is expected to remain so in the coming years. Preliminary data for 2004 indicate that the real non-hydrocarbon GDP grew at 10 per cent.. Both the external current account and consolidated fiscal balances are estimated to have recorded large surpluses in 2004 of 12 percent and 18.3 percent of GDP, respectively. " It noted that the medium-term outlook remains favorable and that the UAE is in a good position to consolidate the recent gains from the high oil prices.

But it again stressed the need for UAE authorities to push ahead with economic diversification programmes and embark on reforms through expansion of the private sector, and imposition of local property and value added taxes.

" The medium-term outlook remains favourable, based on current expectations that world oil prices will remain high and the UAE's oil production will increase steadily to more than three million barrels per day by 2010. Real non-hydrocarbon GDP growth is projected to remain robust as the economy gains traction from the ongoing productivity enhancing structural reforms, improved investment regime and a more streamlined business climate.

During 2006, both the fiscal and external current account balances are projected to continue to register large surpluses averaging about 22.5 per cent and 17 per cent of the GDP respectively." In an earlier report on the income of oil producers, EIA projected the UAE's oil export earnings at around US$34 billion in 2005 and US$37 billion in 2006. But it later revised up such projections with the continued surge in oil prices, predicting the income to hit a record US$39 billion this year and climb further to US$42.7 billion in 2006.

As for the UAE's economic performance, EIU said it would continue to record high real growth rates while its fiscal surplus would rise to its highest ever level.

"The UAE economy is expected to grow at an average annual rate of around 6.5 per cent in real terms during 2005-2006. Besides high oil prices and production, industrial growth will be the mainstay of the expansion, underpinned by continued-albeit modest rises in oil production as high prices allow OPEC to hold back from enforcing quota levels." "As for exports, we expect them to reach a total of US$83.4 billion this year, an all time high for the third year in succession.

The performance largely reflects further expansion in energy earnings as rising prices are compounded by increases in volumes, although we expect non-oil exports and re-exports to show growth, services earnings are expected to strengthen this year and next year, driven largely by further growth in the tourism sector." The report said the surge would widen the country's current accounts surplus to a record US$14.8 billion (15.4 per cent of the GDP) in 2005 from US$12.4 billion in 2004. But it expected the surplus to sharply recede to around US$8.3 billion (9.1 per cent of the GDP) in 2006 mainly due to higher imports and lower oil prices.

In its annual review about the UAE's economic and social indicators, the IMF said steady expansions in the UAE's hydrocarbon sector over the past decade has catapulted it to the world's number six in crude exports and it could advance further in the next few years when its oil output surpasses three million bpd.

As oil prices are projected to remain strong in the coming years, higher output will enable the UAE to net its highest ever income next year and maintain high revenues until 2010, the IMF said, adding that the UAE's economy would gallop by 22.6 per cent in current prices in 2005 and around 7.3 per cent in real terms, one of its highest growth rates.

"The medium-term outlook remains favorable based on current expectations that world oil prices will remain high and oil production will increase steadily to more than 3 million barrels per day by 2010," it said.

" Real non-hydrocarbon GDP growth is projected to remain robust as the economy gains traction from the ongoing productivity enhancing structural reforms, improved investment regime, and a more streamlined business climate. During 2006-10, both the fiscal and external current account balances are projected to continue to register large surpluses averaging about 22.5 percent and 17 percent of GDP, respectively." It noted that with an oil production close to capacity at about 2.5m bpd, the UAE currently ranks the 9th largest crude oil producer and 6th net oil exporter worldwide. But it added that the country's role in the global oil market will "certainly increase further in the future, as its oil reserves amount to 10 per cent of the world total.”

The UAE also has the fifth largest gas reserves after Russia, Iran, Qatar and Saudi Arabia and heavy investments in this sector would push its gas production from 45.4 billion cubic metres in 2004 to 54.2 billion cubic metres in 2005.


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