Economy of the UAE
This page presents an overview of the UAE's economy and the government's efforts to enrich its national income towards knowledge-based, sustainable growth far from dependency on oil resources. This page covers:
- Economy in the past and present
- Features of this solid economy
- Federal Budget 2016
- Gross domestic product
- Assets of banks
- National development strategies in UAE
- The Islamic economy in the UAE
- A Green Economy for Sustainable Development
- Economy and innovation
- UAE Post-Oil Strategy-2016
- Value Added Tax (VAT)
Economy in the past and present
Before the discovery of oil, the region depended on a simple economy, mainly on nomadic farming, date palm cultivation, fishing, pearling and seafaring.
The discovery of oil in 1958 led to a significant transformation in the economical, as well as the social life in the UAE. Within a short period, the UAE's GDP increased more than 236-fold from AED6.5billion in 1971 to AED 1,540 billion in 2014.
Currently, the UAE has the world's seventh largest reserves of both oil and natural gas, estimated at 97.8 million barrels and 215 trillion cubic feet respectively. This means that it holds 4 per cent of the world's oil reserves and 3.5 per cent of gas reserves.
Revenue from oil resources has allowed the government to initiate significant social and economic development in its industries and infrastructure. Owing to government's efficient policies, today, the UAE's non-oil sectors contribute to more than two third of the country's gross domestic product (GDP).
Features of this solid economy
Despite recent fluctuations in oil prices and global economic recession witnessed through different periods, the UAE provides a safe, stable and attractive economic environment based on the following features:
- It enjoys a strategic location between Asia, Europe and Africa; the world's fastest developing economies. Thousands of Chinese businesses use Dubai as a hub for Africa. Indian traders use the emirate to access the world. Latin Americans see the country as a launching platform into South Asia. Western nationals use Dubai as a hub for the Middle East.
- The UAE maintains strong financial reserves and durable banking sector, which makes it safe for investment. With sufficient liquidity and capital adequacy, it was possible for UAE banks to increase its lending (8.2 per cent during the first quarter of 2015 to reach AED1.44 trillion). According to S&P and Fitch, global rating agencies, the UAE maintains AA rating, which indicates its credit worthiness and ability of spending.
- According to Sovereign Wealth Fund Institute figures, Abu Dhabi Investment Authority is the largest sovereign wealth fund in the Middle East and the second largest in the world.
- Government spending on infrastructure continues to receive a major injection of capital.
- Abu Dhabi continues to develop the infrastructure required for one of the wealthiest cities in the world.
- Dubai is implementing new projects for hosting World Expo in 2020; AED 30 billion will be spent on infrastructure at the Expo site and the city.
- The UAE plans to spend AED six billion on major infrastructure developments across the country, including road networks and federal buildings. Khalifa Initiative in the northern emirates is designed to ensure that inhabitants of these emirates enjoy the same facilities as those living in the larger emirates of Abu Dhabi and Dubai.
- The UAE is also working on the Etihad Rail project, which will offer a significant leap in land transport by year 2021.
- The policy of economic diversification has led into impressive development in key sectors such as tourism, air transport, trade, financial services, manufacturing and alternative energy. The UAE has made progress towards ending its economic dependence on hydrocarbons. Oil industries accounted for around 30 per cent of GDP in 2014, down from 79 per cent in 1980.
- According to an UNCTAD survey of 80 Investment Promotion Agencies (IIAs), the UAE ranks 11th in the survey where IIAs chose the UAE as the most promising investor home economies.
- The UAE has a series of multi-specialty free zones with various types of economic incentives:
- exemption from corporate taxes and import/export duties
- full foreign ownership with 100 per cent profit repatriation
According to the Ministry of Economy statistics, foreign direct investment (FDI) contributed five per cent to the UAE's GDP in 2014 and grew 25 per cent to more than AED47 billion.
Dubai Investments Park (DIP) has attracted 436 new companies in the first five months of 2015, taking the total number of companies within the 2,300- hectare development to nearly 4,500.
Federal Budget 2016
The Government's AED48.5 billion federal budget for 2016 with zero deficit shows its strong position and determination to continue its ambitious projects in vital sectors like healthcare, social development, economic development and preservation of the environment, culture and infrastructure, in line with the UAE Vision 2021. It shows that low global oil prices has only had a limited impact on the UAE federal government's future plans.
Gross domestic product
In 2014, UAE's gross domestic product at current prices was recorded at AED 1.46 trillion when compared to AED 1.42 trillion in 2013. GDP grew at a rate of 3.2 per cent in 2014, when compared to 3.7 per cent in 2013.
In 2014, non-oil GDP growth was at 8.1 per cent and surpassed the overall GDP growth which clearly exhibits the UAE's diversification of economy away from oil sector.
International trade has been a significant driver of growth for the UAE's economy. In 2014, it reached AED 2.58 trillion and in 2013, it had reached AED 2.53 trillion.
Assets of banks
UAE Central Bank's total assets stood at AED 332.7 billion in May 2015 compared to AED 322.4 billion in May 2014, i.e. an increase of 3.2 per cent which signals the adoption of expansionary policy.
Gross assets of banks in the UAE increased by 3.3 per cent in Q1 of 2015 to reach AED 2,380 billion as against a decline of 0.3 per cent in gross assets in Q4 of 2014.
Gross credit expanded by more than 2.3 per cent in Q1 2015 as against a decline of 0.3 per cent in credit in Q4 of 2014.
The UAE's competitiveness level
IMD World Competitiveness Yearbook
According to the IMD World Competitiveness Yearbook, the UAE is ranked 1st regionally and 12th globally amongst 61 countries reviewed for their capability to manage their resources for long-term value creation.
As indicated in the UAE Federal Competitiveness and Statistical Authority, the UAE:
- ranked 1st in the quality of roads (Global Competitiveness Report)
- ranked 1st in the importance ICT to government vision (Global Information Technology Report)
- ranked 1st in the quality of air and transportation (World Competitiveness Yearbook)
World Bank report 2016
According to the World Bank report which measures the performance of 189 countries in ‘facilitating doing business for investors', the UAE ranked first in the Arab world for the 3rd year in a row.
- 1st regionally in the general classification and the number of documented improvements
- 1st globally in the category of the impact of non-payment of taxes, which does not affect business
- 2nd globally in the category of the process of construction permits
- 4th globally in the category of electricity delivery.
National development strategies in UAE
The UAE has developed several strategies to promote its overall economic and social position and diversify its national income based on a sustainable and knowledge-based economy.
UAE Vision 2021
The UAE Vision 2021 aims to make the UAE among the best countries in the world by UAE's golden jubilee celebrations in 2021. The Government have set national key performance indicators for competitive knowledge economy.
The vision focuses on the UAE becoming the economic, touristic and commercial capital for more than two billion people by transitioning to a knowledge-based economy that promote innovation, research and development.
Abu Dhabi Vision 2030
Abu Dhabi Vision 2030 provides a comprehensive plan for the diversification of the emirate's economy and a significant increase in the non-oil sector's contribution to the emirate's gross domestic product (GDP) by the year 2030. The vision identifies two key priority areas for economic development in Abu Dhabi:
- building a sustainable economy
- ensuring a balanced social and regional economic development approach that brings benefits to all
Dubai Plan 2021
Dubai Plan 2021 aims to reinforce Dubai's position as a key player in the global economy and one of the top five centres for trade, logistics, finance and tourism.
The announcement of Dubai as the Capital of Islamic Economy was an important step in recognising Dubai as one of the leading economic centres.
Expo 2020 Dubai
In November 2013, the United Arab Emirates was nominated to host the World Expo 2020 in Dubai.
Estimates indicate that the economic impact of Expo will be approximately US$19.6 billion between now and 2021.
In addition, it is estimated that over 275,000 jobs will be created to cater the Expo across various sectors including tourism, aviation and infrastructure.
The Islamic economy in the UAE
The UAE Government has recognised the importance of the Islamic economic sector, driven by the increase in the global Muslim population that numbers approximately 1.6 billion.
Dubai was the first to establish Islamic banks worldwide with the opening of Dubai Islamic bank (DIB) back in the 1970s, in addition to having the Dubai Financial Market (DFM), which is the first global Shari'a compliant exchange.
According to the second edition of the Global Islamic Economy Indicator (GIEI), which covers 73 countries, the UAE has received top rankings as one of the healthiest Islamic economy environments worldwide, second only to Malaysia.
A Green Economy for Sustainable Development
Under this initiative, the UAE seeks to become a global hub and a successful model of the new green economy, to enhance the country's competitiveness and sustainability and preserve its environment for future generations.
The UAE has many contributions in the field of renewable energy including:
- Shams 1, the largest concentrated solar power plant in the world
- Masdar city, the most sustainable environmental city in the world
- energy production plants from wastes; Abu Dhabi government-controlled energy firm TAQA, and Sharjah-based Bee'ah
- The solar garden in Dubai.
Economy and innovation
In 2015, the UAE government injected AED300 billion to foster a knowledge economy, driven by innovation to prepare the UAE for a world after oil.
The Emirates Science, Technology and Innovation Higher Policy launches 100 initiatives with major investments in education, health, energy, transport, space and water.
It will include fields such as robotics, solar power, developing intellectual property, stem cell research and biotechnology.
UAE Post-Oil Strategy-2016
Currently, the UAE is underway to launch its roadmap for UAE after oil. The emphasis will be on human capital, knowledge and innovation.
Value Added Tax (VAT)
The UAE is considering levying Value Added Tax (VAT) from January 2018. The rate of VAT is likely to be 5 per cent.
VAT will provide the UAE with a new source of income which will be continued to be utilised to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
Implication of VAT for individuals
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of reliefs may be granted.
As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual's lifestyle and spending behaviour. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase.
The government will include rules that require businesses to be clear about how much VAT an individual is to pay for each transaction. He will have the required information to decide whether to buy something.
Implication of VAT for businesses
Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
VAT-registered businesses generally:
- must charge VAT on taxable goods or services they supply
- may reclaim any VAT they have paid on business-related goods or services
- keep a range of business records which will allow the government to check that they have got things right
VAT-registered businesses must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be done online.
If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.
VAT in GCC
The UAE needs to coordinate VAT implementation with other GCC countries because she is connected with them through ‘The Economic Agreement between the GCC States' and ‘The GCC Customs Union'. The GCC has always worked together in designing and implementing new public policies as such collaborative approach is best for the collective development of the region.
Read more about VAT on the website of Ministry of Finance.