How is the United Arab Emirates Reacting to Low Oil Prices?

The Emirate produces about 3 million b/d of crude oil, but government revenues have been falling continuously from 41% of GDP in 2013 to about 29% of GDP in 2015. In an environment of low oil prices, the government has continued its spending trend with expenditures rising from 30% of GDP in 2013 to 34% of GDP in 2015.

As a result, the surplus of about 10.4% of GDP in 2013 has turned into a fiscal deficit of an estimated 5.2% of GDP in 2016. The high real GDP growth of over 6% per year in recent decades is starting to fall off due to lower oil revenues.

The government has been investing its oil surpluses into the non-oil economy. In particular, it has managed to develop the Dubai financial and real-estate centers, international airline hubs in Dubai and Abu Dhabi, and sports-tourism in a number of Emirates as well as light manufacturing and transport and retail trade services.

However, since June 2014, it has been affected by plummeting global oil prices which have resulted in a drop in hydrocarbon exports and revenues. While it managed to sustain growth rates of 4.6% in 2014 and an estimated 3.3% in 2015, UAE’s growth in 2016 is projected to drop to 2.1%.

Though reserves stand at comfortable levels to cushion the impact of low oil prices, the UAE government is keen to raise non-oil revenues by implementing a VAT at the latest by 2018, in conjunction with other members of the Gulf Cooperation Council. It is also considering the introduction of a corporate tax. However, additional measures will be needed including a reduction in electricity and water subsidies and a gradual slowdown in the implementation of Government Related Entities (GRE’s) mega-projects.