The UAE economy is forecasted to grow at 2.5% in 2016, recording the worst figure that is similar to the global economic crisis that hit the region in 2009 (International Monetary Fund, 2016). This figure gives an opportunity to look at the major issue crippling the region, mainly poor oil prices. Since 2014, oil prices have drastically dropped from $104 to $30 per barrel, thus cutting down government revenue and, consequently, expenditure. This problem is likely to create a gulf for the UAE on its way to achieving the Vision 2030, which is dependent on oil revenue. Thus, this paper aims to prove that the UAE should mitigate the risk posed by falling oil prices because it decreases government’s income rates and minimizes chances of realizing their Vision 2030.
The goal of the UAE to maintain a high standard of living is based on the proceeds from oil sales, which has been dwindling in value since 2014 (International Monetary Fund, 2016). The decline in oil prices will cut down revenues earned by the UAE states, making it hard to meet its obligations in front of the nation. For example, the state may not be able to provide infrastructure and health services, which will lead to poor living conditions. Moreover, the ongoing shift from oil dependence to knowledge-based economy will worsen the country’s servitude on foreign oil market, thus leading to capital flight due to remittances.
The price of any commodity is driven by the demand and supply function. After the period of approximately four-year stability at around $104 per barrel until 2014, oil prices declined to $30 – 45 per barrel (International Monetary Fund, 2016). Forecasts show strong expansion of supply from non-OPEC countries, which has resulted into supply shocks. Since this new supply was injected into the market, the increase in the amount of oil in the market superseded demand and culminated dwindling of prices (International Monetary Fund, 2016). As a result, low oil prices are expected to become even lower in the future, thus increasing the negative impact on the UAE economy and social life.
The UAE implements over 10% of oil supplies into the market and holds the fourth largest gas reserves in the world. Over the last four decades, the UAE has exploited these resources together with her beneficial strategic location to become a high income earning economy. As a result, more than 63% of the UAE’s GDP comes from oil and gas markets (Ewers, 2015). In 2012, oil exports were used to fund 80% of the UAE’s budget (Luciani et al., 2012). According to Ewers (2015), the UAE is placed among the top five of Nabaro infrastructure index (NBI). The NBI rates 25 states across the globe in terms of the levels of their investment attractiveness. It also considers the country’s credit availability, region/state economic stability, the level of government participation, and sustainability (Ewers, 2015). All these favorable conditions are relying on oil revenues, thus any threat facing this revenues will affect investment around the whole infrastructure (Shayah, 2015). In other words, poor oil prices will negatively impact credit availability and induce economic instability that will lead to a poor track record in supporting infrastructure development. Even though poor investment in infrastructure may suspend the achievement of Vision 2021, oil dependence and the fall in oil prices is far more significant threat to the UAE.
Another undesired outcome presented by decreases in oil prices is a deficit in trading accounts due to more imports compared to exports. Well balanced imports and exports, according to the contemporary economists, leads to economic stability without demand and supply shocks (International Monetary Fund, 2016). The results of the imports to the UAE totaled $274 billion in 2012, making the region the largest consumer market, while her exports stood at the mark of $314 billion (Gurrib & Alshahrani, 2013). Simulation figures presented by Shayah (2015) demonstrate that with the current trend in oil pricing, the UAE is likely to run a deficit in the trading accounts with $308 and $212 billion in imports and exports respectively. This kind of deficit will lead to the weakening of local currency, unemployment, and generally poor living conditions for people all over the country.
What is more, after the UAE has been subjected to the negative consequences of being a resource magnate, the government decided to invest in knowledge-based and technology corporations.. To mitigate the pressure exerted by changes in oil prices, the state has plunged itself to high demand of foreign labor. It is estimated that 4 million foreigners have been contracted to support a total of 300,000 private corporations (Luciani et al., 2012). Domestic labor supply in the UAE does not meet the job market demand, prompting employers to seek employees from Asian countries.
Threat Mitigation Models
Intelligence and Information
Diversification benefits can offer additional means by which the UAE can pull herself out of the oil price instability threat. It promotes economic development and creates job opportunities, while simultaneously mitigating the risk of high economic specialization that has made the UAE vulnerable to external shocks (Ewers, 2015). According to Luciani et al. (2012), a diversified economy improves performance and restrains volatility in favor of sustainable development.
Different studies in economics identify resources as a fundamental component in churning wealth and eventually increasing standards of living. This means that any resource is feasible. In other words, just like minerals, capital or people could substitute the latter, making it easier for the UAE to gain diversified incomes (Gurrib & Alshahrani, 2013). This concept also encourages the UAE to fund other projects besides oil-related. For instance, Israel lies in an arid area; however, it is renowned for producing high quality agricultural products. Investment in agriculture will boost UAE’s informal economy through offering job opportunities to the unskilled population (Gurrib & Alshahrani, 2013).
Knowledge appears from the combination of intelligence and information. Achieving a knowledge-based state, the UAE has to promote the service industry that relies more on labor than natural resources (Shayah, 2015). According to International Monetary Fund (2016), major service industries that can thrive in any economy include tourism, real estate development, financial systems, and sports. Moreover, there are many skillful and talented people who are ready to help their country to develop. Therefore, if the UAE supports this model, it has high chances of achieving sustainability. Conferring to Ewers (2015), oil is a non-renewable energy form that will sooner or later be depleted, whereas skills can effectively be documented and passed on to future generations.
The UAE should change their policy and invest more money in educational institutions. This will empower more people and will help to shift from oil dependence and to mitigate the future risk of oil price fluctuation. The Abu Dhabi Education Council has invested only 2.4 billion to establish 44 new schools in the past 4 years, which is dismal compared to the amounts of money spent to reinvest the off shore oil wells. Facts presented by Gurrib & Alshahrani (2013), show that the UAE still invests more in Foreign Direct Investments and Oil wells -65%- compared to the education sector -14% (International Monetary Fund, 2016). However, the strategy to increase investment in education to at least 25% will ensure the whole population’s education needs are catered for, wherein the poor will also benefit from skills acquisition. The contemporary UAE favors only the rich, who can afford expensive schools for their kids, at the same time marginalizing the poor who remain uneducated and occupy the informal sector.
From the strategic point, investing in education will increase the supply of skilled workers into the market and decrease demand of importing foreign labor. What is more, this would reduce capital outflow because fewer remittances will be send out to the other countries. In other words, more capital will be generated inside the country, supporting local industries and making the region self-sustainable because of increased expenditure.
Alternatively, the UAE could engage OPEC member countries in controlling the supply of oil in order to avoid price shocks. According to Shayah (2015), economic shocks appear when the demand and supply equilibrium is distorted by either a shortage or surplus of either demand or supply alike. It means that the UAE can effectively predict oil demand trends borrowing statistics from history, gasoline industry expansion, power, and transportation demands. Thus, the only one variable is left to be manipulated at will – a supply. By holding back reserves and providing only the needed amounts, supply shocks can be eliminated (Gurrib & Alshahrani, 2013). Achieving stability in oil revenues the UAE will cut down the impact of surprising revenue shocks. In the long run, the established stability will help the government avoid economic woes.
Moreover, extending diplomatic ties with other countries, the UAE stands will reach better Foreign Direct Investment (FDI) opportunities. FDI proceeds from good interstate relations. Therefore, if the UAE installs strong ties with other nations through supporting them when they are in need, these nations will extend investment opportunities to the UAE. In the future, firms built on the UAE territory will boost government’s revenue and per capita income (International Monetary Fund, 2016).
The UAE economy relies 60% on oil and it takes advantage of the rising financial reserves taken from oil. To mitigate this concentration risk, the government can invest in oversee corporations and earn a revenue through buying stocks. According to Shayah (2015), investment into profitable organizations will save UAE’s money from inflation and simultaneously will earn more. The UAE could invest in top investment banks (JP Morgan), technological giants (Google), manufacturing conglomerates (General Motors), and real estate firms such as Blackstone. As a result, the UAE will gain income from all its investment, protecting its revenue shocks (Ewers, 2015). State investments into different infrastructures help them to secure revenues, solidify interstate ties, and expend touristic sphere.
In conclusion, decline in oil prices and overdependence on foreign labor creates a threat to the UAE’s sustainability. This is a strategic problem since it has long term negative implications on the people’s living conditions. For example, when the government fails to meet its obligations to provide health and education infrastructures due to the low revenues, the people are forced to live with hardship (Gurrib & Alshahrani, 2013). In 2012, 85% of the UAE’s state budget was funded by oil market. Therefore, after the decline in oil prices in 2014 from $104 to an average of $38 per barrel makes it unbearable for the state to meet its obligations (International Monetary Fund, 2016). To eliminate this threat the UAE should encourage more people to actively participate in different economic activities. What is more, beneficial diversification highly relies on enhanced educational institutions so the government ought to invest more in education. As a result, the UAE will have a skilled, dependable, and educated population. Finally, the UAE should establish friendly diplomatic relations with other countries in order to improve foreign direct investments and to reduce the capital flight.