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SETTING POSITIVE TRENDS FOR THE REGION
An outward-oriented development strategy and prudent financial policies
have resulted in impressive economic growth over the years and have led
to a large accumulation of external financial assets. This success has
been underpinned by Abu Dhabi’s prudent management of its oil wealth and
Dubai’s strong push for economic diversification. All indications are
that the liberal economic policies followed thus far will be broadened
and accelerated in the period ahead.
Economic Growth
Economic growth has been impressive, reflecting sharply higher oil
prices, increased oil production, strong investor confidence, and a
significant increase in foreign direct investment. Preliminary data for
2005 indicate that real nonhydrocarbon GDP grew at 11 percent, while the
hydrocarbon sector registered a growth rate of 2.1 percent. Growth was
broad-based with most sub-sectors growing at historically high rates,
especially in manufacturing, real estate and construction, and trade.
However, inflation has been on the rise, driven by the strength of
domestic demand, a hike in gasoline prices and a significant increase in
the prices of non-tradables such as rents and services. Both the
external current account and overall consolidated fiscal balances are
estimated to have recorded large surpluses in 2005 (14.7 percent and
26.9 percent of GDP, respectively). The nonhydrocarbon deficit
(excluding investment income) narrowed by 1.7 percentage points of GDP,
to 17.3 percent. The broad money stock rose by 34 percent, mainly on
account of a rapid increase in private sector credit.
In 2005, Abu Dhabi’s budget improved markedly owing to high oil prices
and moderate expenditure increases. The two other key emirates, Dubai
and Sharjah, maintained their policy of executing budgets that are
largely in balance.
The equity markets, after having risen significantly since 2004, have
had a sharp correction since their peaks in November 2005. The sharp
corrections in the U.A.E. bourses were due to market overvaluation and
the liquidation of existing positions to fund subscriptions for Initial
Public Offerings (IPOs). The high demand for IPOs was in turn the result
of a policy of underpricing them. The banking sector in the U.A.E.
remains strong, bolstered by effective supervision, but the fast growing
capital markets and nonbank financial institutions pose new regulatory
challenges. The U.A.E. authorities, are taking steps to continue to
strengthen supervision of capital markets and nonbank financial
institutions. Also, considerable progress has been made with respect to
the regulatory framework governing the Dubai International Financial
Center and an extensive set of laws have been enacted, benchmarked to
best international practices.
The major emirates (Abu Dhabi, Dubai, and Sharjah) are capitalizing on
the favorable economic environment to carry out reforms that will foster
more private sector participation and further diversify the economy.
Dubai passed a property law which allows 100 percent foreign ownership
of properties in pre-designated areas, while working with the private
sector to provide infrastructure and other services that are
traditionally provided and financed by the public sector. Sharjah
established a number of industrial free zones and also benefited from
attracting new small and medium-sized enterprises that are rapidly
expanding. Abu Dhabi has embraced utilit y
privatization and rationalized its fiscal policy through outsourcing of
public expenditure.
Key government entities (such as the Abu Dhabi National Oil Company,
Dubai Ports Authority, and Dubai Aluminum Company) have massive
investment plans to further increase the capacity of upstream activities
in the petrochemicals sector, infrastructure in airports and ports, and
new manufacturing plants in the metals sector.
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