CONVENTIONAL wisdom has it that when the oil price is riding high, the Gulf states embark on a spending spree, resulting in a mini economic boom. Conversely, the brakes go on when oil prices fall, leading to stagnation and recession.

In the UAE, however, economic forecasting is not quite so straightforward. Two years of rising oil revenues have not encouraged a loosening of the purse strings. Instead, the message from government departments in Abu Dhabi through to the northern emirates is the same: fiscal discipline is in, waste is out.

The UAE economy remains one of the most robust in the region. A vibrant non-oil sector, accounting for 65 per cent of gross domestic product (GDP), has ensured that the UAE has been far better equipped to handle the periodic downturns in the international oil market than some of its neighbours. While others were struggling with stagnation from 1993-95, the federation posted steady growth.

The 20 per cent rise in the oil price during 1996 underpinned a fourth consecutive year of economic expansion. However, the rate of growth was relatively modest by regional standards. Nominal growth was put at 10.9 per cent, but estimates for real growth ranged between 3.5 per cent and 6.9 per cent, depending on which inflation figure was factored in. While the federal Planning Ministry estimated inflation at 4 per cent, the consumer price index produced by the Department of Economic Development in Dubai showed a 7.4 per cent rise.

What is clearer is that the oil price increase - from an average of $16.60 a barrel in 1995 to $19.70 a barrel last year - swelled government coffers. Figures released by the Central Bank of the UAE show that consolidated oil and gas receipts rose in 1996 by 15.6 per cent to AED 37,000 million. The jump pushed total government revenues up to AED 53,790 million from the previous AED 42,533 million.

However, there was disappointment for those expecting a comparable rise in capital spending. In 1996, consolidated development expenditure actually dropped by 15 per cent to AED 10,190 million. The trend has continued into this year: first half data for the federal government, which primarily meets the needs of the poorer northern emirates, shows that development spending fell by 23 per cent from the corresponding period in 1996.

Even in wealthy Abu Dhabi, all the signs point to a squeeze on capital expenditure. The largest civil construction project in progress, the Abu Dhabi grand mosque, has been put on hold as the client seeks to reduce its budget to AED 800 million from the original AED 1,400 million.

Contract awards have been delayed on the UAE Armed Forces weapons procurement programme, as the emirate re-evaluates its costs, valued at up to $10,000 million over the next five years, and the form of payment. One idea gathering momentum is that the government will opt to pay some of the bill in oil, rather than having a straight cash transaction.

At first sight, the drive to curb capital spending can seem puzzling. After all, the UAE has no foreign debt and enjoys a healthy current account surplus, which in 1996 widened to AED 24,460 million from the previous AED 18,660 million. Moreover, through its investment authority, Abu Dhabi holds overseas assets conservatively estimated at $100,000 million.

Nevertheless, there are some very logical explanations for the situation. The first and most important is that while capital expenditure is dropping, current spending is soaring. In 1996, it rose by 29 per cent to AED 57,284 million, resulting in overall spending reaching a record high of AED 71,510 million. The sharp increase was partly due to an exceptional item. In its latest annual report, the central bank speaks of a one-off payment totalling AED 7,000 million 'in settlement of an external obligation by a UAE emirate government involving the international liquidation of an entity.' The oblique reference appears to relate to the payment by the Abu Dhabi government to depositors in the Luxembourg-based Bank of Credit & Commerce International (BCCI), which was closed in most international markets in 1991 and in which the emirate held a majority stake.

Without counting the transfer, current spending was still on an upward spiral, rising by 13 per cent to AED 50,000 million. Part of the increase was attributed to the 15-30 per cent salary increases awarded to government employees on 1 December to mark the start of celebrations for the federation's silver jubilee and the 30th anniversary of Sheikh Zayed's accession as ruler of Abu Dhabi. At the same time, subsidies and transfers grew by 40 per cent to just over AED 10,000 million, excluding the BCCI payment.

Current expenditure now accounts for 80 per cent of all government spending in the UAE. Further rises seem inevitable, given that the population is rising by 4 per cent a year and both the federal and local governments remain firmly committed to maintaining the generous welfare state.

Other factors are also coming into play in forcing down capital expenditure. During 1994 and 1995, when oil prices were weak, development spending was maintained at just under AED 12,000 million a year. Now the oil markets have rebounded, local finance departments are taking time out to replenish reserves.

Until recently, there seemed little scope for a substantial increase in government revenues, in view of the UAE's long-standing commitment to the OPEC quota system. Despite having as much as 500,000 barrels a day (b/d) of spare oil capacity, Abu Dhabi has demonstrated considerable restraint over production potential. Acting as the federation's swing producer, it has ensured that UAE output has remained close to its quota of 2.161 million b/d: this year, production has been averaging about 2.22 million b/d.

For the first time in five years, however, there are some grounds for optimism that the UAE will be given the green-light to raise output. Against a background of strong demand growth, OPEC oil ministers were expected in late November to discuss a quota increase of nearly 2 million b/d to 27 million b/d.

Petroleum & Mineral Resources Minister Obeid bin Saif al-Nasiri has joined his Saudi Arabian counterpart Ali Naimi in supporting the move, which would be implemented as a pro-rata increase in member country quotas. If approved, the UAE would be expected to receive a quota increase of just over 160,000 b/d to 2.32 million b/d. At 1996 prices, the increase would feed through as an extra AED 2,500 million in oil and gas receipts.

The latest forecasts from the Planning Ministry indicate that 1997 will be another year of consolidation for the UAE. Released in June, the projections pointed to a nominal increase in GDP of 4.4 per cent, with inflation dropping to 3.7 per cent in the current year. Five months on, the forecasts appear somewhat conservative as, contrary to expectations, the oil price has held up, with Brent averaging $19.31 a barrel this year.

Nevertheless, as recent experience has highlighted, favourable oil market conditions are unlikely to be an excuse for a government spending spree.