UAE in numbers

AED43.6bn: Total value of the UAE federal budget in 2010

AED17bn: Amount contributed by Abu Dhabi

Source: MEED

The bonds that tie the seven emirates of the UAE together have been through some tough stress tests over the past couple of years. At the height of the global financial crisis, oil-rich Abu Dhabi was forced to step in to give financial support to neighbouring Dubai, providing $20bn in emergency aid to help support the debt-laden conglomerate Dubai World.

Abu Dhabi may be keen on having a greater role for federal bodies, such as the UAE federal customs authority

Sultan Sooud al-Qassemi, Dubai School of Government

This unprecedented step has set Emiratis thinking about economic decision-making in the UAE as a whole. The UAE is a federal entity, and, until now, the individual emirates have been left largely to do their own thing – based on the implicit financial support provided by Abu Dhabi’s status as a major hydrocarbons producer. 

UAE consolidated budget, expenditure shares
Source Share of expenditure (percentage)
Abu Dhabi government 72
Federal government 16
Dubai government 12
Source: IMF

Those comfortable assumptions may no longer hold as true as they once did. In June, calls were made from within the Federal National Council (FNC) for all seven emirates to start to pay their fair share of the federal budget, instead of the burden falling on Abu Dhabi and, to a lesser extent, Dubai.

UAE federal coffers

Of the AED43.6bn ($11.8bn) federal budget for 2010, Abu Dhabi pays close to AED17bn and Dubai contributes AED1.2bn. No other emirates contribute to the federal coffers; the remaining expenditure is derived from revenues earned by federal bodies.

 UAE consolidated fiscal accounts  (AEDbn)
  Revenues  Expenditure and grants
2008 450.3 254
2009e 292.6 290
2010f 360.9 271
e=estimate; f=forecast. Source: IMF 

The proposed changes to the federal pot have not come out of the blue. When Abu Dhabi stepped in with financial support for Dubai in late 2009, few doubted there would be a price to pay for the bailout.

Many say that price has been paid in part through the acquisition by Abu Dhabi-related entities of a series of corporate assets in Dubai.

Government-related firms, such as Mubadala Development Company, are also reported to have picked up significant tracts of Dubai real estate.

Yet this alleged accumulation of Dubai trophy assets is far from proven. Sultan Sooud al-Qassemi, a fellow at the Dubai School of Government, says the Abu Dhabi government remains a savvy investor and Dubai offers many value opportunities.

“Members of Abu Dhabi’s ruling family, like many others, as well as the Abu Dhabi government have been active in investing in the UAE since the 1970s, especially in the real-estate and industrial sectors,” he says.

“But I do not believe that Abu Dhabi is keen on having a say in Dubai’s economy, since it has launched its own economic plan under Vision 2030.”

Even if direct economic control is off the agenda, UAE policymakers want to create a more lasting policy response to the Dubai World crisis, forging new federal level institutions that will help to ensure such crises are not repeated.

For all the speculation about Abu Dhabi’s designs on an asset haul next door, the emirate is more likely to leverage its clout in political terms. Abu Dhabi’s greater interest is in developing a centralised political system.

If the crisis has had one positive side-effect, it may be in the greater cooperation between the federal and emirate levels of government, as well as between the emirates themselves. 

Some of the measures were initiated long before Dubai World said it intended to request a debt standstill in November 2009. Earlier that year, a Fiscal Coordination Committee was established, along with initiatives to develop multi-year rolling expenditure plans and coordinate debt management between the federal government and the emirates, through the creation of debt management units at both levels.

UAE legislative initiatives

In November 2007, UAE President Sheikh Khalifa bin Zayed issued an emiri decree establishing the Emirates Investment Authority (EIA). The federal sovereign wealth fund has a remit to steward federal government holdings in more than 30 corporations, including Etisalat, Du, Gulf International Bank, United Arab Shipping Company and Gulf Investment Corporation, and is headed by Sheikh Mansour bin Zayed.

Legislative initiatives have also bolstered the sense of a united federal economy. The adoption of the Federal Statistics Law and the establishment of the National Bureau of Statistics (NBS) are seen as key steps in developing capacity at the federal level. The NBS will coordinate between the federal and emirate levels for the collection, compilation and dissemination of data – the lack of which is often a major source of complaint for overseas investors.

These various bodies are intended to provide greater institutional strength to the emirates’ federal economic strategy. More will need to be done, however. Masood Ahmed, director of the International Monetary Fund’s Middle East and Central Asia department, says that although these initiatives will foster coordination, there is still room to further rationalise investment decisions at the federal level and to strengthen the co-ordination of fiscal and debt-management policies.

Policymakers have maintained the momentum for greater cohesion throughout the recent crisis. Perhaps the most significant announcement came in May 2010, with new steps to address remaining gaps in the UAE’s legal and regulatory infrastructure.

Sheikh Ahmed bin Saeed al-Maktoum, chairman of Dubai’s Supreme Fiscal Committee, announced that the emirate is set to issue a public debt management law later this year, and establish a debt management office (DMO) to co-ordinate the raising of debt for government-related entities. A similar debt management unit is planned to be set up in Abu Dhabi to centralise debt decision making.

Improved transparency in the UAE economy

Analysts have given a positive reaction to these initiatives. “The most positive outcome we can see from the financial crisis is the improved transparency and the introduction of best practice standards in the economy,” says Marios Maratheftis, chief economist at the UK’s Standard Chartered Bank. “This is slowly happening. The creation of the DMO in Abu Dhabi is also a welcome development, especially if it leads to a more co-ordinated approach to borrowing in the future.”

The DMO promises more joined up thinking over debt raising from Dubai. “Certainly, any consolidation in Dubai’s steps towards reform will make sure that efforts aren’t unnecessarily duplicated,” says Al-Qassemi. “We have seen in the past how even within Dubai World, Nakheel and DP World raised debt from various sources without co-ordinating their efforts. Today, such an event will be unlikely to take place.”

More federal economic bodies may be needed, says Al-Qassemi, including a commission to investigate exactly where mistakes have been made, so they are not repeated. 

New federal institutions form one part of the equation, but existing bodies are also likely to play a more prominent role in harmonising economic strategies. “What Abu Dhabi may be keen on having is a greater role for federal bodies, such as the UAE federal customs authority, with regards to areas where business interests intersect with national security, including the ports, airports and logistics hubs across the country,” says Al-Qassemi.

The federal budget may also be called upon to provide support for Dubai in the future, even though the Dubai World restructuring has settled the debt issues. UAE fiscal policy is on an expansionary course during the next five years and the bulk of the spending will continue to come from Abu Dhabi as Dubai focuses its efforts on meeting its financial obligations.

Despite calls for a fairer division of the federal budget burden, there are unlikely to be any near-term changes over its funding sources, which will continue to be covered mainly by Abu Dhabi and Dubai. But even for those emirates, their individual budgets remain far more important than the federal purse.

The official federal budget only accounts for about one-quarter of revenue and expenditure in the UAE economy. Most spending occurs at emirate level and each of the seven emirates will continue to operate its own budget, alongside the federal plan.

Nonetheless, pressure is growing for a more equitable contribution to the federal budget – even if for the smaller northern emirates, this is largely symbolic given their small financial resource base.

While Abu Dhabi’s leadership has in the past taken a laissez-faire approach to the federation’s finances, it now has reason to keep a closer watch on its coffers in future. “Abu Dhabi has recently launched many large projects that coincided with the global financial crisis, which may mean that finances have to be tightly controlled and overseen by the Abu Dhabi Audit Authority,” says Al-Qassemi.

Others are also calling for the federal budget funding base to be diversified. Al-Qassemi has suggested an automatic process for collecting fees, based on a specific percentage of an emirate’s gross domestic product, with a recalculation of the ratios of the various emirates until the federal budget is able to be entirely covered by revenues of federal bodies. He urges a 10 per cent tax levy on the profits of listed companies. With the top 25 in the UAE by market value registering profits of AED35bn, this would provide an AED3.5bn budget contribution.

But some are sceptical about the prospects of a more equal contribution to the federal budget. “They want the smaller emirates to pay money into a common pot, but it’s not really about the money – it’s more about making the other emirates aware that this all costs money. That is the main thrust,” says Eckert Woertz, a director at the Dubai-based think-tank Gulf Research Centre.

Centralising trend

There is no denying that the post-financial-crisis UAE is a different beast than before. There will be a greater centralising trend as Abu Dhabi’s economic leadership role demands more overt political stewardship.

“Politically, the financial crisis seems to have boosted the federation,” says Tristan Cooper, head analyst for Middle East Sovereigns at US rating’s agency Moody’s. “Other emirates, especially Dubai, have been reminded of the value of their bonds with Abu Dhabi and the umbrella of federal protection.”

Abu Dhabi’s support for Dubai and the other emirates is part of its leadership mandate. Dependence on the capital will only increase over time, especially with projects such as Abu Dhabi’s nuclear power programme and the national railway in the planning stages.

Such schemes will have the ultimate effect of centralising the federation around Abu Dhabi’s prodigious resource base. For the other emirates, there will have to be a greater financial quid pro quo.