Balance Of Payments And Trade In Uae Economics Essay

The UAE is one of the strongest and prosperous economies of the world. It has been growing continuously over the past few years. The country has been growing at the average rate of 6% per year in the past decade. In the previous years the country’s economy was majorly dependant on the revenue generated by export of oil and petroleum products. But from the last decade the economy of the UAE has been diversified and is now contributed by other industries like, tourism, real estate and construction. Currently the oil and petroleum sector accounts only for one third of the total GDP of the country which used to be three fourth parts till 1980. The current per capita GDP of the UAE is one of the highest in the world, 24,000 USD. The export and import policies and strategies of goods and services in UAE mainly depends upon the free trade zones in the country because in these free trading zones mostly non oil products are being traded. The main benefit of these trading zones is that they are exempted from the time consuming and irritating obligations of licensing and all. The foreign and international trade and business relationships of the UAE with other countries like India, China, Japan and European Union has been improved in the past years and the balance of payments and trade has also been increased in these years. Previously the country was in deficit of balance but now the balance has risen to surplus amount. (Balance Of Payments – BOP) (Balance Of Trade: Definition)

Balance of Payment

The balance of payments (BOP) is a record of all transactions between one particular country and the rest of the countries. It compares the difference of value of imports and exports of products, services and fiscal transactions in terms of dollars. The BOP includes the trade balance, foreign investments and investments by foreigners. The BOP calculates international transactions for a specific time period, normally one year. For nation sources of funds like exports and investments are surplus items and use of funds like imports and invest in foreign countries are deficit items. BOP indicates the economic and political stability of the country. You can analyze it, i.e., if a country has a positive BOP, it means that there is substantial foreign investment within that country. The value of national currency of a country gets appreciation if the BOP is positive. If the value of a country’s import is higher than the value of its exports then the balance will be in deficit. A deficit in the balance shows a dependency on foreign investors or an overvalued currency. After including all components in BOP sheet, it must balance. The overall surplus or deficit must be zero. If a deficit in the balance then the country pays off the difference of value by exporting gold or consented hard currency. When a country is not able to pay for its debt repayments then it is called as currency crisis or BOP crisis. It came with rapid decline in nation’s currency value. It occurs because of large capital flow which is related to economic growth. However at a point foreign investors become concerned about their inbound capital and pull out funds. The rapid drop in the value of currency occurs because of the capital outbound flows. This causes an issue for business firm of affected country who has received loans. Foreign reserves try to support the domestic currency with very limited options after government fatigued. It increases the interest rates in order to prevent declines in value of currency. There are three methods to correct balance of payment imbalance. Adjustment of nation’s internal prices and adjustments of exchange rates are important methods. (Balance Of Payments – BOP)

Rebalancing by adjustments of exchange rate

An increase in the value of currency of nation make imports cheaper and exports less matched. So it tends to correct current account surplus and make flow of investment less attractive towards capital account in order to help with a surplus. Conversely a decrease in the value of currency of nation makes things expensive for people to buy and increase the competition in exports with the others. Thus helps to correct the deficit. If nation is selling more and imports less, than the demand of currency increases because selling nation’s currency will be the need of other countries to make payment for the exports. If nation is exporting goods of less value and importing value is more than to pay for the excess import value it replace it with foreign currency so the currency will increase in international market thus value of currency tends to fall. BOP effects are also influenced by the difference in interest rates of nations. (Balance Of Payments – BOP)

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Rebalancing by adjusting internal prices and demand

Making changes in the domestic economy is a standard approach to correct imbalance, when exchange rates are fixed by gold standard or when imbalance is among members of currency union. Change is optional for the country which is in surplus but it is must for the deficit country. Mechanism is automatic in case of gold standard. If a nation has favorable trade balance then there will be an inflow of gold. It will increase the money supply because of this prices increase and inflation occurs thus decreases surplus. If a nation has deficit BOP then there will be an outflow of gold and occurs a deflationary effect so that prices reduced and makes export more competitive, thus do the re-balance. (Balance Of Payments – BOP)

Balance of Trade

The balance of trade being a larger part of the economic unit, BOP, which includes all economic transaction between one country and the rest world. If a nation exports more than it imports then it has trade surplus or favorable balance of trade. If imports are more than exports then it has trade deficit or unfavorable balance of trade. There must be a favorable balance of trade but classical economics says it to be more important as for a nation so as to fully utilize its available economic resources rather than to build a trade surplus. The balance of trade indicates the nation’s international economic position.

Factors affecting the balance of trade is inclusive of:

The cost of manufacturing of product and services in the exporting country is different than that in the importing country.

The price and availability of other subsidiary products, raw material and other required inputs.

Fluctuation in exchange rates.

Various restrictions on different type of trading medium

Non economic hurdles like, environmental, health and social.

Trade deficit is bad or not, it depends on business cycle and economy. If a country is in recession then it would like to exports more in order to create demand and jobs. But in strong expansion, nation would like to imports more which raise price competition and limits the inflation. So a trade deficit may help during an expansion but not good in recession. (Balance Of Trade: Definition)

The UAE Balance of Payment

The UAE is a member of the GCC trade group and also a member of World Trade Organization, World Bank and International Monetary Fund for the past ten years. The country has never required financial help from the World Bank or the International Monetary fund because of its strong financial position and huge treasures of wealth. Balance of Payments which is an important economic indicator to determine the country’s financial condition in the global market, in the previous year was more than 100 billion AED because of the real estate and construction business in the country. In the previous year the official reserve account of the UAE has been increased by 50 billion AED. The economy of the country is majorly driven by tourism, construction, real estate, and oil industry. So the balance of payments has to be done from various perspectives in the UAE. According to the IMF three major accounts need to be taken care of for the balance of payments in such a diverse economy, these accounts are: (McRae.)

Current Account – This account keeps track of the country’s assets from trades of goods and services and one sided transactions from foreign countries. In the year 2004 the UAE Central Bank recorded the total balance of -9 billion AED.

Capital Account – This account is for the flow of payments of capital items. In 2004 IMF reported 78,062 million UAE capitals of machinery, medical and electricity. The export value of the above capital was 610 million AED. The trade surplus reported by CIA in 2004 was $19 billion.

Financial Account – This account handles the trade of stocks and bonds, currency transaction. The net investment projected by the International Monetary Fund in 2005 was 26.3 billion AED. The 392 commercial banks of the country have the total deposit of 491,523 million AED.

Business Monitor International is a leading publisher of highly specific business information about the global markets of the world. In a report of BMI it is mentioned that the international trade of UAE will increase because of the improved two ways trading with US, Iran and SA. The boost in tourism and expansion in hotel and airport projects will also strengthen the position of UAE in balance of payments, the measure of payment flow between a country and the rest of the world. According to the report the import of the UAE is increasing by 8% per year whereas the export is declining by 6% in 2009 but is forecasted to grow again by 11% in 2011. The report also said that the current account balance of the UAE is more than 20% of the GDP for the forecast period which will definitely rise as the result of improved trading relations and flourishing tourism of the country. The Balance of Payment of the UAE in 2007 was 22.2% of the GDP which decreased till 2009 and is expected to increase up to 25.2% in 2011. According to the National US-Arab Chamber of Commerce the export of US to the UAE was increased by 40% between 2005 ad 2006. The re-exporting capability of the UAE is certainly good news for the balance of payments of the country. (FRANCO, 2007)

Balance of Payment is the sum of exports products and services and net income like interests and foreign aids. Current account balance is a major indicator of any country’s financial condition. The current account balance or the balance of payments for UAE in the year 2005 brought the country at 13th rank in the world. It is 136.32 percent more than in the previous year. In 2006 UAE was on ranked as 10th country for the current account balance of 36.158 billion US$ which is around 60 percent more than in 2005. In 2007 UAE recorded a decline of 46 percent in the current account balance and rolled down to 20th ranking. In 2008 the current account balance for UAE increased by 13 percent and came at 19th position. In 2009 UAE recorded a drastic dip of 130 percent in the current account balance and came at 163rd ranking in the world. (FRANCO, 2007)

The UAE Balance of Trade

The balance of trade of the United Arab Emirate in the December of year 2008 was recorded to 231.1 billion AED. The economy of the country is no more dependent on the oil and petroleum products but still they are an important part for the revenue of the country. The major ingredients of the country’s imports are machinery, chemicals, transport equipments, and food and the major trading countries with UAE are India, China, Japan and European Union. The following figure shows the trade balance chart of the UAE. (United Arab Emirates Balance of Trade)

The trade balance of the UAE has been very much dependant on the oil and petroleum revenue. The trade balance of UAE including the oil products has always been surplus in the past years whereas excluding oil and petroleum the trade balance was in deficit throughout the last decade. The country recorded a surplus in trade balance (including oil) of 19% of the total GDP in the year 2004, the value of which was 63 billion AED. The deficit in trade balance (excluding oil) in 2000 was maximum i.e. 26% of the GDP which has been decreasing gradually in the past years and as recorded only 8% of the total GDP in year 2004 with the value of 27 billion AED. (U.A.E. Trade Policy)

The trade balance of UAE from the past years has been noticed to be shifting from deficit to surplus. A recent report from the Ministry of Foreign Trades of the UAE said about the commercial and business relations between UAE and India that the trade balance of UAE with India which was in deficit of worth 7.3 billion AED in the Q1 of 2009 has now been moving to positive side and in the Q1 of 2010 the trade balance was in surplus with the amount of 2.2 billion AED. The comparison of these two quarters shows that the value of non oil international trade between the two countries has been increased up to 83%. The value of the international trade in the Q1 of 2009 was equal to 20.5 billion AED and the value of trade in the Q1 of 2010 was 37.5 billion AED. These economic indicators are the proof of strong bilateral business and commercial relationships between the UAE and India. The development and the strength of the UAE’s economy can also be seen from the results of the fiscal policies and strategies of the countries and their execution. The country has now developed a diversified economy and exports of non oil products. (UAE achieves a surplus of Dh2.2billion in its trade balance with India, 2010)

Conclusion

The above discussion of the balance of payments and balance of trades of the UAE depicts that the foreign trade and international fiscal and business relationships of the country has been improved in the past years. The balance of payments which used to be on the negative side and the country under the debts of other foreign countries has now shifted to the brighter side and increase to the surplus amount. The balance of trade of the UAE was majorly dependant on the export of oil products in the previous decade. But now the trade balance of the country majorly consists of export of non oil products. The trade balance of the country with other countries was in deficit in the previous year but now it has been increased to the positive side and stood up with surplus value.