UAE economy set to expand by 3%

Dubai : According to World Bank estimates, the UAE economy will grow by about three per cent next year, which is higher than the 2009 rate.

This is one of the many points Shamshad Akhtar, regional vice-president for the Middle East and North Africa at the World Bank, made in an interview with Gulf News at the Dubai School of Government. She also said that investors had overreacted to the efforts by Dubai World to restructure its debts.

Akhtar spoke on the bank's work with countries of the region to diversify their economies and how they had handled the global economic crisis.

GULF NEWS: The global economic crisis has been felt in all parts of the world. How do you think it has been handled by the UAE Government?

SHAMSHAD AKHTAR: The UAE, like other GCC countries that grew at a faster pace, has been impacted more significantly and the UAE had certain features which impacted its growth more significantly.

What features?

It is more reliant on being a trading hub and there has been a slowdown in trade both regionally and internationally. 

Do you think the UAE took the appropriate responses?

A combination of measures has been taken by the UAE government which are no different from what had been taken by other countries in the region and in other parts of the world. One can differ on the magnitude and the pace and the sequencing of it but I think they gave a fiscal stimulus that they can afford. They were able to stand by to provide required support through the central bank.

There was also consideration and reflection being made on how to try to look at developing a more aggressive debt management strategy and work is underway on that. So on multiple fronts, there is work being done. The key issue is that it had registered a sharper slowdown (it declined from close to 7.8 per cent to about 0.3 per cent — quite a sharp dip in 2009) but our forecast indicates that it will grow in the range of about three per cent, which is higher than the 2009 so UAE is on its way to recovery.

What do you think of the efforts by the Dubai government to deal with the fallout from the request by Dubai World to restructure its debt?

This event is still unfolding. In the way that it evolved, it did shake some confidence in the market, but its impact was over exaggerated by the international markets because the exposure is contained and will be even more ring-fenced.

The government has already announced it will stand by to support to a certain extent. It has already set in motion debt resolution mechanism and it will also try to take some additional steps which are going to unfold. To what extent a financial restructuring will impact the real sector is yet to be determined. If anybody is forecasting it is without any information and data.

Do you think they are going about the restructuring the right way?

Well let's say it was an experience of its own kind. One should draw from lessons today and try to introduce a better solvency regime and let people understand that when they come in UAE markets (or for that matter any markets where they are seeking higher returns) they should be able to take the risk associated with it.

Like everywhere else there has to be a market resolution strategy; it cannot always be that the governments and the public sector are going to bail out everything. So I think the thing for markets to understand is that UAE and Dubai are a market oriented economy and a very open economy. And foreign investment should be able to assess its risks and rewards into entering a market of this kind and should be prepared to enjoy higher returns along with the risks.

What do you make of the media coverage of this? Has it been a major factor?

I think it's an image issue and there are two sides which need to be addressed. One is that Dubai is a model of economic development which has emerged over night and its business is skewed towards some sectors which may not be prone to some long-term sustainable development.

I don't subscribe to that view. How many countries in the world would be able to transform this area into a real high quality infrastructure? This has taken a lot of investment and thought and was developed in order to cater for a growing economy which would attract more foreign inflows and use this as a financial and corporate hub to trade basically. This economy has developed a services' industry and infrastructure and it has also these attractions to get the tourists. Sometimes the tourist development side is emphasised more than other parts of it. But it is a very open-oriented economy.

The second problem is people think, no matter what happens in Dubai, it will be rescued by somebody and that will only be corrected if we have a proper legal and regulatory supervisory framework.

In the past, you have referred to the "triple-F phenomena" — food, fuel and the financial crisis in the Arab world. You have also said the food crisis has hit the region hardest, in part because of a growing population and a heavy dependence on imported food. Is the region faring better than others?

I think the region has fared better if you look at the growth track record. First of all the 2009 contraction to economic growth to 2.2 per cent has reflected better numbers than what other countries experienced.

Our last economic report points, the region will be able to register about four per cent economic growth in 2010. These figures are below the pre-crisis growth rates but when you evaluate them relative to other regions, I think they have fared reasonably well.

When you really analyse it further you do find that the region faces some social problems, in particular the unemployment levels — which were always high but have been aggravated by the recent crisis.

As far as the Gulf states are concerned, people say water is food and, there is a water scarcity issue here. Are you working on this specifically?

It has to be recognised that the GCC stands out in the MENA region for growing the fastest. As a result its consumption of commodities and public goods has been substantially higher. One of the most appropriate policies given the water situation in the GCC area is to look at conservation quite effectively. We may not have necessarily a specific project. However, we have an original approach where we are trying to promote regional economic integration and development and sharing the knowledge and we have an Arab water academy (based in Abu Dhabi) that has been established with our support.

Do you think there is sufficient integration of economies in the Arab world?

In terms of the changes occurring there is a move and recognition towards the need for trying to work together on a regional level.

There is a small rise in intra-regional trade from 7.3 to 10.5 per cent according to a study. However, these levels are very low when you compare them with other regional blocs like ASEAN or the Latin American regional trade bloc. Trade integration is still very low.

Why do you think that is?

Because these economies are trading more with the developed countries and one lesson that was learned during the crisis is the need to diversify their trade from advanced economies to within the region because when you trade within the region, you will be able to also evolve more linkages by way of capital flows and that will be a good opportunity for the region to invest within the region rather than overseas. GCC has sufficient oil surpluses that should now be deployed within the MENA region. And the investments can now be used to nurture more trade within the region.

This is a long term process. The World Bank is launching what we call the Arab world initiative to focus on promoting regional projects which will enhance connectivity amongst the MENA countries by developing road networks and energy sharing and others, harmonise the standards within the MENA region such as energy regulatory standards, the financial standards and to share knowledge products so that the region benefits.

We have a long-term agenda and we are now engaging with regional policy makers to sit down and discuss how to develop regional infrastructure.

Why did these countries choose to trade with the world?

Industralised countries have huge demands for goods and services. For example, the Egyptian textile products and Tunisia's higher-value added textile products go to Europe [about 57 per cent of Tunisia's exports go to Europe].

In some cases it is because of proximity — Tunisia is linked much better to Europe as a whole. I am not saying that these countries should not trade with the developed countries. But trade needs to diversify from oil and crude oil products in the region.

Secondly, one needs to start building bridges with regions that are in proximity because that will also reduce the cost of transportation and also use the resources of the region to invest in firms within the region.

Do you think there is a healthy relationship between oil and non-oil producing Arab countries?

Clearly one needs to see what the comparative advantages in promoting all this. MENA countries need to lower tariff barriers and all non-tariff barriers to promote regional integration.

Once you start with cross-border facilitation and you have a smooth flow of goods and products, you will see the benefit more visibly. So we need to develop infrastructure and have more resource sharing between countries.

The European Common Market (ECC) also had a lot of questions asked, but it started with a common market first and then that laid foundation for more internal trading.

In this region, there are supporting arrangements, but are they optimal? No. Before you want oil producing countries to invest in non-oil producing nations, the latter need to improve their policy environment to attract foreign investments.