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UAE needs to review policies enforced during slowdowns

By Wam
The UAE needs to adopt rational policies in periods of prosperity and reconsider those that it enforces during economic slowdowns with a view to replacing them with policies that encourage expansion, according to a recent study.

Compiled by the Economic Policy Research Institute (Epri) of the Dubai Economic Council’s General Secretariat, the study said the UAE’s monetary policy of linking the exchange rate of the dirham to the US dollar had coupled the country’s economy to that of the United States. Consequently, this policy might sometimes be contrary to the needs of the country’s economy.

For instance, it cited how in the period from 1982 to 1988 US monetary policy tried to restrict inflation by raising interest rates. The UAE Central Bank also pushed the rate up, which led to a drop in investment over that period. Similarly, in the period from 2007 to 2008 the US Federal Reserve started to reduce the rate of interest in the face of economic slackness. The UAE Central Bank followed suit at a time when the economy was facing inflation, which required an increase in the interest rates, the Epri report said.

Available data shows that a big drop in liquidity in the UAE economy has always preceded all cases of stagnation and slackness. The average nominal annual growth of GDP reached some 16 per cent over the period 1974 to 2006. Meanwhile, the average annual growth of local liquidity was 17 per cent. However, during periods of economic stagnation, average annual liquidity growth ranged between three per cent and 11 per cent. Local liquidity levels reached 10.6 per cent during the first stagnation period from 1977 to 1978, 2.8 per cent in 1982-1988, and 10.8 per cent in the third period from 1997 to 1998.

The study said the UAE economy underwent four periods of prosperity and three of stagnation between 1975 and 2006 and the real GDP grew by an annual rate of about six per cent.

During the first period – 1977 to 1978 – growth went down to minus five per cent from about 14 per cent earlier. This was accompanied by a drop in the global demand for oil, which led to a reduction in investments and government spending.

The study said during the second period – 1982 to 1988 – the average growth dropped by about five per cent, accompanied by a drop in oil exports again since the UAE was committed to Opec quotas.

In the third period – 1997 to 1998 – the real average growth went down to almost zero from some eight per cent before the period began. During this period the UAE economy was affected by the banking crisis that hit the economies of Southeast Asia and Latin America.