The UAE economy has been on an upward trajectory lately. It witnessed a whopping 8.2% growth at the beginning of 2022. The primary reason for this sharp growth spike is higher oil prices and the UAE government’s measures to stabilize the economy in the wake of the Covid-19 pandemic.
As per a statement released by UAE’s Central Bank in its latest Quarterly Economic Review 2022, the reason for UAE’s rapid economic growth in 2022’s first quarter can be attributed to a substantial boost in oil production. Secondly, during the same period, the UAE economy was further strengthened by an increase in the gross domestic product (sectors unrelated to oil & natural gas).
UAE’s economy experienced a steep growth rate of 3.8% in 2021. As per the predictions of the regulator & industry experts, this growth rate will jump to 5.4% in 2022 and 4.2% in 2023.
Expert Predictions & Statistical Data
As per research by the International Monetary Fund, the UAE’s economy will grow by 4.2% this year, while Emirates NBD forecasts a 5.7% growth. The Abu Dhabi Commercial Bank (ADCB) predicts a 6% growth, owing to an exponential rise in the oil sector.
Suppose the UAE economy grows by 6%. In that case, as estimated by ADCB, it will be the most extraordinary rise since 2011, when the economy soared by 6.9%. How did the ADCB come to the above conclusion? ADCB states three reasons to back up these claims.
- Strong emphasis on the oil sector
- OPEC+ plans to accelerate production considerably
- UAE will further increase its oil production from September 2022
Mr. Edward Bell, the senior director of market economics at Emirates NBD, also voiced similar optimism. He said that oil production would increase steadily in 2022 due to increased OPEC+ output along with UAE’s decision to invest heavily in upstream capacity for oil & natural gas.
Furthermore, even the Central Bank opined that UAE might enjoy robust economic growth because of increased oil output, plus the administration’s initiatives to expand the manufacturing sector’s size twofold by the end of 2031.
UAE’s Oil Sector & Impact on Global Prices
hydrocarbon GDP has grown at a steady pace of 13% per year. The Central Bank further added that the augmented oil supply could stabilize global markets and foster growth.
However, everything would depend significantly on global economic conditions, recession probabilities, and geopolitical instability. The International Monetary Fund and the World Bank understand the current market situation, lingering effects of Covid-19, and the ongoing Russia-Ukraine conflicts. Hence, they have revised their global economic predictions for 2022.
Keeping in mind the Russia-Ukraine conflict, market recovery post-Covid, along with the demand/supply factors in the global oil market, the Central Bank forecasts the oil GDP to rise by 8% in 2022 and 5% in 2023.
Performance of Non-Oil Sectors in the UAE
The non-oil sectors of the UAE have experienced impressive growth of 6% in the first quarter of 2022. The reasons for this growth (as per the Central bank) are as below-
- Authorities brought the Covid-19 situation under control.
- Relaxation of rules & restrictions post-pandemic.
- Expo 2020 Dubai
- Increased global travel
The Central Bank speculates that the aggregate GDP of non-oil sectors will increase by 4.3 percent in 2022 and 3.9% in 2023. Factors like sluggish economic growth, the mighty US dollar, soaring interest rates, and rising inflation may affect overall progress. Regardless of these factors, the ADCB believes that the UAE’s non-oil sectors will witness sustained growth that will carry over into the second half of 2022.
Other factors that can play a prominent role in the growth of the non-oil sector are the repressed demand for travel & tourism, plus Qatar hosting the FIFTA World Cup. The Central Bank also highlights other factors that could speed up non-oil GDP growth in 2022.
- A rise in oil prices
- Increased oil and gas production
- More government revenue
- Enhanced public spending
- The surge in government & private sector spending
It is interesting to see how UAE’s dynamic private sector is growing each day, bolstered by impressive reforms and an attractive job market that attracts talent from all over the world. The UAE’s banking sector has bounced back strongly in the first quarter of 2022, showing positive signs like potent loan growth and remarkable gain margins strengthened by a rising interest rate environment.
A business condition survey conducted by the Central Bank also showed that the business outlook in the first quarter of 2022 showed an upward trend for the future. In the first and second quarters of 2022, the purchasing managers’ index reached a high of 55.6, the highest reading since mid-2019.
Even business activities and orders experienced significant growth, with 28% of companies stating robust growth in business activity.
Impact of Inflation in the Wake of Economic Growth
The Central Bank predicts that the inflation rate will reach 5.6% in 2022. As per the banking regulator’s report, the pricing mechanism administered by the Ministry of Economy will curb the steep price rise of food commodities & daily necessities while keeping inflation in check.
The rise in prices of imported goods would have adversely affected the UAE economy had the dirham not been tied to the US dollar. By the end of 2022’s first quarter, the US dollar appreciated by 10% related to other currencies, but the UAE dirham experienced steady appreciation.
As of now, many countries a struggling to cope with the aftermath of Covid-19, but the UAE has bounced back strongly. Most of this credit goes to the early implementation of fiscal measures and stimulus programs. What did the UAE government do to handle the pandemic-induced crisis?
The UAE authorities knew they had to act proactively to revive the stagnant economy. Apart from introducing cushioning measures to minimize Covid-19’s effects, the UAE government released emergency funds (for individuals and businesses) amounting to Dh388 billion right from the beginning of the worldwide health crisis.
These emergency funds & monetary support initiatives also included Dh50 billion released by the Central Bank under the Targeted Economic Support Scheme. Not only did these measures stabilize the banking and financial sectors, but they have put them on the path to steady growth. Businesses can benefit from these measures till June 2022.
The UAE government understands that the country’s economy and practices must evolve. Additionally, the administration also needs to adopt practices to be at par with other jurisdictions. Most countries are still struggling to overcome the effects of the recession. In contrast, the UAE is poised to take giant strides in progress.
All this is possible because the UAE administration is taking proactive measures to counter the negative aspects and promote a business-friendly environment while encouraging talent in every sector. The time is right for entrepreneurs and start-ups to consider a jurisdiction to set up their companies.
Many individuals and companies are slightly apprehensive about company setup in the UAE because of the corporate tax implementation in 2023. However, the corporate tax is only 9% in the UAE, a lot less than other global jurisdictions & that too for companies that exceed a certain income threshold.
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