Julian Taylor reports from Dubai on the United Arab Emirates' projected return to growth this year.

The UAE had the seventh largest economy in the Middle East in 1998, when the oil price slump dealt a heavy blow to the finances of regional oil exporters. It enjoyed nine years of uninterrupted growth in the years to 1997. In that period, GDP expanded by 79 per cent without significant inflationary pressures. A report issued by the Abu Dhabi crown prince's court last year expects a return to glory, beginning with a modest real growth of 2.7 per cent this year, rising to 3.4 per cent in 2001. The country's per capita income is expected to reach $17,200 this year.

Over the next 12 months, the UAE is expected to resist the temptation of resuming high levels of spending. However, if oil prices continue to strengthen, government spending may loosen, providing a modest boost to the economy. The UAE is also expected to increase its budget to create jobs for nationals. This may discourage private investors, who would not only have to deal with reduced demand for goods in local and regional markets, but would also have to face renewed efforts to force them to hire UAE nationals.

Despite the recent upturn in oil prices, the UAE economy is now facing tough times. The reasons are simple: key export markets are still depressed, private investment is weak and consumer demand is low. But the future is not bleak. The open economy will ensure that inflation remains modest, while mergers strengthen the banking sector. The much-anticipated stock exchange, which is expected to be one of the strongest in the region, will be well regulated, while privatisation issues will increase liquidity on the exchange. Although charges for government services may rise between now and 2001, zero direct taxation at corporate and personal levels is expected to be maintained.

Besides that, the manufacturing sector is expected to show some gains, while other sectors, like construction, transport, trade, real estate, finance and tourism should gather strength by the end of 2001. According to a report published by the Cyprus-based Business Monitor International (BMI), the UAE expects imports to expand by five per cent in 2000 and six per cent in 2001 as the economy recovers. Growth in non-oil exports is also expected to rise by five per cent in the following two years, while re-exports are set to rise by five per cent. In Dubai alone, trade volumes are expected to hit nearly $30 billion in 2001, according to Dubai Chamber of Commerce and Industry statistics. It is also expected that the non-oil sector will account for 75.4 per cent of GDP by 2001. However, BMI expects real growth in the non-oil sector to recover only modestly, by 1.5 per cent in 2000 and 2.4 per cent in 2001 as local, regional and international demand increases only slowly.

Both Abu Dhabi and Dubai will remain the driving force behind the UAE's economic performance between now and the year 2001. In fact, the emphasis for both Abu Dhabi and Dubai will be on encouraging private sector participation in the development of the economy.

Unlike Dubai, Abu Dhabi's future is assured as a centre of the hydrocarbon industry, with nearly 92 billion barrels of proven oil reserves and 5.3 trillion cubic feet of natural gas. BMI expects the oil sector's contribution to GDP to rise to 24 per cent in 2000 and 24.6 per cent in 2001 as it makes up for the ground lost in the 1998-99 slump, when its share fell to 23.5 per cent and 23 per cent respectively. On top of its natural wealth, Abu Dhabi utilises shrewd investment strategies to finance a wide range of projects every year. Analysts believe Abu Dhabi will continue to invest oil revenues to add to its steady stream of investment income from its massive overseas assets, estimated at about $150 billion.

In the gas sector alone, Abu Dhabi will spend nearly $2 billion on projects. The emirate has recently channelled more than $1.2 billion into boosting onshore gas production to meet growing domestic demand for power and petrochemical feedstock. In 1998, work began on the second phase of the onshore gas development programme (OGD-II), which is designed to add a further one billion cubic feet per day of gas to national supplies from 2001, in addition to an extra 856 million cu ft/d due from the Asab gas development (AGD).

Similarly, Abu Dhabi's petrochemicals plans will move forward as the joint venture Borouge project to produce ethylene and polyethylene begins production in 2001. Firmer oil prices will help the emirate to finance its $1 billion per year programme to increase oil and gas recovery and develop its petrochemicals industry.

Meanwhile, Abu Dhabi's bid to become a trading centre of global as well as regional stature is being given a strong boost now that the Saadiyat Island scheme is under way. The estimated $3.3 billion scheme aims to achieve a New York-, London- or Tokyo-style financial centre, mopping up the Gulf's one trillion dollars of capital and $400 billion of annual commodity trading. Despite the initial optimism, however, questions remain over whether Saadiyat will be able to attract enough business from the Gulf and surrounding regions to take it into the big league.

With demand for power, water, sewage and waste disposal rising, Abu Dhabi is also taking significant steps to privatise its power and water sectors. The first phase of the first foreign-financed independent power project (IPP), Taweelah A2, will be completed by 2001. Building new power-generation and water-desalination plants cost an average of $800 million per year between 1993 and 1997. Hospitals are the next likely target for private involvement.

Unlike Abu Dhabi, Dubai does not have plans to privatise its existing utilities. But it is preparing for the post-oil era by building a comfortable environment for foreign investors. The emirate aims to encourage tourism, conferences and sporting events and to establish a presence as a regional and international financial and offshore business centre. However, the short-term outlook for Dubai's diversified economy is not so rosy. Despite its plans for the post-oil era, the emirate's falling oil production, now less than 230,000 barrels per day, is still its largest source of revenue. Although the recovery in oil prices that started in March 1999 will help to alleviate Dubai's fiscal plight, the Economist Intelligence Unit (EIU) believes the key to its long-term recovery lies elsewhere.

In fact, Dubai hopes that firmer oil prices will spark an increase in demand for imports via Dubai into neighbouring Saudi Arabia, Kuwait and Iran.

Dubai, which has earned a reputation for constantly reinventing itself, hopes to achieve growth rates in real non-oil GDP of six to seven per cent per year between now and the year 2015. In 1993, the emirate chalked out a strategic plan for development until 2012, keeping in mind the growing needs of urbanisation and industrialisation. The plan projected a population of 1.31 million by 2005 and 2.194 million by 2012. It estimated that 9.3 million telephone lines would be required in 13 years time and projected demand for power and water by 2012 was put at at 3,630mW and 1,150 million gallons per day, respectively.

According to government forecasts, Dubai's tourism revenue is set to rise to 20 per cent of its annual GDP during 2000, up from from 13 per cent in 1996. As testimony to the growing success of Dubai as a travel and leisure tourism centre, the emirate's international airport expects to double capacity to 12 million passengers by the end of this year. Contingency plans have also been made for a further extension, which will increase the capacity to 25-30 million passengers.

If the emirate succeeds in diversifying its economy and opening up to foreign investment, major new business opportunities may emerge between now and the year 2001. Stimulating investment will then be the key to boosting economic growth in the Gulf Arab state, and will largely be achieved through relaxing investment regulations by changing the UAE's regulatory framework and in particular, relaxing restrictions on foreign investment activity. The popularity of the free zones in the UAE, where no such constraints apply, testifies to that.