With Brent crude oil prices hitting an 11-year low of $35.98 (Dh132) a barrel, there is a temptation for oil-dependent economies such as Abu Dhabi to slash their budgets. But the approval of a Dh17.5 billion budget for large-scale capital projects across the emirate next year is a good sign for the economy. The money will be allocated to housing (Dh5.9bn), infrastructure (Dh4.3bn), education (Dh1.8bn), government facilities (Dh614m) and social centres (Dh644m).
Even with falling revenues, it is important to invest in projects like these because some of them will be influential in diversifying the economy away from extractive industries, making the emirate more financially robust by lessening our exposure to global fluctuations in crude oil prices.
Infrastructure investments, in particular, help solve some of the challenges the UAE economy faces by driving productivity growth, creating jobs, enhancing competitiveness, and increasing living standards and social prosperity. These factors are all critical for the country’s long-term progress.
One piece of news that is helping provide room to manoeuvre is a new report by the Ministry of Finance showing the UAE is likely to run a smaller fiscal deficit this year than predicted. Government strategies to cut or eliminate financial subsidies for fuel, water and electricity have succeeded in decreasing spending by 21.6 per cent in the three months to September, compared to the year before.
The flucuating price of oil shows why economic diversification efforts should continue. Despite increasing global demand for oil, rising from 91.3 million barrels per day last year to 97.4 million bpd by 2020, Opec predicts economic growth in member states will remain below their potential in the next few years. Introducing some forms of tax will, as we argued on these pages yesterday, help make government revenues more predictable.
This measured and nuanced response shows the UAE is moving in the right direction, with the end result of these financial challenges being a more mature and robust economy.
