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DEC Calls for Expansionary Policies to Tackle Slowdown

A study prepared by the DEC’s Dubai Economic Policy Research Institute, known as EPRI, said that the duration of the country’s previous booms and busts depended on the policies the government devised in response to them.

“The government must reconsider the nation’s economic policies during recessionary times and replace them with expansionary policies. Conversely, the government has to adopt rationalised policies during booms,” the study said.

The UAE’s past monetary policies, which were aligned with those of the US due to the dirham’s peg to the dollar, did not serve the national economic need, it argued.

The UAE experienced four booms and three recessions during the period 1975-2006. Over those three decades, the average annual growth rate in real gross domestic product (GDP) was six per cent, while during 1974-2006 the average annual nominal GDP growth rate was 16 per cent, and the annual average of domestic liquidity growth was 17 per cent.

According to the latest forecast by Standard Chartered, the UAE’s economic growth would slow to 0.5 per cent in 2009 after reaching 7.5 per cent in 2008.

Central Bank Governor Sultan Nasser Al Suwaidi also has warned that annual economic growth in the UAE, the world’s fifth-largest oil exporter, would fall by more than half in 2009 to 3.1 per cent from 7.5 per cent due to lower oil output and slowing consumer spending.

During the UAE’s first recession, the study said, the country’s growth rate dropped from 14 per cent in 1977 to negative 5 per cent in 1978. At the same time, the fall in global demand for oil, and therefore the fall in UAE oil exports and revenues, resulted in low investment and public spending. “Subsequently, the recession got deeper,” the study noted.

The second recession, in 1982-1988, occurred when real GDP growth dropped an annual average of negative five per cent. This downward cycle was triggered by a decrease in oil exports, which fell as a result of softening global demand and the UAE’s commitment to lower Opec production quotas, the study said.

The third recession, according to the EPRI study, struck in 1997-1999, when real GDP growth dropped from eight per cent in 1997 to almost zero in 1998. “During this period, the UAE economy was influenced by the financial crisis that hit the South East Asia and Latin American economies. The crisis immediately started with a collapse in real estate and financial markets, then moved to many Asian banks and other countries,” it said.

In these earlier economic cycles, the UAE government, unlike governments with developed economies, increased spending during booms and cut spending during recessions, the study said.

· issacjohn@khaleejtimes.com