LONDON, 15 November 2004 — Will it be “business as usual” for the Gulf emirate of Abu Dhabi and the federation it underwrites through being the single largest net revenue contributor, the United Arab Emirates (UAE), following the recent death of the revered Zayed ibn Sultan Al-Nahayan, ruler of Abu Dhabi and the president of the UAE?
“Babu Zayed”, as he was affectionately known by millions in the region, for years was the cementing force that kept the federation ticking, sometimes perceivedly by some sections in his own royal household at the expense of Abu Dhabi and to the advantage of neighboring Dubai, the second largest net contributor to the UAE budget, and by far the more savvy and promotion-friendly of the seven emirates that make up the federation.
But even before the demise of Zayed there were signs that the “Young Turks” at the Abu Dhabi royal court were contemplating a new dispensation for the emirate in a post- Zayed era.
While Dubai is working toward a “Future Without Oil” and has been promoting the emirate inter alia as an entrepot; a distribution hub; a shopping paradise; an Internet and media highway; a real estate investment destination; and more recently as a sports and leisure center, Abu Dhabi perceivedly has been lagging behind, despite the fact that much of the economic and development activity for which Dubai was claiming credit, has largely been financed by money from Abu Dhabi.
While Dubai has been aggressively forging ahead with its Dubai International Financial Center (DIFC), whose regulatory authority, the DFSA, in September 2004 issued its the first three authorizations and licenses to international banks and insurance companies, Abu Dhabi effectively scrapped its own Saadiyat International Financial Services Center some two years ago.
The new generation of the House of Al-Nahayan are much keener to put their emirate first, and according to some insiders, this will be reflected in future decision-making. This in the context of both Abu Dhabi’s relations with the other six emirates in the UAE, and in the context of the coterie of hangers on and so-called advisers that was such a feature of their father’s court.
The two pressing economic policy challenges for both Abu Dhabi and the UAE are in policy reform and in compliance processes and implementation. In September 2004, the then Crown Prince Khalifah ibn Zayed Al-Nahayan, issued Law 6 of 2004 for the setting up of a Financial Supervisory Bureau, an independent audit committee tasked with monitoring the financial behavior and accounts of; conducting special investigations into; and ensuring compliance with both local, national and international laws to which Abu Dhabi are privy to, of all Abu Dhabi government ministries and departments; the National Consultative Council, municipalities; utilities; and companies and projects in which the Abu Dhabi government has a stake of 52 percent or more. The audit committee will report directly to Khalifah.
The UAE, and especially Abu Dhabi, has been at the center of one of the more notorious collapses in international banking in recent years — that of Bank of Credit & Commerce International (BCCI). Abu Dhabi and the House of Al-Nahayan were the largest shareholders in BCCI, whose management was effectively outsourced to Pakistani banker Agha Hasan Abedi.
Whatever the merits of the case — and there is a serious case still to be answered by the Bank of England for not doing enough to save the bank especially after Zayed offered to underwrite the losses — there was a general perception that the House of Al-Nahayan had lost control over the management and accountability processes not only dealing with the BCCI debacle but also in general in other projects and investments in which it had a stake.
The UAE, according to a recent report by Standard Chartered Bank, is expected to earn $30 billion in oil revenues in 2004 thanks to the high oil prices, resulting in a current account surplus of $8.8 billion. This compared with a projected surplus of $6.9 billion in 2003.
But the Fund urged the UAE government (and its component individual emirates) to improve transparency; to forge greater economic coordination between the seven emirates in the federation; and to further strengthen fiscal and financial sector policies. “While noting the efforts of some emirates and the federal government to improve the efficiency of public administration,” stressed the consultation, “the (IMF) directors also stressed the importance of improving fiscal data and transparency, and the use of medium-term budget frameworks.”
Furthermore, the fund urged the UAE to fully assess the regulatory arrangements of the DIFC, and especially how they complement or are in conflict with the federal financial sector regulations. One banker in Dubai, for instance, stresses that a major challenge for the DIFC will be the extent to which the DFSA and its enforcement can operate outside the legal structure of the UAE.
The fund also suggested the phasing out of subsidies especially in the water and electricity sectors; and the introduction of value added tax (VAT) and an expansion of the corporate tax base.
In the current high oil price environment, the short-to-medium term economic prospects for both Abu Dhabi and the UAE are indeed encouraging. The IMF projects GDP growth at 7 percent for the UAE in 2003, the same as Standard Chartered Bank, but falling to 3 percent in 2005.
Another recent IMF report also warned that Middle East countries including the Gulf states lag behind other regions in foreign investment regimes and the reduction of barriers to entry such as minimum capital requirements; prohibited investment sectors; complex procedures and regulations; protection of property rights and so on.
The challenge for the scions at the Court of Al-Nahayan is give much greater and more meaningful accountability and transparency substance to the form of both Abu Dhabi as an emirate and the UAE as a federation.
