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1998 Country Report on Economic Policy
and Trade Practices: United Arab Emirates
UNITED ARAB EMIRATES
The Department of State submitted this report to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, on January 31, 1999.
Key Economic Indicators
(Billions of U.S. Dollars unless otherwise indicated)
1996 1997 1998 1/ Income, Production and Employment: Nominal GDP 2/ 47.5 48.0 50.7 Real GDP Growth (pct) 9.4 0.8 N/A GDP by Sector: 3/ Agriculture 1.4 1.4 N/A Manufacturing 4.9 5.4 N/A Services 9.4 9.7 N/A Government 4.8 5.3 N/A Per Capita GDP (US$) 18,600 17,800 17,800 Labor Force (000s) 1,109 1,131 1,250 Unemployment Rate (pct) 2.6 2.6 2.6 Money and Prices (annual percentage growth): Money Supply (M2) 2.4 9.0 N/A Consumer Price Inflation (pct) 3.3 2.8 2.1 Exchange Rate(Dirham/US$) Official 3.67 3.67 3.67 Balance of Payments and Trade: Total Exports FOB 4/ 32.4 31.1 33.2 Exports to U.S. 5/ 0.5 1.0 0.6 Total Imports CIF 4/ 26.3 25.0 25.9 Imports from U.S. 5/ 2.5 2.6 2.0 Trade Balance 4/ 6.1 6.1 7.3 Balance with U.S. 5/ -2.0 -1.6 -1.4 Current Account Surplus/GDP (pct) 1.2 1.3 N/A External Public Debt 0.0 0.0 N/A Debt Service Payments/GDP (pct) N/A N/A N/A Fiscal Deficit/GDP (pct) 13.0 3.9 N/A Gold and Foreign Exchange Reserves (end of period) 8.0 8.3 N/A Aid from U.S. 0 0 0 Aid from All Other Sources 0 0 01/ Estimates based on available monthly data in November 1998.
2/ GDP at current prices.
3/ GDP at factor costs.
4/ Merchandise trade.
5/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1998 figures are estimates based on data available through August.
Sources: Ministry of Planning, Central Bank, Ministry of Economy and Commerce.1. General Policy Framework
The United Arab Emirates (UAE) is a federation of seven emirates. The individual emirates retain considerable power over legal and economic matters, most significantly over ownership and disposition of oil resources. Each emirate has its own Customs Service, as well as its own Civil Aviation Authority. The federal budget is largely derived from transfers from the individual emirates. Abu Dhabi and Dubai, the most prosperous emirates, contribute the largest shares.Oil production and revenues from the sale of oil constitute the largest single component of GDP, accounting in 1997 for 30.3 percent of GDP and equaling roughly 40 percent of export and 86 percent of government revenue. Rising or declining oil prices have a direct effect on GDP statistics and an indirect impact on government spending but may, nevertheless, be less obvious in terms of overall economic activity. The great majority of the UAE's oil export income comes from Abu Dhabi Emirate, though Dubai and Sharjah also produce and export a modest amount of oil and gas products. The scarcity of oil and gas reserves in the UAE's northern emirates has led to continued -- and successful -- attempts at economic diversification. Important sectors under development include tourism, manufacturing, air travel and cargo services, and vessel fuel bunkering.
Government fiscal policies aim to distribute oil wealth to UAE nationals by a variety of means. Support from the wealthier emirates of Abu Dhabi and Dubai to less wealthy emirates is provided through the federal budget, largely funded by Abu Dhabi and Dubai, and by direct grants from the governments of Abu Dhabi and Dubai.
Federal commercial laws promote national ownership of business throughout the country. Foreign businesses, except those seeking to sell to the UAE Armed Forces, must have a UAE national sponsor. Agency and distributorship laws require that a business engaged in importing and distributing a foreign-made product must be owned 100 percent by a UAE national. Other businesses must be at least 51 percent owned by nationals. Companies located within the UAE's nine free zones are exempted from agency/distributorship, sponsorship, and national ownership requirements. However, if they lack 51 percent national ownership, they are treated as foreign firms and subjected to these requirements if they market products in the UAE.
The central bank seeks to maintain the dirham/dollar exchange rate, which has not changed since 1980, and to keep interest rates close to those in the United States. Given these goals, the bank does not have the scope to engage in independent monetary policy. Trends in domestic liquidity continue to be primarily influenced by residents' demand for UAE Dirhams relative to foreign exchange. Banks convert dirham deposits to foreign assets and back again in search of higher rates of return and in response to fluctuations in lending opportunities in the domestic market. To a limited extent, domestic liquidity can be influenced by the central bank through its sale and purchase of foreign exchange, use of its swap facility, and transactions in its certificates of deposit.
In recent years the UAE has run budget deficits. In 1994, the UAE budget deficit as a percentage of GDP was 7.9 percent; in 1996 that figure grew to 13.0 percent, before decreasing to approximately 4 percent in 1997. Assuming current policies remain unchanged, fiscal deficits will persist. Deficits are financed by domestic borrowing, principally by overdrafts from banks in which government entities have an ownership share, and by liquidation of or interest from overseas assets.
2. Exchange Rate Policies
There are no restrictions on the import or export of either the UAE Dirham or foreign currencies by foreigners or UAE nationals, with the exception of Israeli currency and the currencies of those countries subject to United Nations sanctions. Since November 1980, the dirham, though formally pegged to the IMF's Special Drawing Rights (SDR) at the rate of 4.76190 dirhams per SDR, with a margin of fluctuation set initially at 2.25 percent and widened in August 1987 to 7.25 percent, has been kept in a fixed relationship with the U.S. Dollar. The exchange rate is 3.67 UAE Dirhams per 1 U.S. Dollar.3. Structural Policies
Foreign workers make up approximately 90 percent of the UAE labor force. In an effort to stem the problem of illegal immigration and employment, better regulate the labor market and improve its efficiency of administration, a new Labor Law came into effect on 1 October 1996 which dramatically increased the severity of penalties applicable to immigration offenses. As a result of the new immigration rules, nearly 10 percent of the UAE's population (roughly 20 percent of its work force) left the country between the beginning of August and the end of October 1996, although most returned in subsequent months once their immigration status was clarified. Employment of UAE citizens -- known as "Emiratization" -- is a stated national objective. In addition to persuasion and encouragement, the UAE Government has begun to employ legislation as a tool for promoting job opportunities for UAE nationals. Beginning in January 1999, employment of UAE nationals in the banking sector must increase by 4 percent per year, with UAE nationals required to comprise 40 percent of total banking sector work force in 2009.
There is no income tax in the UAE. Foreign banks pay a 20 percent tax on their profits. Foreign oil companies with equity in concessions pay taxes and royalties on their proceeds. There are no consumption taxes, and the highest customs duty is 4 percent. More than 75 percent of imports still enter duty free. Gulf Cooperation Council (GCC) states continue to be engaged in discussions on unifying customs tariffs. Some progress has been made on this issue; the UAE, with its dependence on trade and its commitment to the free flow of goods, continues to push for lower rates than its GCC neighbors.
Prices for most items are determined by market forces. Exceptions include utilities, educational services, medical care and agricultural products, which are subsidized.
A passport and visa are required for entry into the UAE. Multiple entry visas for business or tourism and valid for up to ten years are available to U.S. passport holders from UAE embassies. Sponsors are not required, but applicants may be asked to provide an invitational letter to confirm the purpose of travel. These visas do not permit employment in the UAE.
4. Debt Management Policies
The UAE Federal Government has no official or commercial foreign debt. Some individual emirates have foreign commercial debts, and there is private external debt. There are no reliable statistics on either, but the amounts involved are not large. The foreign assets of the Abu Dhabi and Dubai governments and their official agencies are believed to be significantly larger than the reserves of the central bank.
5. Significant Barriers to U.S. Exports
The UAE maintains non-tariff barriers to trade and investment in the form of restrictive agency, sponsorship, and distributorship requirements. In order to do business in the UAE outside of one of the free zones, a foreign business in most cases must have a UAE national sponsor, agent or distributor. Once chosen, sponsors, agents, or distributors have exclusive rights. They cannot be replaced without their agreement. Government tendering is not conducted according to generally accepted international standards. Retendering is the norm. To bid on federal projects, a supplier or contractor must be either a UAE national or a company in which at least 51 percent of the share capital is owned by UAE nationals. Federal tenders are required to be accompanied by a bid bond in the form of an unconditional bank guarantee for 5 percent of the value of the bid.Except for companies located in one of the free zones, at least 51 percent of a business establishment must be owned by a UAE national. A business engaged in importing and distributing a product must be either a 100 percent UAE owned agency/distributorship or a 51 percent UAE/49 percent foreign Limited Liability Company (LLC). Subsidies for manufacturing firms are only available to those with at least 51 percent local ownership.
The laws and regulations governing foreign investment in the UAE are evolving. There is no national treatment for investors in the UAE. Foreigners cannot own land or buy stocks. There have been no significant investment disputes over the past few years involving U.S. or other foreign investors. Claims resolution is generally not a problem, because foreign companies tend not to press claims, knowing that to do so would jeopardize future business activity in the UAE.
6. Export Subsidies Policies
The government does not employ subsidies to provide direct or indirect support for exports.
7. Protection of U.S. Intellectual Property
The UAE is a member of the World Trade Organization (WTO) and should be in compliance with its obligations under the Trade Related Aspects of Intellectual Property (TRIPs) Agreement by January 1, 2000. The UAE is also a contracting party to the World Intellectual Property Organization (WIPO), and it signed the Paris Convention for the protection of industrial property (patent, trademark and related industrial property). The UAE remains on USTR's "Special 301" Watch List because of deficiencies in protection of Intellectual Property Rights (IPR). In April 1998, the USTR cited inadequate protection of computer software and pharmaceutical patents as reasons for maintaining the UAE on the Watch List.In 1992 the UAE passed three laws pertaining to intellectual property: a Copyright Law, a Trademark Law, and a Patent Law. Enforcement efforts did not begin in earnest until 1994. As a result of these efforts, the UAE is largely clean of pirated sound recordings and films. While the government has also undertaken enforcement actions against local companies selling pirated computer software, U.S. industry remains concerned about reports of large-scale copying of business computer software by corporate end-users. Efforts to combat computer software piracy in the UAE have been successful; according to industry estimates, the rate of software piracy in 1997 declined 12 percentage points, to 60 percent. The UAE is recognized as the regional leader in fighting computer software piracy.
UAE patent law provides process, not product, patent protection for pharmaceutical products. The Ministry of Finance and Industry is currently in the process of amending the Patent Law; the amended version is expected to provide explicit product patent protection to pharmaceuticals. A local pharmaceutical manufacturer continues to produce patent protected products. The Ministry of Information is currently amending the Copyright Law to bring it up to international standards.
According to the International Intellectual Property Alliance, estimated 1997 losses to U.S. copyright-based industries were $27.4 million in the UAE, a slight decrease from the prior year.
8. Worker Rights
a. The Right of Association: There are no unions and no strikes. The law does not grant workers the right to organize unions or to strike. Foreign workers, who make up the bulk of the work force, risk deportation if they attempt to organize unions or to strike. Since July 1995, the UAE has been suspended from U.S. Overseas Private Investment Corporation programs because of the government's lack of compliance with internationally recognized worker rights standards.b. The Right to Organize and Bargain Collectively: The law does not grant workers the right to engage in collective bargaining, which is not practiced. Workers in the industrial and service sectors are normally employed under contracts that are subject to review by the Ministry of Labor and Social Affairs. The Ministry of Interior Naturalization and Immigration Administration is responsible for reviewing the contracts of domestic employees as part of residency permit processing. The purpose of the review is to ensure that the pay will satisfy the employee's basic needs and secure a means of living. For the resolution of work-related disputes, workers must rely on conciliation committees organized by the Ministry of Labor and Social Affairs or on special labor courts. Labor laws do not cover government employees, domestic servants, and agricultural workers. The latter two groups face considerable difficulty in obtaining assistance to resolve disputes with employers. While any worker may seek redress through the courts, this puts a heavy financial burden on those in lower income brackets. In Dubai's Jebel Ali Free Zone, the same labor laws apply as in the rest of the country.
c. Prohibition of Forced or Compulsory Labor: Forced or compulsory labor is illegal and not practiced. However, some unscrupulous employment agents bring foreign workers to the UAE under conditions approaching indenture. The government prohibits forced and bonded child labor and enforces this prohibition effectively. In 1996, the UAE ratified the International Labor Organization's 1957 Abolition of Forced Labor Convention.
d. Minimum Age for Employment of Children: Labor regulations prohibit employment of persons under age 15 and have special provisions for employing those aged 15 to 18. The Department of Labor enforces the regulations. Other regulations permit employers to engage only adult foreign workers. In 1996, the UAE ratified the International Labor Organization's 1973 Minimum Age Convention. In 1993, the government prohibited the employment of children under the age of 15 as camel jockeys and of jockeys who do not weigh more than 45 kilograms. The Camel Racing Association is responsible for enforcing these rules. Children under the age of 15 working as camel jockeys have still been observed. In September 1998, a local newspaper reported the hospitalization of a five-year old, 20 kg camel jockey injured at work. The government prohibits forced and bonded child labor and enforces this prohibition effectively (see section "c" above). The government does not issue visas for foreign workers under the age of 16 years. Education is compulsory through the intermediate stage, approximately the age of 13 or 14 years.
e. Acceptable Conditions of Work: There is no legislated or administrative minimum wage. Supply and demand determine compensation. However, according to the Ministry of Labor and Social Affairs, there is an unofficial, unwritten minimum wage rate which would afford a worker and family a minimal standard of living. As noted above, the Ministry of Labor and Social Affairs reviews labor contracts and does not approve any contract that stipulates a clearly unacceptable wage.
The standard workday and workweek are eight hours a day, six days per week, but these standards are not strictly enforced. Certain types of workers, notably domestic servants, may be obliged to work longer than the mandated standard hours. The law also provides for a minimum of 24 days per year of annual leave plus 10 national and religious holidays. In addition, manual workers are not required to do outdoor work when the temperature exceeds 112 degrees Fahrenheit. Most foreign workers receive either employer-provided housing or housing allowances, medical care, and homeward passage from their employers. Most foreign workers do not earn the minimum salary of $1,090 per month required to obtain residency permits for their families. Employers have the option to petition for a 6-month ban from the work force against any foreign employee who leaves his job without fulfilling the terms of his contract.
The Ministry of Health, the Ministry of Labor and Social Affairs, municipalities and civil defense units enforce health and safety standards. The government requires every large industrial concern to employ a certified occupational safety officer. An injured worker is entitled to fair compensation. Health standards are not uniformly observed in the housing camps provided for foreign workers. Workers' jobs are not protected if they remove themselves from what they consider to be unsafe working conditions. However, the Ministry of Labor and Social Affairs may require employers to reinstate workers dismissed for not performing unsafe work. All workers have the right to lodge grievances with Ministry officials, who make an effort to investigate all complaints. However, the Ministry is understaffed and under-budgeted; complaints and compensation claims are backlogged.
Rulings on complaints may be appealed within the Ministry and ultimately to the courts. However, many workers choose not to protest for fear of reprisals or deportation. The press periodically carries reports of abuses suffered by domestic servants, particularly women, at the hands of some employers. Allegations have included excessive work hours, nonpayment of wages, and verbal and physical abuse.
f. Rights in Sectors with U.S. Investments: There is no difference in the application of the five worker rights discussed above between the sectors of the UAE economy in which U.S. capital is invested and other sectors of the economy. If anything, sectors containing significant U.S. investment, such as the petroleum sector, tend to have better working conditions, including higher safety standards, better pay, and better access to medical care. Extent of U.S. Investment in Selected Industries -- U.S. Direct Investment Position Abroad on an Historical Cost Basis -- 1997
(Millions of U.S. Dollars)
Category Amount Petroleum 370 Total Manufacturing 59 Food & Kindred Products 0 Chemicals & Allied Products 7 Primary & Fabricated Metals (1) Industrial Machinery and Equipment 3 Electric & Electronic Equipment 0 Transportation Equipment 0 Other Manufacturing (1) Wholesale Trade 91 Banking (1) Finance/Insurance/Real Estate (1) Services 97 Other Industries (1) TOTAL ALL INDUSTRIES 682(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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