The Indian rupee was the principal medium of exchange in the amirates until 1966, when Abu Dhabi began using the Bahraini dinar and Dubayy and the northern amirates switched to the QatarDubayy riyal. The federal Currency Board was established in 1973 to manage the new national currency (the UAE dirham, divided into 100 fils). The UAE dirham was officially linked in 1978 to the special drawing rights of the International Monetary Fund; in practice, however, the UAE dirham was pegged to the United States dollar. The rate of Dh3.67 to US$1 has held constant since the end of 1980.

Reluctant to transfer financial accountability over local banks (including ones in which they had major interests) to outsiders, the ruling amirs refused to give the Currency Board, managed mainly by foreigners, any control over banking. In the midst of an oil boom, banks proliferated, credit expanded, and real estate speculation was rampant, creating a chaotic financial environment. In 1975 a moratorium on the opening of new banks was imposed, temporarily lifted, then reimposed. The board's lack of foreign exchange meant it could not support the UAE dirham in 1977 when a massive run on the currency led to a financial crisis and the collapse of two banks. In late 1980, a law converting the Currency Board into a central bank took effect. Although the Central Bank had more authority than the Currency Board, it encountered opposition from various members of amirate ruling families when it attempted to put new policies and regulations in place.

The Central Bank's responsibilities include issuing currency, maintaining gold and foreign currency reserves, regulating banks, and controlling credit to encourage balanced economic growth. It also advises the government on monetary and financial policy. In 1981 the moratorium on new banks was lifted once again. But in an effort to rein in the proliferation of banks, the Central Bank announced the same year that foreign banks would receive no new branch licenses and that foreign banks already operating in the country would be restricted to eight branches each by 1984.

The Central Bank took several measures in the early 1980s to strengthen the banking structure. It expanded audits and inspections, increased bank reporting requirements, established a computerized loan risk department, and set minimum capital requirements. The Central Bank also created a regulation that limited the size of a bank's loans to its directors. As a result of a violation of this regulation, administrators appointed by the Central Bank in 1983 took over the UAE's third largest bank, the Union Bank of the Middle East. The Central Bank and the Dubayy government bailed out the bank in the amount of US$380 million. Another bank, the Emirates Industrial Bank, was established in 1983 with capital of Dh500 million as a source of loans for new industries.

As a result of uncertainty in the wake of Iraq's August 1990 invasion of Kuwait, between 15 and 30 percent of customer bank deposits were transferred out of the UAE. At least two banks required injections of funds from the Central Bank to maintain liquidity, but confidence and deposits gradually returned. The Central Bank's governor was replaced in 1991 in the wake of the failure of the National Investments and Security Corporation.

Another crisis rocked the UAE banking sector in 1991 when the Luxembourg-registered Bank of Credit and Commerce International (BCCI) was shut down in most of the sixty-nine countries in which it operated. BCCI's troubles began in 1988 when two of its United States subsidiaries were accused of laundering profits from the illegal drug trade. Abu Dhabi's ruler and UAE president, Shaykh Zayid ibn Sultan Al Nuhayyan, is a founding shareholder in BCCI and in 1990 had purchased, along with others in Abu Dhabi, a 77 percent share in the bank. Having moved the bank's headquarters from London to Abu Dhabi, Shaykh Zayid ibn Sultan was in the process of restructuring the troubled bank when an audit commissioned by the Bank of England alleged major and systematic fraud by BCCI. That audit triggered the closing of most of BCCI's banks worldwide.

The ripples of the crisis spread throughout the UAE business community. In addition to its massive obligations worldwide, BCCI owed agencies in Abu Dhabi US$1.4 billion and private investors US$600 million. In October 1992, a Luxembourg court approved a US$1.7 billion compensation agreement between the bank's liquidators and the majority shareholders. The agreement called for the shareholders to pay 30 to 40 cents on the dollar to BCCI depositors.

Budget

The provisional constitution stipulates that each amirate contribute to the federal budget. In practice, however, Abu Dhabi was the only contributor in the 1970s; Dubayy began to contribute in the early 1980s. In 1991 Abu Dhabi provided 77.5 percent of the federal budget and Dubayy, 8.5 percent. The government levies taxes on oil companies and banks in Abu Dhabi and Dubayy but not on other businesses and individuals.

The poorer amirates benefit from federal expenditures on defense, infrastructure, education, and social services, but they draw up their own budgets (which are seldom published) for municipal expenditures and industrial projects. Some of these projects have been motivated more by prestige than practicality. For example, Dubayy, Sharjah, and Ras al Khaymah have built large international airports, even though they are a one-half-hour drive from each other and less than a two-hour drive from Abu Dhabi's large international airport.

Ras al Khaymah and Sharjah have borrowed heavily to finance facilities and industries, resulting occasionally in economic and political problems. Sharjah, for example, suffered a coup attempt in 1987 carried out by opponents critical of the amir's alleged financial mismanagement. The amirate's debt burden at the time was estimated at US$920 million.

The revenue and spending estimates for the UAE's first and only five-year plan (1981-85) were based on strong oil revenues in the late 1970s. Petroleum revenues fell in the early 1980s, however, rendering many of the plan's goals unattainable. The federation's first budget deficit (Dh3.9 billion) occurred in 1982. Since that time, government planners have opted for a more flexible approach, keeping in mind the vagaries of the world oil market and tending to be more conservative in revenue and spending projections. Even so, sudden drops in oil revenues have repeatedly forced the government to put new projects on hold and to freeze current projects. Deficits generally are funded by Abu Dhabi and Dubayy and by borrowing from the Central Bank.

Although there is no attempt at long-term, coordinated development planning, three main objectives have guided federal government spending. These include strengthening the federation's physical infrastructure and social services network, diversifying the economy, and expanding entrepôt trade.

Despite slowdowns in world oil markets and amirs jealous of their local sovereignty, the UAE has been able to finance massive infrastructure projects (roads, utilities, communications, ports, and airports); modern education, health, and welfare systems; and improvements in agriculture and fishing. The lion's share of the federal budget, however, goes to defense. As a result of the continuing potential for conflict in the gulf in the 1990s, defense will probably continue to absorb between 40 and 50 percent of federal outlays and will not face the same cuts as do other sectors if the economy contracts.

After battling budget deficits during most of the 1980s, the UAE saw budget surpluses in 1990 and 1991. Deficits were projected to return in 1992 and 1993, with an almost US$710 million shortfall expected in 1993 (the figure includes US$245 million rolled over from the previous year's deficit).

Abu Dhabi is one of the world's most generous donors of foreign aid in terms of GDP and population. In 1981 foreign grants and loans amounted to US$2.7 billion, or 8 percent of GDP. Even in leaner times, aid in 1983 was US$1 billion, or 4 percent of GDP. The Abu Dhabi Fund for Arab Economic Development, with paid-up capital of US$500 million, extends loans and grants mainly to Arab and Muslim countries. Recipients have included Bangladesh, Egypt, Jordan, Mauritania, Morocco, Syria, and Yemen. The level of annual outlays depends on oil revenues. In 1989 the fund's committed capital was US$2.2 billion. Loans in 1988 amounted to US$41.1 million, up from US$4.2 million in 1987.

Trade

The UAE, in particular Dubayy, epitomizes trade. The federal government promotes open and free trade as an official policy, and a thriving source of income and full employment has resulted. The oil economy (world prices and demand as well as local production) and regional security strongly influence trade. Oil and gas exports account for about three-fourths of all exports. The UAE's balance of trade surplus grew during the boom years of the 1970s but leveled off in the 1980s with decreased oil production. Although the Iran-Iraq War buffeted the oil economies of the region, Dubayy's fruitful trade links with Iran helped it to have exports and reexports of US$354 million in 1987.

The end of the Iran-Iraq War in 1988 led to a 20 percent increase in UAE imports, reducing the trade surplus from its 1987 level of US$5.2 billion (Dh19 billion) to US$3.7 billion (Dh13.7 billion). But oil price increases andproduction increases resulting from Iraq's invasion of Kuwait in 1990 created a windfall for the UAE and drove the federation's trade surplus to US$9.3 billion (Dh34.1 billion).

Administering customs and setting rates are functions reserved to the individual amirates, and duties and regulations therefore vary among them. In 1982 Dubayy and Sharjah reduced their customs duties from 3 percent to 1 percent, bringing them on a par with Abu Dhabi's tariffs. In 1983 a 4 percent general import tariff was imposed to conform to agreements among GCC members on minimum duties.

Principal imports are manufactured goods, machinery, transportation equipment, food, and live animals. Leading suppliers in 1988 were Japan, Britain, and the United States. Nonpetroleum exports include basic manufactures, aluminum, and cement. The reexport trade overshadows national exports. Federal exports, which consist largely of petroleum, go mainly to Japan. In 1988 national exports amounted to US$518 million while reexports stood at more than US$2 million. Iran, Qatar, and Saudi Arabia are the principal recipients of reexports. The view along Dubayy's bustling creek gives ample evidence of the vibrant reexport trade. Scores of large, motorized dhows tied up four and five deep line the wharf, their decks and holds packed with refrigerators, television sets, clothing, toys, and even automobiles. In 1991 Dubayy's imports (much of which was destined for reexport) arrived from Japan, the United States, China, Britain, and the Republic of Korea (South Korea).

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Source: U.S. Library of Congress