The 2008 Financial Crisis
The UAE was not immune to the 2008 financial crisis. Government levies few taxes – Dubai has no income tax – and government accounts for only USD 10 billion of the emirate’s debts, but its rulers sponsor companies, which together have accumulated about USD 70 billion in liabilities, making a total debt almost equal to the emirate’s 2008 GDP of USD 82 billion.
UAE authorities tried to counter the slowing growth and even decline of international credit after the 2008 financial crisis by increasing spending and liquidity in the banking sector, especially in Dubai, which lacked sufficient cash to meet its debt obligations. The UAE Central Bank and Abu Dhabi-based banks bought the largest shares; in 2009, the government of Abu Dhabi gave Dubai an additional loan of USD 10 billion.
The confidence-building measures offered by the government included:
- The Central Bank establishing a USD 21 billion liquidity facilit.
- Bank deposits reaching USD 285 billion at the end of the first quarter of 2009, compared to USD 252 billion at the end of June 2009.
- Monetary authorities reducing the rate of interest from 2.5 percent to 1.5 percent to support borrowing by banks.
- The Federal Government increasing its expenditures through expansionary fiscal policies, to offset the decrease in aggregate demand.
- The government following zero-based budgeting during the 2011-2013 budget cycle.
At the end of May 2010, Dubai World announced its final restructuring of its debt of USD 14.4 billion, the terms of which have been accepted by the creditor banks. Analysts were optimistic that the government would tackle the debt issue without adversely impacting the international credit standing of Dubai and the UAE. A report released by the Foreign Investment Office (FIO) of the Dubai Economic Department in 2010 shows that overall investor confidence in Dubai fared well, indicating a positive position for the emirate, after a period of global turbulence. Asked about their plans, 81 percent of investors who have investments in Dubai said that they intend to maintain or increase investment in the emirate.
Though the economy is expected to continue its slow recovery, the country will continue to face the long-term challenges of dependence on oil, a large expatriate workforce, and growing inflation. The UAE’s strategic plan for the next few years focuses on diversification and the creation of more opportunities for nationals through improved education and increased private-sector employment.
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