Page 210 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 12: Balance of Payments

Notes

Caselet UAE BOP Deficit Turned into Surplus

he balance of payments is the country’s primary record of all trade and financial
transactions conducted with the outside world. These transactions reflect the
Teconomic strength of the national economy and the degree of its adaptability to
changes in the global economy since they gauge the size and structure of both exports and
products, including factors that influence them such as the size of investments, employment
levels and pricing. As an oil exporter, oil and natural gas exports have allowed the United
Arab Emirates (UAE) to sustain a current account surplus for many years, but changes in
the oil prices cause this surplus to fluctuate widely from one year to year.

The decline in oil prices during 2009, led to a noticeable deficit in UAE’s balance of payments
due to the decline in the hydrocarbon revenues and exports, as the average price of UAE’s
Murban crude oil, produced by Abu Dhabi National Company, reached USD 63.7. However,
during 2010, Murban crude oil price increased to reach USD 79.85.
Consequently, UAE’s current account surplus, the main component of the balance of
payments, surged to AED 41.3 billion (2010), compared to AED 28.8 billion (2009). This
surplus was attributed to the increased oil exports beside the high per-barrel prices in the
global markets. Correspondingly, the current account balance reached 3.8% of GDP in
2010.
This was also accompanied by a large improvement in the capital and financial account
resulting from an increase in direct investment inflow to AED 7.1 billion (2010) from AED
4.7 billion (2009) along with a decline in the outflow to AED 7.4 billion compared to AED
10 billion (2009). Besides, funds outflow by banks in 2010 also plunged to AED 4.7 billion
from AED 36.28 billion (2009). As a result of this, the capital and financial account achieved
a surplus of nearly AED 7.4 billion in 2010 compared to the AED 35.5 billion deficit in 2009.
Accordingly, UAE’s balance of payments has turned from the AED 22.5 billion fiscal
deficit in 2009 to AED 26.9 billion surplus in 2010. Furthermore, it is forecasted that the
country’s current account will post a robust surplus in 2011. This is expected to be driven
by higher oil prices and a sustained recovery in tourism and exports as well as the country’s
increasing reputation as a safe haven in a volatile region.

Source: Middle East & Africa CEIC Database Team

Expenditure-Switching Policy

Expenditure switching policy primarily aims at changing relative prices and it includes variation
in exchange rate, exchange control, devaluation, import control and export promotion.

Devaluation

It means an official reduction in the external value of a currency vis-à-vis gold or other currencies.
Depreciation is also a fall in the external value of a country’s currency, not officially, but to the
influence of market forces – demand and supply. Devaluation lowers export prices and increases
import prices. However, it has many limitations. If the economy is already at full employment,
devaluation would be effective only if domestic expenditure or absorption were reduced
automatically by cash balance effect, money illusion and income distribution or by expenditure-
reducing policies.

LOVELY PROFESSIONAL UNIVERSITY 205