The United Arab Emirates (UAE) is the world’s eighth largest oil producer, and the third largest in the Middle East after Saudi Arabia and Iraq. Its oil wealth has led to rapid GDP growth. However, being dependent on oil resources also comes with risks, and can cause a country’s economy to fluctuate according to the oil price. This is often referred to as the resource curse, whereby a country focuses too much of its production in a single industry, not diversifying investments in other sectors. Has the UAE managed to escape the resource curse?
Refresh this chart in your browser | Edit the chart in Datastream
As can be seen in the chart below, the UAE’s GDP changes in the oil price, indicating that the country’s economy is heavily reliant on oil revenues. One notable deviation from this trend is in 2015-2016, when the UAE sustained high GDP growth through fiscal spending in the non-oil sector, despite a sharp decline in the oil price. However, since 2017, the effect of the oil price on economic growth has been particularly pronounced. The UAE therefore risks being subject to the resource curse — so what measures have been taken to mitigate it?
Refresh this chart in your browser | Edit the chart in Datastream
Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.
One way of mitigating the associated with oil-rich economies is to set up sovereign wealth funds as a channel for the large foreign exchange reserves accumulated from oil revenues. The UAE’s foreign exchange reserves reached 41% of GDP in 2023. The country has multiple sovereign wealth funds, with the Abu Dhabi Investment Authority (ADIA) ranking as the third largest in the world. Through the ADIA, the UAE invests budget surpluses from oil revenues. It is a savings fund, and its purpose is to maintain the oil wealth for future generations and generate long-term financial returns. Furthermore, investing the ADIA abroad avoids inflationary pressures in the domestic economy. Since monetary policy in the UAE focuses on exchange rate targeting (pegging the UAE dirham to the USD), avoiding inflationary pressures through other means is essential.
Refresh this chart in your browser | Edit the chart in Datastream
Pegging the AED (the UAE dirham) to the USD helps avoid Dutch disease, another well-known risk for resource-rich countries. Dutch disease is a term used to describe commodity exports leading to a swift appreciation of the local currency, decreasing the competitiveness of other export sectors. Channelling excess export revenues abroad through sovereign wealth funds helps to counterbalance the trade surplus with a capital account deficit, and helps sustain a currency peg.
Another way of mitigating the risk associated with being heavily reliant on one sector, is to diversify investments into other sectors. The UAE’s non-oil output represented 74% of GDP in 2023, comparing favourably to Saudi Arabia, although the gap has started to close. Since our data begin in 2002, the oil share peaked at just above one third of UAE GDP in 2006. It has since dropped to one quarter of GDP. Furthermore, the value of non-oil exports surpassed oil exports in 2015. The government has been successful in diversifying away from oil through investing in non-oil sectors, such as financial services, tourism, real estate, logistics and telecommunications.
Refresh this chart in your browser | Edit the chart in Datastream
Refresh this chart in your browser | Edit the chart in Datastream
A further part of the UAE’s diversification strategy has been to attract foreign direct investment (FDI) — among other measures, through creating free-trade zones. FDI net inflows represented 4% of GDP in 2023, increasing from less than 1% prior to 2000. There are more than 40 free-trade zones in the UAE, each focusing on specific industries. For example, Media City focuses on media, and Science Park focuses on science, biotechnology, and pharmaceuticals. These zones create employment and absorb know-how from foreign companies, fostering innovation and economic diversification. As well as attracting foreign investment through favourable tax terms, they contribute to around 40% of the UAE’s exports.
Refresh this chart in your browser | Edit the chart in Datastream
The UAE has therefore been successful in diversifying investments to non-oil sectors; but its economy is still heavily influenced by the price of oil, and oil revenues are the primary source of government revenue. Risk factors affecting the price of oil, and therefore the UAE’s economy, include: global geopolitical uncertainties; possible demand shocks from slowing global growth; and coordination issues around oil production among OPEC+ countries. For example, OPEC and OPEC+ countries conceded in December not to increase oil production until April 2025, after oil price uncertainty spiked as Saudi Arabia threatened to increase its market share.
Refresh this chart in your browser | Edit the chart in Datastream
In conclusion, the UAE has largely been able to avoid the resource curse through investments in non-oil sectors to diversify its economy. However, although non-oil sectors are growing as a share of GDP, the country is still heavily reliant on oil exports. Factors that may lead to less growth in 2025 include whether OPEC+ decides to extend production cuts, as well as geopolitical tensions such as the conflict in the Middle East. The UAE’s long-run economic growth will depend on how well the country can manage without oil in a world that, despite the election of climate sceptic Donald Trump to the White House, is still transitioning towards net zero. The country’s sovereign wealth funds mitigate this risk, saving parts of the country’s oil wealth for future generations.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
______________________________________________________________________________________
LSEG Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.
LSEG offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
