The Federal National Council of the UAE discusses the annual budget and yearly final accounts. Under the country’s constitution, half of each emirate’s revenues are reserved for the federal budget, but in practice Abu Dhabi and Dubai generate 85 per cent of the UAE’s gross domestic product and are the only ones to contribute to federal finances. Of the two, Abu Dhabi’s contributions are the larger by some margin. The deficit is typically funded by additional contributions from the two emirates, together with some support from the UAE Central Bank. Negotiations are under way with other members of the Gulf Cooperation Council to prepare a common data standard and fiscal accounting framework. Greater rationalization is needed to prepare for the monetary union expected in 2010. The authorities are also discussing a value-added tax as a means of broadening the tax base, if it can be coordinated with the other GCC members. The UAE, with an outward oriented development strategy, has already diminished its dependence on petroleum revenues. Other revenues, amounting to barely five per cent of government revenues in 1980, grew to be one-third of the total in 2004.
Governed by Federal Law 7 of 1976, the State Audit Institution (SAI) conducts audits of ministries, federal government departments, public corporations, and all entities in which public ownership is at 25 percent or more of total shares. In cases of financial misconduct the president of the SAI may decide to prosecute the case before a special disciplinary council or to refer it to the concerned authority. The SAI is expected to write a general annual report of all its activities.
Auditors in the UAE are under the mandate of Law No. 9 of 1975, which established a register for auditors and established standards for the profession in the country. Law No. 22 of 1995 and supplementary regulations in Decree No. 49 of 1997 have now superseded the original legislation. All auditors in the country must register with the Ministry of Economy and Commerce. UAE business law expressly prohibits obstructing auditors’ access to company books and withholding required information; violating of laws pertaining to employment of U.A.E. nationals; and disregarding transparency laws for auditors.
The Public Tenders Law 16 of 1975 regulates all public sector tenders except those concerning federal defense or the individual emirates. The requirement that only UAE entities or nationals may bid may be waived when bids are directly solicited from manufacturers or, on a case-by-case basis, when the goods or services are not widely available.
The Central Bank, established by Union Law No. 10 of 1980, supervises a commercial banking system of 46 banks with over 300 branches. Like other central banks it issues the national currency and directs monetary, credit and banking policy. It also sponsored a seminar in 2004 about informal financial transfers in efforts to regulate and license this segment of the financial system. In late 2005 it joined the International Finance Corporation in promoting international practices of corporate governance in the formal banking sector.
The Central Bank tightened its supervision and monitoring program over the banks following a series of banking scandals and difficulties with non-performing loans in the 1980s and early 1990s. It also set a new risk-weighted minimum capital-asset ratio of 10%—2% above the Basel recommended minimum. Since October 2001, banks are required to inform the Central Bank of all transactions exceeding US$ 10,900. Non-performing loans constituted 12.5 per cent of loans outstanding at the end of 2004, but they were adequately provisioned, keeping the net total (after provisions) to less than 4 per cent.
A new anti money-laundering law in May 2002 gave the Central Bank the power to freeze any suspected accounts for seven days without prior legal permission. The banks were required to provide all details of their clients and internal and external transactions on request and to report on any suspected deal. The Central Bank has already frozen or blacklisted nearly 30 bank accounts on these grounds and uncovered several money-laundering operations inside the UAE. Laws were passed in 2004 against financing terrorism and for addressing money laundering issues in the UAE’s financial free zones.
The federal government has encouraged diversification and privatization of the economy. Dubai has taken the lead in encouraging foreign investment, in efforts to become a leading hub of international commerce, while Abu Dhabi, which accounts for about 95 percent of the oil production, is spearheading the privatization of utilities and seeking foreign investment in some sectors of the economy, particularly the power industry, to bring in modern technology and management techniques and reduce costs.
The most ambitious privatization plans concern water desalination and producing and distributing electricity. 11 companies are to be created in Abu Dhabi to manage the different aspects of producing, operating, scheduling, dispatching and distributing of water and electricity. Other issues include the elimination of government subsidies of water and electricity as well as a plan to trim the 14,000 strong staff in the industry in order to lower costs and increase profitability.
The Emirates Securities and Commodities Authority (ESCA), established in 2000, is the regulatory and licensing body responsible for the market integrity and transparency of the Abu Dhabi Securities Market and Dubai Financial Market, which commenced operations in June of that year. The Dubai International Financial Center in turned opened global operations in September 2004, and efforts are continuing, with advice from the IMF, to develop a comprehensive regulatory framework for these emerging capital markets. There are plans to establish a Securities Exchange Markets Board to monitor the market. Listed companies are obliged in the interests of transparency to issue quarterly financial statements.
In 2006 thirty-eight companies were listed for trade on the ADSM and thirty-four on the DFM. Market capitalization in the ADSM and the DFM reached 60% of GDP at the end of 2004 and was second regionally only to Saudi Arabia, although the turnover ratio remained below 4 per cent of the value of traded stocks. The Central Bank is keen to promote the development of a bond market, as a means to improve liquidity, and allow companies to raise medium-and long-term finance.
The Dubai International Financial Center (DIFC) is intended to become a regional financial center on par with New York, London, Tokyo and Hong Kong. The DIFC possesses its own legal structure and financial regulations, drawn up on the basis of international best practices. The DIFC operates in dollars, and contains its own regulatory body, the Dubai Financial Services Authority, and its own exchange market, the Dubai Regional Exchange (DRX). The regulatory structure for the center was published in December 2003.
The Emirates Center for Strategic Studies and Research is the premier think tank in the UAE. The ECSSR is an independent research institution that serves as a focal point for scholarship on political, economic, and social issues pertinent to the UAE, the Gulf, and the greater Middle East through the sponsorship of empirical research and scientific studies conducted by scholars from around the globe. The ECSSR’s Department of Economic and Social Studies conducts research on economics and society with the objective of providing recommendations that facilitate future policies for the UAE. It also analyzes economic transformations on the local, regional, and international levels that may impact the security and stability of the UAE.
The Emirates Institute for Banking and Financial Studies (EIBFS) offers nearly 200 training programs each year for the burgeoning banking sector. It also publishes a monthly magazine and operates a Research and Studies Department, founded in 2002.
International Transparency Standards
The United Arab Emirates permits publication online of the IMF's annual Staff Report on Article IV Consultations and joined the IMF’s General Data Dissemination System on July 31, 2008. The Emirates have also engaged with the IMF and World Bank in publishing Reports on the Observance of Standards and Codes (ROSC) for banking supervision and payment and settlement.
Both Moody’s and Standard and Poor’s have rated the country.