Abu Dhabi’s Economy Stimulus

624 words | 3 page(s)

The current global macroeconomic dynamics are greatly influencing the strategies initiated in different economies to bolster growth. The volatility of prices experienced in the world’s petroleum sector has persisted and countries that rely on its associated commodities such as crude oil for development have been forced to diversify their economic activities. Abu Dhabi is one of the economies affected by the worldwide slump in crude oil prices, which have resulted in lower revenues and a stagnation of its Gross Domestic Product (GDP). To steer an economic stimulus, the country’s administration has allocated $13.6 billion to facilitate its diversification into other revenue-generating activities and stop relying heavily on petroleum as the only significant component of its GDP.

The injection of the multibillion-dollar package into Abu Dhabi’s economy is expected to stimulate economic activities in the private sector which has been lamenting the lack of government spending in the last few years, reducing the money supply. With the country facing a possible recession, providing a favorable environment for both the public and private companies to flourish will increase job opportunities for citizens and cure the current unemployment issue which has affected its output through the reduction of per capita income. GDP growth relies on consumption, which must be high and it may be in the form of an increased investment level. The move by the Abu Dhabi government implies the adoption of an expansionary fiscal policy to increase the money supply in the economy. An increase in money supply would compel financial institutions to review their interest rates downwards, making access to credit a possibility for all citizens. The income earned through employment and investments will increase the aggregate demand for locally produced goods, making it possible for firms to realize more revenues as a result of the enhanced purchasing power in the economy.

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Abu Dhabi’s economy before $13.6 billion is released by the government into the economy is shown by the equilibrium point P0Q0. This is where the country’s revenue is majorly realized through petroleum sales, with P0 indicating the prevailing market price for commodities while Q0 shows the equilibrium quantity available in the economy. However, with the current global trend whereby oil prices are falling, this equilibrium is low and does not involve the proper utilization of Abu Dhabi’s resources as other sectors are unable to produce enough goods for domestic consumption with the surplus exported to earn the country foreign exchange. However, the increase in money supply stimulates the economy and domestic companies are able to invest more and expand their businesses.

This increases employment opportunities in Abu Dhabi’s economy, enhancing the country’s per capita income as most citizens can now work, boosting their purchasing power and the overall consumption. The new equilibrium point is P1Q1, where P1 is the new equilibrium price triggered by an increase in the aggregate demand. On the other hand, Q1 is the new equilibrium quantity boosted by the enhanced productivity in the economy. Fig. 1 manifests the expansionary fiscal policy whereby an increase in government spending results in an outward shift of the aggregate demand curve fromD0 to D1 to the new equilibrium point where production is optimized.

Overall, the decision of the Abu Dhabi government to inject money into the economy is vital as it triggers a positive realignment of macroeconomic variables such as prices and the unemployment rate to boost productivity. With the falling petroleum prices, it is difficult for the country to attain the desired consumption levels by households to improve its GDP. Through the enhanced money supply, firms operating in other sectors can expand their operations, meaning that the economy is diversified, thus, the decline in the petroleum industry would not have dire implications on the total output.

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