US embassy cable - 03ABUDHABI526

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 000526 
 
SIPDIS 
 
STATE FOR EB, NEA/ARP AND NEA/RA 
DOJ FOR T. GREENBERG 
COMMERCE PASS TO C. LOUSTAUNAU 
TREASURY PASS FEDERAL RESERVE 
NSC FOR J. MYERS 
 
NOFORN 
 
E.O. 12958: DECL: 02/01/2013 
TAGS: ECON, EFIN, EINV, PGOV, TC 
SUBJECT: SHOW ME THE MONEY: INSIGHTS INTO THE UAE BUDGET 
 
1.(U) Classified by A/DCM Tom Williams for reasons 1.5 (b) and (d). 
 
2.(C) Summary and comment:  Like so many countries in this part of 
the world, the UAE does not publish reliable or complete fiscal data. 
Only the federal budget -- which accounts for about a quarter of the 
consolidated fiscal position -- is publicly available. According to 
the IMF, errors and omissions in the budget averaged 13 percent of 
GDP in the 1990s.  A/DCM and Econoff met with Undersecretary of the 
Abu Dhabi Department of Finance Ju'an Salem Al-Dhaheri on January 27 
(the emirate of Abu Dhabi accounts for more than half of the UAE's 
total GDP and is the major contributor to the federal budget) to 
glean some insight into the budget-making process.  In a surprisingly 
candid meeting, Al-Dhaheri admitted that ADIA's significant 
investment income does not factor into the budget.  He commented on 
the Abu Dhabi Finance Department's own investments, which include 
lucrative holdings in the local real estate market. 
 
3.  (C/NF) Summary and comment continued: Al-Dhaheri noted that the 
UAEG would have "no problem" financing the budget deficit this year 
but admitted that investment income had taken a hit the last few 
years due to the sagging global economy. Luckily, only 70 percent of 
the budget is actually spent each year and this year some projects 
are being delayed -- beneficial because the Abu Dhabi budget operates 
on a pay-as-you-go system.  End summary and comment. 
 
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Counting The Revenue... 
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4.  (C/NF) Al-Dhaheri noted that the Finance Department works with 
ADNOC -- the Abu Dhabi National Oil Company -- to determine the 
average oil price for the budget, and estimate oil revenue for the 
coming year.  The Finance Department generally takes a conservative 
stand on oil price assumptions and tends to factor in a lower-than- 
realistic oil price for safe measure.  The assumed oil price is 
adjusted quarterly, using the rolling average oil price during the 
last three quarters as a basis. 
 
5.  (C/NF) The Abu Dhabi Finance Department does not factor the 
investment income from Abu Dhabi Investment Authority's (ADIA) 
significant foreign assets into the budget or consider it revenue. 
 (Note: In reality, ADIA operates as a stand-by source of petty 
cash -- and not so petty cash -- for Abu Dhabi, and the organization 
maintains a certain percentage of liquid investments in order to meet 
the unpredictable demands of financing the federal budget deficit, 
large military purchases, and other sensitive projects outside the 
regular budget. 
End note.)  Al- Dhaheri emphasized that the UAEG finances its budget 
deficit each year from ADIA, not from the domestic banks like some 
other countries in the region.  He noted that the habit in the 
region of laying off government debt on local banks is bad for 
business, and bad for the financial reputation of the country. 
 
6.  (C/NF) Al-Dhaheri mentioned that -- separate from ADIA  -- the 
Abu Dhabi Finance Department invests in local real estate and counts 
this income as budget revenue; the Department receives an average 
rate of return of 15 percent on real estate in Abu Dhabi, and 10 
percent respectively in Dubai.  Al-Dhaheri believes that the current 
practice in Dubai of providing long-term leases (up to 99-years) to 
foreigners unnecessarily invites competition into the market and 
depresses investment returns on real estate.  Al-Dhaheri perceives 
that foreigners circumvent the law requiring that they and they 
alone occupy the properties for which they have purchased long-term 
leases, and instead sublet their properties to others, in effect 
creating unnecessary (and unplanned) competition for UAE nationals. 
 
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...And Limiting Expenditures 
---------------------------- 
 
7.  (C/NF) Many expenditures are omitted from the budget, including 
transfers from Abu Dhabi to the northern emirates as well as 
transfers of foreign aid abroad.  Abu Dhabi budgets for all federal 
programs -- education, health, highway infrastructure, for example 
-- in Dubai and the northern emirates, but Al-Dhaheri confirmed that 
most transfers from Abu Dhabi to the northern emirates occur outside 
of the budget and are authorized by Sheikh Zayid himself.  Sheikh 
Zayid also generously grants foreign aid to countries without 
consideration of the budget, suggesting that his extra-budgetary 
outlays are funded prior to all others. 
 
8.  (C/NF) Al-Dhaheri is keen to balance the federal budget during 
his tenure at the Finance Department, and cut back on government 
waste.  He noted that Abu Dhabi departments -- the spendthrifts of 
the UAE -- use only about 70 percent of the monies allocated to 
them each fiscal year.  They are automatically provided inflated 
budgets, but do not have the capacity to absorb all of the projects 
slated for the year. 
 
9.  (C/NF) Specific projects, which lie outside the budgets of 
individual departments, are sometimes delayed to reduce the 
federal government's fiscal deficit. Al-Dhaheri intimated that 
the Finance Department follows cash-basis accounting procedures 
-- costs are subtracted in the period in which they are paid 
for by cash disbursements (when payment for projects is due), 
rather than allocated in advance for the fiscal year. This method 
allows the UAEG to simply postpone large projects until the next 
fiscal year if oil prices suddenly drop and revenues are less than 
expected.  Al-Dhaheri also confirmed that projects in Abu Dhabi 
receive priority over projects in other emirates. 
 
Wahba