Is UAE Economic Productivity Declining?

Economic production, usually measured using gross domestic product (GDP) or gross national product (GNP), is not the same as economic productivity. Production is creating goods and services. Productivity is what you do with goods and services. To gain insight into the difference let’s look at a simple example.

GDP is a flawed measure

Simplistically, if you produce a widget that nobody uses then you’ve produced something but it is not productive. A little more realistically if you build a building at a cost of AED 60 million and valued in the market at AED 100 million then you have contributed AED 40 million to GDP (local resources involved that contributed to GDP would be counted in the AED 60 million cost). However this contribution to GDP is the same regardless of what is happening with the building. Regardless of whether you fully rent out the building or if it remains empty the GDP contribution remains the same. A reasonable person might argue that a GDP whereby the economy uses the production is healthier than the same GDP whereby the economy does not use the production.

So although GDP growth is often used as the main measure of the health of an economy it is clear that this does not give the full story. How can we clarify the picture further? One way to measure productivity, or if goods and services are being used, is by looking at the total value of transactions in an economy. The idea is that the greater the value of transactions the greater economic activity and, presumably, the greater use of goods and services.

The velocity of money

Looking at the absolute value of transactions is not useful for comparison purposes just as the absolute value of GDP is usually adjusted to GDP per capita to compare between economies. For value of transactions the usual normalisation is by the monetary base, and I will use the M3 money supply. This measure is called the velocity of money, or how often a unit of currency is used in a transaction. For clarity’s sake I should point out that this is economics and therefore there are variants to the definition of velocity of money but I will use this one.

I could not find any data source providing the velocity of money for the UAE so we’ll have to improvise. The UAE Central Bank (CB) provides data for cheques cleared and domestic fund transfers. These don’t necessarily reflect only transactions but it would be safe to say that they provide a directional idea to what is going on. Of course two major components that are missing are cash based transactions and credit card based transactions. The latter two are predominantly retail based whereas the former two would be expected to constitue corporate as well as large retail purchases. Still good enough to give one an idea.

Estimating the UAE’s velocity of money

According to the UAE CB in 2014 cheques cleared amounted to a value of AED 1.6 trillion whilst in 2018 the figure dropped 19% to AED 1.3 T. For customer to customer fund transfers the figure was AED 2.5 T for 2014 rising 28% to AED 3.2 T in 2018. Net is an increase of AED 400 billion which represents an increase of 10% over the statistics. Looks good but we still have to normalise by the money supply M3.

According to the UAE CB M3 was AED 1.3 T in 2014 and 1.6 T in 2018. So in 2014 our simplistic estimate for the velocity of money is AED 4.1 T / AED 1.3 T = 3.15. Similarly the simplistic estimate for 2018 is 4.5 / 1.6 = 2.81, or a drop of 11%. So activity looks like it dropped. We’re missing the cash and credit card transactions so it is important to keep this in mind. But the deficit in our simplistic estimate is about AED 500 billion, i.e. cheque and transfer transactions would have had to increase by an extra AED 500 billion for the 2018 statistic to be 3.15 (equal to 2014). Something to think about.


When making decisions under uncertainty, as any business does, it would be nice if you had all the useful data available. In the absence of a complete data set you have to make estimates, understanding that the lack of data can affect these estimates profoundly. But calculating such statistics can still be useful.