The UAE's current account is expected to remain in surplus in the next two fiscal years despite a projected decline in oil export earnings, a plunge in international interest rates and a high import bill, according to a Western report.

The surplus will allow the government to shun borrowing and at the same time support its overseas assets which in turn will consolidate the UAE's financial credibility in global markets, the London-based Economic Intelligence Unit (EIU) said.

Although oil prices and production are forecast to be lower, the UAE's current account will record a surplus of around $5.2 billion this year and $5.3 billion in 2003, the report said.

The balance, however, is lower than the current account surplus recorded in 2000 and 2001, when it stood at $13.2 billion and $9 billion respectively.

"The UAE's external position will be hit by reduced oil export revenues but the current account will remain in surplus," said EIU, part of the Economist Group.

"The expected decline in oil prices in 2002 will reduce hydrocarbons revenue from an estimated $25.3 billion in 2001 to $22.6 billion in 2002, leaving total exports of $47 billion. Merchandise imports spending will increase slightly by 1.5 per cent in nominal terms as the UAE continues to import products for large infrastructure projects."

The report said the decline in exports and unchanged import value would narrow the trade surplus from around $13.1 billion in 2001 to $10.4 billion in 2002.

The decline will combine with a drop in income flows in line with falling global interest rates and large payments on the services balance associated with trade flows to depress the current account surplus.

"The ratio between the current surplus and the gross domestic product will decline to around 7.4 percent in 2002 from 13.2 percent in 2001 and 20.1 percent in 2000," it said.

In 2003, the trade balance is projected to fall to around $10.1 billion while a modest rise in oil production will fail to offset the effects of the decline in crude prices and a rise in imports.

"However, higher global interest rates and improved corporate profitability in developed markets will lead to a marked increase in the returns on the UAE's overseas portfolios...

"As a result, the current account will show a modest increase in 2003...these surpluses will allow the government to continue build up the country's overseas investments."

The report forecast the UAE's average oil production at around 1.97 million barrels per day in 2002 and 1.98 million bpd in 2003 compared with 2.15 million bpd in 2001 and 2.23 million bpd in 2000.

A surge in prices in 2000 boosted the UAE's crude sales to a record $19.9 billion but they climbed down to around $17.9 billion last year, the report showed.

It said the UAE's strong dirham and its large overseas reserves coupled with the Central bank's strict monetary policy have kept inflation at 1.3 per cent in 2000 and 2001 and the level is projected to remain as low as 1.4 and 1.7 per cent in 2002 and 2003.