If Dubai starts paying its citizens in Bitcoin then Bitcoin won't lose value but gain more value overtime. The reason for that is the interest of the investors. The whale investors or investing companies know the potential of a country like Dubai and when Dubai starts paying in Bitcoin then for that they'll have to reserve huge amount of Bitcoin.
The Dubai Government will keep accumulating more Bitcoin so it can pay the citizens with Bitcoin, however if instead of Bitcoin they choose some kind of stable coin like USDT then that's not going to help Bitcoin at all, but I'm pretty sure Dubai is going to be a hub for cryptocurrencies and they won't avoid Bitcoin and they may also consider paying with some good altcoins as well.
I agree that if Dubai starts paying its citizens in Bitcoin it could lead to significant increase in value. Move would attract major investors and companies who would need to hold large amounts of Bitcoin to facilitate transactions. As Dubai government accumulates more Bitcoin for payments demand would rise driving up value. By the way if they opt for stablecoin like USDT instead it would not benefit Bitcoin. I also believe Dubai will embrace cryptocurrencies including Bitcoin and select altcoins and become hub for digital assets. This move could cement Bitcoin status as more valuable currency and pave way for wider adoption.