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UAE non-oil growth to hit 4pc medium term

DUBAI, July 21, 2016

Non-hydrocarbon growth in the UAE is expected to increase by more than 4 per cent over the medium term as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions, the International Monetary Fund (IMF) has said.

This will be aided by a rise in oil prices, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand, a statement released following the conclusion of the IMF Executive Board's consultations with the UAE.

Persistently lower oil prices continue to weigh on economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, limited negative inward spillovers and contained the weakening of investor appetite, the statement said.
 
Non-oil economic activity slowed to 3.7 percent in 2015 driven by a contraction of public investment in the context of fiscal consolidation, and lower contribution from domestic private demand. Negative effects on overall growth were partially offset by the increase in oil production. Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1 percent of GDP, while the current account surplus declined to 3.3 percent of GDP. Banks remained well capitalised and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs, it said.
 
Economic activity is expected to moderate further in 2016, before improving over the medium term. Non-hydrocarbon growth is projected to slow to 2.4 percent in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions.
 
IMF executive directors welcomed the UAE's resilience to the oil price shock. They commended the authorities for their prudent policies, which helped build large fiscal and external buffers and strengthened the economy. Nevertheless, persistent lower oil prices continue to pose challenges. Directors underscored the need for sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability, and promote long-term growth.
 
IMF welcomed the authorities’ commitment to pursue fiscal consolidation. For the near term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimise the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure intergenerational equity, the statement said.

Directors encouraged the authorities to diversify revenues and rationalise current spending, while further strengthening public financial management. They welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax. They also recommended phasing out remaining energy subsidies, while protecting the vulnerable. Priority should also be given to curb other current spending, while preserving public investment and enhancing its efficiency.

The statement noted that developing a consolidated forward-looking medium-term fiscal framework would assist the authorities in setting direction for fiscal policy, and in aligning resource allocation with the UAE 2021 vision. They encouraged the authorities to strengthen the debt management framework to better account for contingent liabilities from government related entities and public-private partnerships.


IMF directors noted that the peg remains an appropriate anchor for price and financial stability. They supported continued efforts to enhance the monetary framework, particularly by improving liquidity management. They encouraged further steps to develop domestic debt markets and reduce private sector foreign exchange exposure. They also encouraged the authorities to tap into sovereign wealth funds and international capital markets to finance the deficit.

IMF also welcomed the ongoing revision of the central bank and banking law and plans to strengthen banking regulation and supervision. It emphasised that the new law should further enhance central bank independence and governance, align the macroprudential institutional framework with best practices, upgrade banking sector regulation and supervision in line with global standards, strengthen safety nets, and improve the resolution framework.

IMF directors commended the efforts to further diversify the economy away from oil. They encouraged continued action to increase productivity and foster competitiveness. Efforts should continue to improve the business environment, ease restrictions on FDI in the new investment law, and spur competition. In addition, priority should be given to upgrading the quality of education, promoting innovation and entrepreneurship, and facilitating SMEs’ and startups’ access to finance, notably through an approval of the bankruptcy law and further broadening the credit bureau’s coverage, they said. -TradeArabia News Service




Tags: UAE | growth | non-oil |

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