The United Arab Emirates' economy should grow by 3.3 percent this year, a tad higher than previously forecast, but regional turmoil may put pressure on local companies, the International Monetary Fund said.

The IMF predicted in October that economic output of the Opec member would expand by 3.2 percent this year, but prospects have improved as crude prices have touched two-and-half year highs of above $100 per barrel.

'The economic recovery is gaining strength and this is supported by a favourable global environment with high oil prices, though subject to uncertainties arising from regional uncertainty,' Taline Koranchelian, head of an IMF mission to the UAE, told Reuters.

The IMF was assessing the performance of the world's third-largest oil exporter during a regular annual mission that started on February 27.

Analysts polled by Reuters in December were more optimistic, forecasting UAE growth of 3.6 per cent.

Popular revolts against oppressive regimes and economic grievances have swept through the Arab world over the past two months, sending Gulf stock markets lower and pushing up debt insurance costs in the region.

'The re-pricing of risk in the region could lead to higher borrowing costs which may put pressure on the corporate sector including on the GREs (government-related entities),' Koranchelian said.

'However, the UAE may also benefit from higher tourism and investments looking for diversification within the region,' she said.

The UAE has been spared of civil protests so far but with continuing unrest in nearby Bahrain and Oman, the government has pledged to spend $1.6 billion on improving living conditions in less-developed northern emirates.

Koranchelian said the government's short-term policies need to be supportive of the economic recovery in the UAE, where fiscal policy is a key tool to steer the economy as a currency peg to the US dollar restricts monetary policy.

'A neutral fiscal stance will ease the recovery, though the government should stand ready, if need be, to increase spending to support the recovery,' she said.

Analysts expect the second-largest Arab economy to lag behind its Gulf peers due to the impact of debt woes in Dubai, whose gross domestic product should rise by 2.8 percent this year, the IMF forecasts, up from 0.5 percent in 2010.

Prospects improved after state conglomerate Dubai World sealed a deal to restructure nearly $25 billion in debt in September, though uncertainties remain whether the emirate and its companies will be able to repay some $30 billion in bonds and loans over the next two years.

'The restructuring of Dubai GREs is ongoing. Throughout the process, due regard should be accorded to ensuring the viability of these entities through writing-off impaired assets,' Koranchelian said.

'In addition, the government should communicate its GRE financing strategy for 2011 and 2012,' she said.-Reuters