By Staff writer
Persistently lower oil prices continue to weigh on the UAE's economic sentiment and fiscal positions, says International Monetary Fund
Persistently lower oil prices continue to weigh on the UAE's economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, according to the International Monetary Fund (IMF).
In a report from its the Executive Board, the IMF economic activity in the UAE is expected to moderate further in 2016, before improving over the medium term.
Nonhydrocarbon growth is projected to slow to 2.4 percent in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions.
It said 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.
Over the medium-term, the IMF said nonhydrocarbon growth is forecast to increase to above 4 percent as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions as oil prices rise, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand.
It said non-oil economic activity has 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, it added.
"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," the Executive Board noted.
It added that 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.
Executive directors said they welcomed the UAE's resilience to the oil price shock and 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.
Directors encouraged the authorities to diversify revenues and rationalise current spending, while further strengthening public financial management. They also welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax.
Directors 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, they said in the report.
The IMF also commended the efforts to further diversify the economy away from oil, saying efforts should continue to improve the business environment, ease restrictions on FDI in the new investment law, and spur competition.