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Wed 4 Mar 2009 10:55 AM

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UAE gov't to introduce three yearly budgets

UPDATE 1: Gov't moves away from incremental budgeting, in response to unstable economy.

The UAE said on Wednesday it was revamping the way it develops its federal budget, including releasing budgets every three years and adopting a "zero-based budgeting" format.

The first three-year budget would run from 2011 to 2013, and the draft would be ready by November this year, the oil exporter's Ministry of Finance said. Analysts deemed the move as more appropriate to help the country prioritise spending.

The UAE, a federation of seven emirates including Abu Dhabi and Dubai, currently releases budgets every year and uses an incremental budgeting process. Each emirate, meanwhile, devises its own budget.

"We are moving away from incremental budgeting because incremental budgeting presumes a stable environment where current activities persist at roughly the same cost in future years," the ministry said.

"Zero-based budgeting is useful for rapidly growing GDP and (the) need for large-scale infrastructure development."

Last year, the UAE federal government said it raised 2009 state expenditure by 21 percent to 42.2 billion dirhams ($11.49bn) in a balanced budget.

Like its neighbours in the world's biggest oil-exporting region, growth in the UAE is slowing after a six-year economic boom as it suffers from a slump in oil prices and recession in much of the industrialised world.

Ministry undersecretary Younis al-Khouri said individual emirates and ministries contribute to federal revenues, which are "stable, fixed and not dependent on the oil price".

Dubai, facing a real estate downturn and economic slowdown, said in January it projected a budget deficit this year. Abu Dhabi holds more than 90 percent of the UAE oil reserves and is the main contributor to the federal budget.

"It sounds (like) a much more positive and detailed approach to the budget, but one also needs to see how important the federal budget will be in the future compared to the budgets of individual emirates," said Marios Maratheftis, regional head of research at Standard Chartered.

"For an economy like the UAE which is diversifying rapidly, it is important for the government to be making the necessary spending because the authorities have the financial strength."

In incremental budgeting, ministry budgeting teams justify only increases over the previous budget, without reference to previous levels of spending.

Under zero-based budgeting, individual departments would have to build each three-year budget from the ground up, including approving all expenditures rather than just increases in spending, the ministry said.

"There are clear differences between original budget requests from ministries and ultimately approved budgets. But it will mean a lot more work than incremental budgets," it said.

The final 2011-2013 budget would be developed in the first half of 2010, it said. (Reuters)