News Column

UAE to witness for further fiscal consolidation this year: IMF

June 12, 2014

Babu Das Augustine Deputy Business Editor


The UAE is expected cut government spending at both federal level and individual emirate level, according to the International Monetary Fund's 2014 Article IV Consultation Concluding Statement.

"The combined federal and emirate budgets imply further fiscal consolidation this year. Continued fiscal consolidation is appropriate as it would undo earlier fiscal stimulus that is no longer needed amid a strengthening economic cycle and recovering private credit growth," said the IMF statement.

A gradual reduction in fiscal spending is expected to help reduce fiscal vulnerabilities (indicated by an increased break-even oil price). The IMF views the federal budget as balanced and Dubai is on a path of gradual consolidation, further improving its debt sustainability. Abu Dhabi's budget already implies a large fiscal tightening (estimated at nearly 6 per cent of non-oil GDP), including by reducing security, defence, and other current expenditures.

As budget amendments in Abu Dhabi in the course of the year are likely to result in higher than initially budgeted spending, the mission projects a more moderate consolidation for 2014 but encourages the authorities to remain prudent throughout the year.

The IMF mission to the UAE said the medium-term fiscal plans are encouraging. The federal government has a balanced medium-term budget until 2016, and Dubai targets continued gradual consolidation in the coming years. However, the IMF said Abu Dhabi's budget process needs to be strengthened further to avoid frequent midyear budget amendments, and formally adopting a medium-term fiscal plan for Abu Dhabi and the UAE as a whole.

The IMF recommended gradual reduction in energy and water subsidies and limiting of further increases in the wage bill to maintain flexibility in the budget and gradually making private sector employment more attractive for nationals.

While the exchange rate peg has served the UAE well, the multilateral agency said UAE has benefited from the expansionary US monetary policy in the post-global-financial-crisis environment. Looking ahead, higher interest rates as a result of a normalisation of US monetary policy, unless disruptive, would support the UAE in containing private credit growth as the economy is growing at a fast pace.

The Article IV statement said the macroeconomic outlook of the UAE is positive with economic growth expected to remain strong at about 4.75 per cent in 2014 and 4.5 per cent in coming years. Growth will likely be driven by the non-hydrocarbon economy, which is expected to grow at around 5.5 per cent this year and beyond.

By contrast, growth in hydrocarbon production will likely be limited in the context of an amply supplied global oil market. Inflation is expected to further increase, driven by higher rents. The current account is set to further decrease reflecting a projected moderate decline in hydrocarbon prices and continued import growth.

The IMF sees significant external downside risks decline in oil prices, which could be triggered by deceleration of global demand or coming-on-stream of excess global supply capacity. The UAE's substantial foreign assets and fiscal surplus provide buffers against moderate or short-lived shocks. However, a large and prolonged fall in oil prices would reverse the accumulation of savings and ultimately result in lower fiscal spending.

Renewed surges in global financial market volatility could trigger an increase in risk premiums and tighten liquidity conditions for the Dubai government and its government related entities (GREs). By contrast, heightened geopolitical risks surrounding Russia and Ukraine or the Middle East could raise global energy prices and support the UAE's external position.

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Source: Gulf News (United Arab Emirates)

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