## cr17218 ## Source details **Canonical URL:** [cr17218](https://www.imf.org/-/media/files/publications/cr/2017/cr17218.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17218.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17218.pdf.json) --- ### Context and recent developments - UAE adapting to the “lower-for-longer” oil price environment aided by large financial buffers, safe-haven status, a diversified economy, and robust policy responses. - Authorities reformed energy subsidies and continued to improve the business environment; strengthening policy frameworks in financial, fiscal, and statistical areas consistent with IMF advice. - PMI: 56.1 in April 2017 (close to the 19-month high of 56.2 percent in March 2017). - Inflation: 1.8 percent in 2016; picked up in early 2017 after reductions in water and electricity subsidies and higher gasoline prices. - Growth: declined to 3.0 percent in 2016 from 3.8 percent in 2015. ### Economic performance and outlook - Growth and composition (real GDP annual percent change): - 3.3 (2014), 3.8 (2015), 3.0 (2016), 1.3 (2017), 3.4 (2018), 3.2 (2019), 3.1 (2020), 3.1 (2021), 3.1 (2022). - Oil and nonoil growth projections: - Real oil GDP: 0.4 (2014), 5.4 (2015), 3.8 (2016), -2.9 (2017), 3.2 (2018), 2.4 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - Real nonoil GDP: 4.6 (2014), 3.2 (2015), 2.7 (2016), 3.3 (2017), 3.4 (2018), 3.5 (2019), 3.4 (2020), 3.3 (2021), 3.3 (2022). - Outlook highlights: - Overall growth projected to ease to 1.3 percent in 2017, before recovering to above 3 percent in the medium term. - Nonoil growth projected to rise to 3.3 percent in 2017 and remain above 3 percent thereafter. - Inflation projected: 2.2 percent in 2017; 2.9 percent in the year following VAT introduction (one-off impact); then stabilize around 2.3 percent over the medium term. - VAT revenue impact projected to reach 1.5 percent of GDP over the medium term. - Housing market expected to bottom out in 2017, with headwinds from rising supply, fiscal restraint, higher interest rates, and stronger exchange rate. ### Fiscal developments, consolidation, and financing - Nonoil deficit: estimated decline by 6 percentage points to 21.8 percent of nonoil GDP in 2016 (after a decline of 9.7 pp in 2015). - Consolidation in 2016 came broadly equally from increases in revenues and spending restraint. - Total government and GRE debt: declined by 5 pp of GDP to 24.7 percent of GDP (including Abu Dhabi’s Eurobond $5 billion in May 2016 and Sharjah’s sukuk $500 million in January 2016). - Dubai’s GRE debt: decreased by 10 pp of GDP to 60 percent of Dubai’s GDP. - Cumulative deficits under current oil price baseline and assuming projected consolidation: could reach $89 billion over 2017‒22. - Fiscal consolidation path and targets: - Consolidation of 5½ pp of nonoil GDP projected between 2016 and 2022. - Federal budget projected to be balanced during 2018–22 as required under the Constitution; Dubai projected to run deficits reflecting Expo 2020 investment; Abu Dhabi plans steady consolidation. - At consolidated general government level, fiscal withdrawal projected at about 1 pp of nonoil GDP per year over 2018–22. - Under current policies, budget projected to return to balance by 2020. - Deficit financing guidance: - Continue tapping SWFs and international capital markets rather than withdrawing domestic deposits. - Start domestic sovereign debt issuance to develop a domestic debt market; approval of the Public Debt Law and Trust Law would facilitate federal debt issuance, including sukuk. ### Key fiscal and budget numbers (selected) - Consolidated general government (billions of UAE dirhams): - Total revenue: 518.8 (2014); 381.4 (2015); 362.3 (2016); 379.7 (2017); 405.9 (2018); 426.2 (2019); 444.6 (2020); 459.4 (2021); 474.4 (2022). - Expenditures: 490.5 (2014); 425.6 (2015); 417.3 (2016); 423.4 (2017); 434.7 (2018); 441.8 (2019); 445.7 (2020); 448.4 (2021); 450.1 (2022). - Net lending(+)/borrowing(-): 28.3 (2014); -44.2 (2015); -55.0 (2016); -43.7 (2017); -28.8 (2018); -15.6 (2019); -1.1 (2020); 11.1 (2021); 24.3 (2022). - Adjusted nonoil primary balance (percent of non-oil GDP): -37.5 (2014); -27.8 (2015); -21.8 (2016); -22.4 (2017); -20.8 (2018); -19.8 (2019); -18.6 (2020); -17.4 (2021); -16.4 (2022). - Fiscal breakeven oil prices (U.S. dollars per barrel): 91.0 (2014); 64.7 (2015); 61.5 (2016); 67.1 (2017); 62.1 (2018); 57.5 (2019); 53.3 (2020); 50.6 (2021); 48.1 (2022). ### Banking sector resilience, risks, and supervision - Banking sector indicators and developments: - Banks remained adequately capitalized: total capital ratio 18.6 percent and Tier 1 ratio 16.9 percent at end-March 2017; Regulatory capital to risk-weighted assets: 19.3 (2013), 18.2 (2014), 18.3 (2015), 18.9 (2016), 18.6 (2017q1). - Non-performing loans to total gross loans: 6.7 (2013); 5.6 (2014); 5.2 (2015); 5.3 (2016); 5.3 (2017q1). - Return on assets: 1.6 (2013); 1.7 (2014); 1.5 (2015); 1.4 (2016); 1.5 (2017q1). - Liquid Asset Ratio: 19.4 (2013); 22.9 (2014); 21.5 (2015); 21.2 (2016); 22.2 (2017q1). - Credit and funding: - Credit growth slowed to 5.3 percent year-on-year in Q1 2017. - Outstanding loans distribution: private sector 68 percent; GREs 12 percent; government 11 percent. - Most new loans went to GREs (40 percent); GREs also brought half of new resident deposits. - Banks’ wholesale foreign funding: 13.4 percent of total liabilities at end-March 2017. - Bank liquidity supported by increased government and GRE deposits; Liquid asset ratio 22.2 percent at end-March 2017. - Supervisory status and reforms: - CBU implementing capital and liquidity regulations in line with Basel III; upgrading its supervision and regulatory framework; draft central bank and banking law under discussion. - CBU stress tests: most of the 21 local banks would keep capital above the 12 percent regulatory minimum in an adverse scenario; two medium-sized banks had stressed Liquidity Coverage Ratio slightly below 100 percent. - Operational and AML/CFT issues: - Strengthening legal framework for AML/CFT; national risk assessment launched. - Remaining priorities: improve understanding of ML/TF risks (including nonresident flows); refine beneficial owner identification; process backlog of suspicious reports. - Some domestic banks preemptively stopped services to charities, exchange houses, and remittance offices; CBU required pre-notification before banks close accounts held by exchange houses and remittances. ### Bank regulatory and supervisory reform pillars (CBU) - Pillar I: Corporate governance regulations — strengthen board oversight, introduce independent directors, address conflicts of interest. Issued for consultation mid-2017; expected adoption early 2018. - Pillar II: Draft risk management regulations covering overall risk management, operational risk, market risk, interest rate risk, country and transfer risk. Planned issuance in 2017. - Pillar III: New regulations on compliance, outsourcing, internal audit, internal controls, financial reporting, major acquisitions, ownership transfer. Planned issuance during 2017‒18. - Pillar IV: Framework for bank resolution covering recovery and resolution planning, supervisory colleges, depositor protection; tailored to UAE structure where systemic banks are owned by Emirates governments. - Pillar V: Market development regulations: digital payments regulation (issued December 2016); draft crowdfunding regulation; new regulation on nonbank financial institutions. - Expected impact: strengthen supervisory and regulatory framework, facilitate move towards risk-based supervision, and enhance resilience when combined with Basel III and draft Central Bank Law. ### Downside risks and stress scenarios - Risks skewed to the downside: uncertainties around oil prices, policies in major economies, financial market conditions, and potential imprudent implementation of large investment projects. - Specific risks: - Lower oil prices (e.g., faster U.S. shale recovery or reduced compliance with production cuts) could reduce fiscal revenues and confidence; increased issuance by other oil exporters could pressure funding costs. - Retreat from cross-border integration (protectionism) could slow nonoil growth, affecting Dubai and Abu Dhabi via trade and oil demand channels. - Tighter/volatile financial conditions (faster U.S. rate rises or higher volatility) could raise borrowing costs for banks and GREs and affect liquidity; contingent liabilities from megaproject financing would raise sovereign risks. - Modeled scenarios (stress test highlights): 1. Lower oil prices (oil price lower by $10 in 2017-22): - Primary balance would deteriorate to 0.3 percent of GDP in 2022. - Government debt rising to 30.1 percent of GDP in 2022. - Gross financing needs rising to 9 percent of GDP in 2022. 2. GRE contingent liability (20 percent of GRE debt taken over by government in 2017-22): - Primary balance would deteriorate to 1.4 percent of GDP in 2022. - Government debt rising to 25.6 percent of GDP in 2022. - Gross financing needs rising to 5.7 percent of GDP in 2022. 3. Combined scenario (oil price shock + GRE contingent liability): - Primary balance would deteriorate to -0.8 percent of GDP in 2022. - Government debt rising to 13.2 percent of GDP in 2022. - Gross financing needs rising to 30 percent of GDP in 2022. - Dubai-specific stress results: - A sharp decline in GDP growth in 2017 (by ¾ standard deviation) and gradual recovery in 2018–22 would raise Dubai’s debt-to-GDP ratio by about 14.1 percentage points in 2022 relative to the baseline. - Severe global downturn scenario could raise Dubai’s government debt to about 35.7 percent of GDP in 2022. - Combined global downturn with real estate shock and 20 percent GRE debt takeover could raise Dubai’s government debt-to-GDP to 73.3 percent in 2022. ### Structural reform priorities and competitiveness - Findings: - UAE ranks favorably on ease of doing business and competitiveness; Doing Business rank up by eight places; Global Competitiveness Index up by one place. - New bankruptcy law adopted in December. - Innovation Fund: AED 2 billion ($545 million) established to fund entrepreneurs and guarantee access to bank loans. - Policy priorities: - Competition: reduce government footprint, subject GREs to competition laws, privatize nonstrategic GREs, adopt draft foreign investment liberalization (current foreign ownership cap: 49 percent). - Energy efficiency: implement UAE Energy Plan 2050; targets include increasing non-hydrocarbon energy contribution to 50 percent and increasing consumption efficiency by 40 percent by 2050. - Employment: control civil service size and wages, promote entrepreneurship, encourage female labor force participation. - Education and healthcare: improve education quality and STEM focus; protect and improve healthcare spending efficiency; consider universal insurance model in medium term. ### Statistics, data gaps, and priorities - Progress made in monetary statistics; remaining gaps in national accounts, fiscal, labor, and external sectors (including balance of payments and IIP). - Quarterly GDP produced by Abu Dhabi and Dubai but with different base years than federal annual data. - Priorities: - Compile quarterly GDP for the country as a whole and the IIP for the government. - Implement e-GDDS and improve fiscal and external statistics, capacity building, and information-sharing among statistical agencies. - Data adequacy and reporting: - CBU began monthly SRF-based monetary data dissemination in September 2016. - Authorities recommenced reporting high-frequency data for budgetary central government in April 2017. - Key reporting dates: Consumer Price Index latest observation 03/17 (received 05/17); Central Government fiscal data latest observation 12/16 (received 05/17). ### Long-term fiscal sustainability (Annex I) — Permanent Income Hypothesis (PIH) - Staff PIH findings: - Gap between projected deficits and deficits consistent with a constant real per capita annuity: about 8 percent of nonoil GDP in 2016. - Projected to shrink to about 4.2 percent of nonoil GDP by 2022 under the baseline with gradual fiscal consolidation and conservative assumptions. - Projected to close by 2028. - Baseline long-term assumptions (after 2022): flat oil production and annual oil price growth of 2 percent; inflation 2 percent; population growth 1.5 percent; real return on assets 3.7 percent. - Alternative scenarios considered: (i) lower population growth by 0.5 percentage point; (ii) lower real return on assets by 1 percentage point; (iii) lower oil price by $10 in 2017-22 and constant thereafter; (iv) higher oil price by $10 in 2017–22 and increasing by 2 percent per annum thereafter. ### External sector assessment (Annex III) - NIIP estimated at 167 percent of GDP at end-2016, projected to remain stable over the medium term; dominated by SWF assets. - Central Bank international reserves: - 24 percent of GDP. - 5.3 months of imports. - 111 percent of the combined Fund’s metrics as of end-2016. - Current account (billions of U.S. dollars): 53.6 (2014); 16.7 (2015); 8.4 (2016); 10.0 (2017); 11.2 (2018); 12.1 (2019); 12.9 (2020); 15.9 (2021); 18.7 (2022). - Current account (percent of GDP): 13.3 (2014); 4.7 (2015); 2.4 (2016); 2.6 (2017); 2.8 (2018); 2.9 (2019); 2.9 (2020); 3.4 (2021); 3.8 (2022). - External assessment: current account appears moderately weaker than the level consistent with medium-term fundamentals and desirable policies; current account norm from external sustainability approach: 4.1 percent of GDP, implying a moderately negative current account gap. ### Energy efficiency and climate-related policy (Annex IV) - UAE Energy Plan 2050 targets: - Energy mix by 2050: 44 percent clean energy, 38 percent gas, 12 percent clean coal and 6 percent nuclear. - Aim to slash residential energy consumption by 40 percent. - Clean energy and emissions commitments: - INDC target (Paris Agreement): increase zero-carbon energy from 0.2 percent in 2014 to 24 percent by 2021; national clean energy target raised to 27 percent (additional portion from solar). - Barakah nuclear: first of four units scheduled operational in 2017 and expected to reach full capacity by 2020. - Tariff and fuel-price reforms: - Abu Dhabi increased tariffs in January 2015 (by 170 percent for water and by 40 percent for electricity); water and electricity tariffs increased again by 23-28 percent in January 2017. - Expatriates constitute 90 percent of the population; utility fees for expatriates are about three times the rate paid by locals. - Policy recommendations: further price adjustments (including for locals), stepped-up communications, focus on research and technology, green building regulations, and district cooling systems. *IMF staff report: UNITED ARAB EMIRATES — Selected excerpts from "1. Strengthening Regulatory and Supervisory Framework for Banking Sector" (cr17218).* ### 1. Strengthening Regulatory and Supervisory Framework for Banking Sector ____________________ 15 ### 1. Strengthening Regulatory and Supervisory Framework for Banking Sector ### Context: gradual economic adjustment - The UAE is adapting to the “lower-for-longer” oil price environment aided by large financial buffers, safe-haven status, a diversified economy, and robust policy responses. - Authorities have reformed energy subsidies and continued to improve the business environment. - Authorities are strengthening policy frameworks in the financial, fiscal, and statistical areas, consistent with IMF advice. - Recent agreements among major oil producers supported oil prices and investor sentiment; a pickup in global trade and domestic investment, including for Expo 2020, has started to lift the economy. - The outlook for oil prices remains fundamentally unchanged, requiring continued fiscal consolidation and sustained reforms to raise productivity and diversify the economy further. ### Economic performance and recent developments - Growth declined to 3.0 percent in 2016 from 3.8 percent in 2015, reflecting lower oil prices, lower oil production growth, postponement of some public infrastructure projects, and a slowdown in global trade. - Financial conditions remained tight, reflecting higher interest rates, stronger exchange rate, and subdued stock and property prices. - The real estate market remained weak, although house prices in Dubai stabilized in recent months. - Purchasing Managers Index (PMI) was 56.1 in April 2017, close to the 19-month high of 56.2 percent in March 2017. - Inflation fell to 1.8 percent in 2016 but picked up in early 2017 following reductions in subsidies for water and electricity and higher gasoline prices. - Financial Conditions Index (FCI) interpretation: negative readings indicate relatively loose conditions; positive readings represent tighter conditions. ### Fiscal developments and public debt - The nonoil deficit is estimated to have declined by 6 percentage points (pp) to 21.8 percent of nonoil GDP in 2016, after a decline of 9.7 pp of GDP in 2015. - Consolidation in 2016 came broadly equally from increases in revenues and spending restraint. - Decline in oil revenues was partially offset by increased dividends from GREs, administrative fees, and sale of an oil concession. - Transfers to government-related enterprises (GREs) for infrastructure bore the brunt of spending cuts. - The deficit was financed mainly through withdrawals from sovereign wealth funds (SWFs) and external borrowing. - Total government and GRE debt declined by 5 pp of GDP to 24.7 percent of GDP (including Abu Dhabi’s Eurobond issue ($5 billion in May 2016) and Sharjah’s sukuk issue ($500 million in January 2016)). - Dubai’s GRE debt decreased by 10 pp of GDP to 60 percent of Dubai’s GDP; Abu Dhabi’s GREs also continued to deleverage. - Two top Abu Dhabi investment corporations merged, creating Mubadala Investment Company, the 14th largest SWF in the world with estimated $125 billion in assets and $18 billion in debt. ### External sector - The current account surplus declined to 2.4 percent of GDP in 2016 from 4.7 percent in 2015 due to lower oil export revenues; nonoil exports remained stable while imports stayed strong. - Gross international reserves declined to $85.4 billion (5.4 months of imports) but remained adequate for external stability given government foreign assets in SWFs. - REER appreciated by 2.4 percent in 2016 with the U.S. dollar peg, but depreciated by 1.4 percent in the five months of 2017; impact on competitiveness appears limited. ### Banking sector and financial stability - Banks faced shrinking interest margins and rising impairment charges, reducing profitability and triggering cost cutting. - Nonperforming loan (NPL) ratio stopped declining since 2015; rescheduled loans edged up, partly due to weakening SME loan portfolio quality. - Banks remained adequately capitalized with 18.6 percent total capital ratio and 16.9 percent Tier 1 ratio at end-March 2017. - Outstanding loans distribution: private sector 68 percent, GREs 12 percent, government 11 percent. - Credit growth slowed to 5.3 percent year-on-year in Q1 2017; resulting negative credit gap consistent with a negative output gap estimated at less than 1 percent of GDP. - Most new loans went to GREs (40 percent); GREs also brought half of new resident deposits, making them net contributors to bank funding. - Liquid asset ratio was 22.2 percent at end-March 2017, supported by increased government and GRE deposits. - Banks’ wholesale foreign funding remained at 13.4 percent of total liabilities at end-March 2017. - The central bank is implementing capital and liquidity regulations in line with Basel III; central bank is upgrading its framework for supervision and regulation; a new draft central bank and banking law is under discussion. - The authorities have stepped up oversight of GREs’ investment and debt plans. ### Outlook for moderate recovery - Nonoil growth projected to rise to 3.3 percent in 2017, reflecting increased domestic public investment and pickup in global trade; nonoil growth is expected to remain above 3 percent thereafter. - Real oil GDP growth estimated to contract by 2.9 percent in 2017 due to the UAE’s commitment to the OPEC agreement, but projected to recover in 2018 and return to a rising trend over the medium term. - Overall growth projected to ease to 1.3 percent in 2017, before recovering to above 3 percent in the medium term. - VAT is not expected to have a significant adverse impact on growth. - Housing market expected to bottom out in 2017, partly due to Expo 2020 investment; market faces headwinds from rising supply, fiscal restraint, higher interest rates, and stronger exchange rate. - Inflation projected to rise to 2.2 percent in 2017 due to utility and gasoline price adjustments and higher imported inflation. - Inflation projected at 2.9 percent in the year following VAT introduction (one-off impact), then stabilize at around 2.3 percent over the medium term. - Current account surplus expected to improve to 2.6 percent of GDP in 2017 and increase to 3.8 percent by 2022 as oil revenues rise with increased oil production and nonoil exports and tourism receipts grow. - Rising infrastructure investment, including for Expo 2020, expected to increase remittance outflows to South Asia and other MENA countries. ### Downside risks and scenarios - Risks are skewed to the downside, reflecting uncertainties around oil prices, policies in major economies, and financial market conditions. - Large investment projects, if not implemented prudently, may create macro-financial risks for GREs and banks (most government-owned). - Specific risks: - Lower oil prices due to faster-than-expected US shale recovery and/or reduced compliance with production cuts could reduce fiscal revenues, investment, and confidence; spillovers from other oil exporters could weaken trade, tourism, and asset prices; increased issuance by other oil exporters to finance deficits could pressure funding costs. - Retreat from cross-border integration (protectionism) could slow nonoil growth, particularly affecting Dubai’s trade, financial, and logistics role and Abu Dhabi via lower global oil demand and prices. - Tighter and more volatile financial conditions (faster U.S. rate rises or higher market volatility) could raise borrowing costs for banks and GREs and affect domestic liquidity; contingent liabilities or imprudent financing of megaprojects would raise risks for GREs, banks, and sovereigns. - A scenario of a rise in protectionism assumes a 10 percent increase in the effective cost of imports and temporary rises in sovereign and corporate risk premia depending on trade exposures; impacts are modeled using IMF G20MOD and country-specific approaches. ### Policy discussions — growth-friendly fiscal consolidation - Sustained yet gradual fiscal consolidation recommended to ensure intergenerational equity while mitigating adverse impacts on nonoil growth. - Under current policies, the budget projected to return to balance by 2020. - The gap between the current nonoil primary deficit and that consistent with the permanent income hypothesis should close by 2028 (Annexes I-II). - Consolidation of 5½ pp of nonoil GDP projected between 2016 and 2022. - After two years of rapid adjustment, a pause in consolidation in 2017 is appropriate given tightened monetary conditions and Expo 2020 investment needs. - During 2018–22: federal budget projected to be balanced as required under the Constitution; Dubai projected to run deficits reflecting Expo 2020 investment; Abu Dhabi plans steady consolidation. - At the consolidated general government level, fiscal withdrawal projected at about 1 pp of nonoil GDP per year over 2018–22. - Pace and profile of consolidation considered appropriate given moderate recovery outlook, significant buffers and fiscal space, investment needs, and expectation that investment would add productive capacity. - Authorities noted the fiscal position could improve faster if large investment projects are completed as scheduled and transfers to GREs for capital spending decline more sharply than staff projections. *IMF staff report: UNITED ARAB EMIRATES — Selected excerpts from "1. Strengthening Regulatory and Supervisory Framework for Banking Sector" (cr17218).* ### 10. The authorities intend to underpin fiscal consolidation with a combination of ### 10. The authorities intend to underpin fiscal consolidation with a combination of ### Fiscal consolidation strategy and spending efficiency - Authorities’ strategy: spending restraint, improvements in efficiency, and increases in nonoil revenues. - Staff support and key recommendations: - Stepped-up spending reviews supported by appropriate budget controls to increase efficiency of spending and contain its growth. - Contain the wage bill as a share of nonoil GDP and maintain other current expenses constant in real terms. - For capital expenditures, including those undertaken by GREs, require careful cost-benefit analysis to support project prioritization to contain expenditure growth while mitigating adverse impact on the non-oil economy and aligning spending with development goals. - Staff estimate: the consolidated public wage bill amounted to just over 6 percent of non-oil GDP in 2016, much lower than the average of 19 percent of non-oil GDP for other GCC countries. Note: public wage bill in the UAE may be underestimated as wages in some sectors may be classified under other categories of expenditures. ### Revenue measures and VAT/excise implementation - Key priority: timely introduction of the VAT and excise taxes (the latter on tobacco, alcohol, and soft drinks) in coordination with other GCC countries. - GCC agreements: Unified Selective Excise Tax and Unified Value Added Tax (VAT) agreements came into effect after ratification by the UAE on May 24, 2017. - Remaining steps: finalizing the list of exemptions and zero rates; adopting the Tax Transaction Law, VAT Law, and Excise Law. - Authorities’ implementation timetable: confident that the VAT would be implemented on January 1, 2018, as publicly announced. - Revenue impact projection: the overall revenue impact of the VAT tax is projected to reach 1.5 percent of GDP over the medium term. - Institutional decision: authorities expect to reach a political decision on the distribution of VAT revenues between the federal and Emirates governments soon; this decision could be part of a broader system of transfer rules in the context of fiscal federalism. ### Fiscal outlook and deficit financing - Under the current oil price baseline and assuming fiscal consolidation proceeds as projected, cumulative deficits could reach $89 billion over 2017‒22. - Deficit financing guidance: - Continue to rely on tapping SWFs and international capital markets rather than withdrawal of domestic deposits to avoid tightening of liquidity and crowding out private activity, while diversifying financing sources depending on market conditions. - Starting domestic sovereign debt issuance to facilitate development of a domestic debt market, provide federal and Emirates governments with new funding sources, and benchmark the yield curve for corporate financing. - Approval of the Public Debt Law and Trust Law would facilitate debt issuance at the federal level, including of sukuk. ### Adaptation to new oil market realities and reform priorities - Underlying goal: adapt to a model with persistently lower oil revenues by diversifying revenue sources and focusing state role on delivering high-quality services efficiently and equitably, targeting social benefits to the most vulnerable, and creating an even playing field for private sector growth. - Policy recommendations: - Further improvements in efficiency of government and GRE spending to enhance diversification, education and health outcomes in line with the National Agenda’s goals. - Ensure energy prices (especially for gas) are in line with market prices, accompanied by measures to alleviate impacts on the most vulnerable. - Develop a privatization agenda focused on non-strategic enterprises with better transparency to complement fiscal reforms and promote private investment. - Building on recent energy subsidy reforms emphasized. ### Fiscal policy framework and budget management - Need for a more comprehensive and transparent fiscal policy framework to reduce susceptibility to oil cycles and align fiscal policy with diversification and productivity goals. - Progress noted: - Federal medium-term framework for 2017‒22 approved last October. - General government accounts consolidated and published, albeit with a lag. - Staff recommendations: - Strengthen budget management through regular publication of detailed annual budgets and fiscal outturns (as done by the federal government); make budgets more comprehensive and clearly identify transfers to and from GREs and SWFs. - Formally adopt multi-year frameworks and integrate them with the annual budget process to set fiscal policy direction; strengthen fiscal anchors and targets and ensure comprehensive coverage of liabilities. - Integrate Emirates governments’ frameworks into a consolidated framework for the entire country to align resource allocation with national development plans. - Enhance coordination between governments and GREs: review and vet GREs’ investment plans, continue monitoring and control of contingent liabilities, and ensure monitoring covers PPPs and liabilities of global subsidiaries and companies with less than 50 percent government ownership. - Improve cash management: expand coverage of Treasury Single Accounts (TSA), improve liquidity forecasting for entities outside TSAs, and improve information-sharing on cash management among fiscal and monetary authorities, GREs, and SWFs. - Authority action: Abu Dhabi authorities noted a new fiscal law regulating cash surpluses has recently been adopted. ### Liquidity management and domestic debt market development - CBU intentions and staff support: - CBU considering consolidating its operational framework to keep money market rates in line with those implied by the peg while introducing market-determined variable-priced certificate-of-deposit auctions. - Basel III liquidity requirements recently introduced expected to incentivize banks to manage liquidity more actively. - Development of debt markets would provide banks with new dirham-denominated instruments and support liquidity management. - Legal developments: draft Public Debt Law and Trust Law under consideration to support domestic market development and debt issuance. ### External position, exchange rate peg, and external buffers - Assessment: longstanding exchange rate peg has anchored prices and should be maintained. - External buffers: - Central bank reserves amounted to 107 percent of the Fund’s reserve metric at end-2016; substantial additional external buffers are held by SWFs. - External sustainability: external position was moderately weaker in 2016 than the level consistent with fundamentals and desirable policies (Annex III). A moderate negative current account gap is expected to close as medium-term policy settings are reached (as the fiscal balance improves to levels consistent with intergenerational equity). - Authorities reiterated commitment to the peg and agreed gradual fiscal adjustment was appropriate. ### Banking sector resilience, risks, and supervisory actions - Banking sector status: - Banks remain sound and liquid, with stable and fully provisioned NPLs. - Loans to related parties and concentration risks remain high in some cases. - Asset quality at Islamic banks is slightly weaker than at conventional banks; both are adequately capitalized. - CBU stress tests: except for a few small and medium-sized banks, most of the 21 local banks would keep capital above the 12 percent regulatory minimum in an adverse scenario. Two medium-sized banks had stressed Liquidity Coverage Ratio slightly below 100 percent. - Credit growth: - Credit growth excluding GREs is subdued (below 5 percent year-on-year as of end-March 2017) but expected to pick up, particularly to construction, hospitality, and tourism sectors ahead of Expo 2020. - Supervisory recommendations: - Continue to monitor lending standards and concentration risks; strictly enforce existing limits on lending to related or single borrowers. - Use differentiated loan-to-value and debt-to-income ratios and minimum financing requirements for developers to limit real estate exposure risks. ### AML/CFT progress and operational risks - Progress: strengthening of legal framework for AML/CFT; national risk assessment launched. - Remaining priorities: - Continue improving understanding of ML/TF risks, including those related to nonresident financial flows. - Further refine identification of beneficial owners of deposits and loans and improve entity transparency of companies created in the UAE. - Swiftly process the backlog of suspicious reports. - Operational issue: some domestic banks preemptively stopped providing banking services to charities, exchange houses, and remittance offices. CBU initiated corrective measures, requires pre-notification before banks close accounts held by exchange houses and remittances, and is engaging in international forums to clarify supervisor requirements in correspondent banks’ home jurisdictions. - Staff encouragement: maintain efforts to ensure financial inclusion and minimize migration of remittances to informal channels. ### Box 1 — Strengthening the Bank Regulatory and Supervisory Framework (CBU reform pillars) - Pillar I: New corporate governance regulations and standards to strengthen board oversight, introduce independent directors, and address conflicts of interest. Issued for consultation in mid-2017 and expected to be adopted in early 2018. - Pillar II: Draft risk management regulations and standards covering overall risk management, operational risk, market risk, interest rate risk, and country and transfer risk. Planned issuance in 2017. - Pillar III: New regulations on compliance, outsourcing, internal audit, internal controls, financial reporting, major acquisitions, and significant ownership transfer. Planned issuance during 2017‒18. - Pillar IV: Develop a framework for bank resolution after Basel III capital and liquidity requirements are implemented; cover recovery and resolution planning, supervisory colleges, and depositor protection; tailor framework to UAE structure where systemic banks are owned by Emirates governments. - Pillar V: Market development regulations to address new financial products and services: digital payments regulation issued in December 2016; draft crowdfunding regulation; new regulation on nonbank financial institutions to specify permitted areas of operation. - Expected impact: strengthen supervisory and regulatory framework, facilitate move towards risk-based supervision, and enhance resilience when combined with Basel III regulations and the draft Central Bank Law. *Source: IMF staff report excerpt for the United Arab Emirates (content unit cr17218).* ### 19. As part of the adjustment to lower oil prices, the authorities are continuing to take ### cr17218 - 19. As part of the adjustment to lower oil prices, the authorities are continuing to take ### Structural reform priorities and competitiveness - Findings: - The UAE scores high on global indicators for the ease of doing business and competitiveness; rankings moved up by eight places in the World Bank’s Doing Business Survey and by one place in the World Economic Forum’s Global Competitiveness Index. - A new bankruptcy law was adopted in December. - Authorities have merged ministries, outsourced some services, and expanded online services. - An Innovation Fund, worth AED 2 billion ($545 million), was established to provide funding to entrepreneurs at subsidized rates and guarantee access to bank loans. - Capital market regulations are being enhanced to facilitate issuance and trading of conventional and Islamic instruments and improve firms’ access to market financing. - Policy recommendations (priority areas): - Competition: - Reduce the footprint of the government in the economy by subjecting GREs to competition laws and regulations and privatizing nonstrategic GREs to raise productivity. - Adopt the draft law liberalizing rules for foreign investment outside the free zones (current rule: foreign ownership not allowed to exceed 49 percent of total assets of a company) to bring in new capital, spur diversification, increase stock market liquidity, and facilitate privatization of nonstrategic GREs. - Reduce the cost of doing business; improve coverage by credit bureaus and collateral registries to enhance SMEs’ access to finance. - Ensure effective implementation of the new bankruptcy law to improve access to credit while safeguarding banks’ balance sheets. - Energy efficiency: - Implement the 2050 Energy Plan announced in early 2017, targeting an energy mix combining renewable, nuclear and clean energy resources. - Targets: increase the contribution of non-hydrocarbon energy in the total energy mix to 50 percent and increase consumption efficiency by 40 percent by 2050, including through innovative technologies and urban planning strategies. - Employment: - Control the size and wages of the civil service and promote entrepreneurship to increase private sector employment and productivity. - Encourage female labor force participation to expand the pool of talent and policymaking input; the gender gap is the second lowest in the GCC but still below global comparators. - Synergy: - Increase cooperation and coordination among emirates to create cost, revenue, and market synergies and complementarities in investments (example: merger creating Emirates Global Aluminum). ### Education and healthcare (public spending, outcomes, and reforms) - Findings: - Public education spending per student in UAE public schools is about twice as much as in the average OECD economy; outcomes are not yet high. - 80 percent of primary and secondary students in the UAE are enrolled in private schools (compared to 31 percent in the OECD); the school-age population is 17 percent of the working-age population (compared to 29 percent in the OECD). - Healthcare expenditure as a share of GDP and per capita is on the low end compared to OECD countries, even after demographic adjustments (population age 65+ is 1 percent in UAE vs. 16 percent in OECD). - Policy recommendations: - Education: - Improve performance without raising costs by implementing new quality standards for teachers and schools, developing curriculums, introducing a common framework for school evaluation, enhancing focus on STEM and innovation, and establishing a national exam to monitor performance across jurisdictions. - Healthcare: - Gradually increase public healthcare resources while improving spending efficiency; protect healthcare budgets during fiscal consolidation. - Short-term efficiency gains from greater integration across emirates’ models. - Medium-term: enhance monitoring and oversight to unlock the potential for a universal insurance model at an affordable cost. ### Fiscal policy, sustainability, and public financial management - Findings: - The fiscal position weakened following lower oil revenues; financial conditions tightened and growth slowed post-2014 oil shock. - The long-standing peg to the U.S. dollar remains appropriate. - Ample fiscal space allows gradual deficit reduction while mitigating adverse impacts on the economy and financial sector. - Policy recommendations: - Sustain momentum in fiscal reforms and coordinate with structural reforms. - Timely introduction of VAT and excises to diversify revenues away from oil. - Contain public spending growth and improve spending efficiency while continuing public investment to diversify the economy (consistent with Vision 2021 National Agenda). - Adopt and publish multi-year plans integrated with the annual budget process to strengthen credibility. - Strengthen fiscal anchors and targets to anchor fiscal sustainability and intergenerational equity. - Enhance coordination between governments and GREs regarding investment and borrowing plans; strengthen control of contingent liabilities from GRE and PPP investment. - Step up development of the domestic debt market and more active liquidity management by the CBU to expand financing options and promote healthy credit conditions. - Close a moderate current account gap over time as fiscal savings rise to levels consistent with intergenerational equity. ### Financial sector resilience and supervision - Findings: - Weaker economy raised risks of bank loan delinquency, requiring higher provisioning; however, financial buffers, safe-haven status, sound banks, and a diversified economy help cope with the shock. - Policy recommendations: - Continue upgrading supervisory and regulatory frameworks: implement Basel III capital and liquidity standards, risk management regulations, corporate governance standards, and new financial products and services. - Closely monitor financial vulnerabilities, including currency mismatches, foreign exchange and concentration risk; undertake prompt supervisory actions as needed. - Sustain progress in strengthening the AML/CFT regime, paying attention to risks related to money transfer operators facilitating remittance flows from the large expatriate community. - Improve coordination between governments, GREs, SWFs, and the CBU to facilitate cash management and liquidity forecasting. ### Statistics and data quality - Findings: - Progress made in strengthening monetary statistics; remaining gaps in national accounts, fiscal, labor, and external sectors (including balance of payments and IIP). - Quarterly GDP is already produced by Abu Dhabi and Dubai, but with different base years than the federal annual data. - Policy recommendations and priorities: - Stepped up efforts to fill remaining data gaps; priorities include further improving fiscal statistics and starting compilation of quarterly GDP for the country as a whole and the IIP for the government. - Implement the Enhanced General Data Dissemination System (e-GDDS) to provide a roadmap and facilitate dissemination via a National Summary Data page. - Continue Fund technical assistance; increase statistical agencies’ resources, enhance capacity building, improve information-sharing among local and federal statistical agencies, and agree on consistent methodologies. - Immediate priorities: compile quarterly GDP and IIP for the government. ### Staff appraisal and economic outlook - Findings: - The economy is weathering the post-2014 oil shock reasonably well; growth is projected to recover over the next few years as fiscal consolidation eases, global trade regains momentum, and investment (including for Expo 2020) accelerates. - Downside risks include a further sustained decline in oil prices, tighter financial conditions, a rise in protectionism and an intensification of regional conflicts. - Policy recommendations (summarized): - Continue gradual fiscal consolidation after the current projected pause, to reduce spare capacity and then tighten gradually and steadily as growth strengthens. - Sustain structural reforms to make the economy more productive and alleviate the oil shock’s impact on medium-term growth. - Preserve healthcare budgets during fiscal consolidation and improve efficiency in education spending alongside education reforms. - Promote entrepreneurship, control civil service size and wages, and encourage female labor force participation to improve private sector employment. - Continue efforts to improve statistics as a critical input for policy analysis and decision-making. *UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND* ### 30. It is recommended that the next Article IV consultation takes place on the standard ### cr17218 - 30. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Latest economic developments - Domestic interest rates have followed increases in the U.S. Federal Reserve rates; U.S. Fed funds rate, interbank, LIBOR, and CD rate series shown for May 2013–May 2017. - Dirham appreciated in tandem with the stronger U.S. dollar. - Asset prices have recovered recently: Residential Real Estate and Stock Market Index (Index, April 2012=100) presented for May 2013–May 2017. - Indicators for economic activity and confidence improved: PMI and Consumer Confidence indices (January 2013−January 2017) moved toward expansion. - Oil prices firmed (Oil Prices, May 2015–May 2017; Index; 2005=100) and global PMI improved (Global PMI, May 2013–May 2017). ### Real sector developments and outlook - GDP growth and composition - Real GDP growth (annual percent change): 3.3 (2014), 3.8 (2015), 3.0 (2016), 1.3 (2017), 3.4 (2018), 3.2 (2019), 3.1 (2020), 3.1 (2021), 3.1 (2022). - Real oil GDP: 0.4 (2014), 5.4 (2015), 3.8 (2016), -2.9 (2017), 3.2 (2018), 2.4 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - Real nonoil GDP: 4.6 (2014), 3.2 (2015), 2.7 (2016), 3.3 (2017), 3.4 (2018), 3.5 (2019), 3.4 (2020), 3.3 (2021), 3.3 (2022). - Key drivers and near-term prospects - GDP growth will decline in 2017 due to oil output cuts. - Nonoil activity is expected to strengthen, including a pickup in construction activity ahead of Dubai Expo 2020. - Inflation fell in 2016 reflecting subdued domestic demand and declining house prices; inflation is expected to pick up in 2017 owing to utility price adjustments and higher imported inflation. ### Fiscal developments and outlook - Fiscal performance and revenue - Government spending decreased in 2016, but the overall fiscal balance deteriorated in 2016 as oil-related revenues declined due to lower oil prices. - Adjusted nonoil primary balance (percent of non-oil GDP): -37.5 (2014), -27.8 (2015), -21.8 (2016), -22.4 (2017), -20.8 (2018), -19.8 (2019), -18.6 (2020), -17.4 (2021), -16.4 (2022). - Fiscal breakeven oil prices (U.S. dollars per barrel): 91.0 (2014), 64.7 (2015), 61.5 (2016), 67.1 (2017), 62.1 (2018), 57.5 (2019), 53.3 (2020), 50.6 (2021), 48.1 (2022). - Consolidated general government (selected levels, billions of UAE dirhams) - Total revenue: 518.8 (2014), 381.4 (2015), 362.3 (2016), 379.7 (2017), 405.9 (2018), 426.2 (2019), 444.6 (2020), 459.4 (2021), 474.4 (2022). - Expenditures: 490.5 (2014), 425.6 (2015), 417.3 (2016), 423.4 (2017), 434.7 (2018), 441.8 (2019), 445.7 (2020), 448.4 (2021), 450.1 (2022). - Net lending(+)/borrowing(-): 28.3 (2014), -44.2 (2015), -55.0 (2016), -43.7 (2017), -28.8 (2018), -15.6 (2019), -1.1 (2020), 11.1 (2021), 24.3 (2022). - Subnational highlights - Abu Dhabi: Net lending(+)/borrowing(-) 22.8 (2014), -45.8 (2015), -48.7 (2016), -33.7 (2017), -17.8 (2018), -2.9 (2019), 9.5 (2020), 17.8 (2021), 27.6 (2022). - Dubai: Net lending(+)/borrowing(-) 6.9 (2014), 9.9 (2015), 1.2 (2016), -3.0 (2017), -5.7 (2018), -8.2 (2019), -7.2 (2020), -4.1 (2021), -1.1 (2022). ### Monetary and financial developments - Banking sector liquidity remains comfortable: Bank liquidity series (foreign assets, CDs held by banks, central bank deposits) tracked Apr-2010–Apr-2017. - Banking sector liabilities rose, driven by an increase in foreign-currency denominated liabilities and foreign currency deposits. - Debt issuance patterns - Total debt issuance by borrower type declined overall, but public sector issuance increased in 2016. - Debt issuance by borrower type presented for 2007–June 2017 (U.S.$ billions). - Credit and deposit dynamics - The gap between credit and deposit growth has narrowed; bank deposits and private sector credit contributions to y-o-y growth shown for 2011Q1–2017Q1. - Change in credit standards in 2016 (net balance, percent) shown for All firms, SMEs, and Large firms. - Policy rates and spreads - Yields spreads tightened and credit risk perceptions improved following the increase in oil prices. - 10-Year bond spreads over corresponding U.S. T-bonds for Dubai and Abu Dhabi presented May-2016 to May-2017. ### External sector developments and outlook - Current account and trade - Current account balance (billions of U.S. dollars): 53.6 (2014), 16.7 (2015), 8.4 (2016), 10.0 (2017), 11.2 (2018), 12.1 (2019), 12.9 (2020), 15.9 (2021), 18.7 (2022). - Current account balance (percent of GDP): 13.3 (2014), 4.7 (2015), 2.4 (2016), 2.6 (2017), 2.8 (2018), 2.9 (2019), 2.9 (2020), 3.4 (2021), 3.8 (2022). - Trade balance and exports: Exports and re-exports (billions of U.S. dollars) shown 2014–22; oil exports and nonoil exports series shown. - Structural features - Nonoil external deficits remain large. - Diversification of export destinations is underway, and export composition (re-exports, nonoil, gas, hydrocarbon) tracked 2008–17. - Foreign direct investment increased steadily: FDI inflows, FDI abroad, net FDI (2006–16, billions of U.S. dollars). - External buffers - Gross official reserves (billions of U.S. dollars): 78.5 (2014), 94.0 (2015), 85.4 (2016), 80.7 (2017), 79.5 (2018), 78.9 (2019), 81.9 (2020), 82.0 (2021), 87.5 (2022). - Reserves in months of next year's imports, net of re-exports: 5.4 (2014), 6.5 (2015), 5.3 (2016), 4.7 (2017), 4.5 (2018), 4.2 (2019), 4.0 (2020), 4.0 (2021), 4.0 (2022). ### Business environment and governance - Governance and competitiveness indicators - World Governance Indicators (percentile rank) and World Bank Doing Business 2017 ranks presented; UAE ranks favorably on many indicators compared with GCC and advanced economies. - Policy-relevant diagnostics and recommendations - Further progress in contract enforcement and registering property rights would be particularly helpful. - Education and innovation policies need to be further improved. - Global Competitiveness Index (2016–17) component ranks and PISA student performance scores (Math and Science, 2015) are presented to illustrate areas of strength and weakness. ### Key macroeconomic figures and projections (select from Table 1) - Oil sector - Exports of oil (billions of U.S. dollars): 101.9 (2014), 61.5 (2015), 50.9 (2016), 57.5 (2017), 60.7 (2018), 61.9 (2019), 64.0 (2020), 66.8 (2021), 70.3 (2022). - Average crude oil export price (U.S. dollars per barrel): 98.95 (2014), 52.44 (2015), 44.05 (2016), 52.95 (2017), 53.15 (2018), 52.85 (2019), 53.05 (2020), 53.85 (2021), 55.0 (2022). - Crude oil production (millions of barrels per day): 2.8 (2014), 2.9 (2015), 3.0 (2016), 2.9 (2017), 3.0 (2018), 3.1 (2019), 3.2 (2020), 3.3 (2021), 3.4 (2022). - Output and prices (selected) - Nominal GDP (billions of UAE dirhams): 1,481 (2014), 1,315 (2015), 1,281 (2016), 1,399 (2017), 1,481 (2018), 1,559 (2019), 1,641 (2020), 1,730 (2021), 1,824 (2022). - Nominal GDP (billions of U.S. dollars): 403 (2014), 358 (2015), 349 (2016), 381 (2017), 403 (2018), 424 (2019), 447 (2020), 471 (2021), 497 (2022). - CPI inflation (average): 2.3 (2014), 4.1 (2015), 1.8 (2016), 2.2 (2017), 2.9 (2018), 2.5 (2019), 2.4 (2020), 2.3 (2021), 2.1 (2022). - Savings, investment, and public finances (percent of GDP) - Gross domestic investment: 24.0 (2014), 28.4 (2015), 26.9 (2016), 26.9 (2017), 26.8 (2018), 26.8 (2019), 26.8 (2020), 26.6 (2021), 26.5 (2022). - Gross national saving: 38.8 (2014), 29.1 (2015), 29.3 (2016), 29.5 (2017), 29.6 (2018), 29.6 (2019), 29.7 (2020), 30.0 (2021), 30.3 (2022). - Revenue: 35.0 (2014), 29.0 (2015), 28.3 (2016), 27.1 (2017), 27.4 (2018), 27.3 (2019), 27.1 (2020), 26.6 (2021), 26.0 (2022). - Expenditures: 33.1 (2014), 32.4 (2015), 32.6 (2016), 30.3 (2017), 29.3 (2018), 28.3 (2019), 27.2 (2020), 25.9 (2021), 24.7 (2022). - External sector (selected) - Current account balance (percent of GDP): 13.3 (2014), 4.7 (2015), 2.4 (2016), 2.6 (2017), 2.8 (2018), 2.9 (2019), 2.9 (2020), 3.4 (2021), 3.8 (2022). - External debt (percent of GDP): 48.2 (2014), 62.9 (2015), 66.2 (2016), 61.2 (2017), 58.5 (2018), 56.3 (2019), 54.2 (2020), 52.0 (2021), 50.0 (2022). - Gross official reserves (billions of U.S. dollars): 78.5 (2014), 94.0 (2015), 85.4 (2016), 80.7 (2017), 79.5 (2018), 78.9 (2019), 81.9 (2020), 82.0 (2021), 87.5 (2022). ### Debt maturities and public sector financing (select highlights) - Government-related and GRE debt maturities presented by emirate and borrower type for 2016H2 and 2017–22, with totals and percent-of-GDP statistics for Abu Dhabi and Dubai. - Dubai maturing bonds and loans include large scheduled amounts in 2017 and 2021–22; aggregated Government plus GREs with >50% government ownership totals and in percent of 2016 GDP reported. ### Financial soundness indicators (select) - Regulatory capital to risk-weighted assets: 19.3 (2013), 18.2 (2014), 18.3 (2015), 18.9 (2016), 18.6 (2017q1). - Non-performing loans to total gross loans 1/: 6.7 (2013), 5.6 (2014), 5.2 (2015), 5.3 (2016), 5.3 (2017q1). - Return on assets: 1.6 (2013), 1.7 (2014), 1.5 (2015), 1.4 (2016), 1.5 (2017q1). - Liquid assets to total assets (Liquid Asset Ratio) 2/: 19.4 (2013), 22.9 (2014), 21.5 (2015), 21.2 (2016), 22.2 (2017q1). *Source: IMF staff report and accompanying tables and figures.* ### Annex I. Long-Term Fiscal Sustainability Analysis ### Annex I. Long-Term Fiscal Sustainability Analysis ### Long-term fiscal sustainability (Permanent Income Hypothesis) - Staff analysis using the permanent income hypothesis (PIH) suggests that the government does not save its exhaustible oil revenue sufficiently for future generations. - Gap between projected deficits and deficits consistent with a constant real per capita annuity: - about 8 percent of nonoil GDP in 2016. - projected to shrink to about 4.2 percent of nonoil GDP by 2022 under the baseline with gradual fiscal consolidation and conservative assumptions. - projected to close by 2028. - Sensitivity: Favorable persistent shocks could imply a smaller gap and/or faster closure. - Baseline long-term assumptions (after 2022): - flat oil production and annual oil price growth of 2 percent. - inflation of 2 percent. - population growth of 1.5 percent. - real return on assets of 3.7 percent. - Alternative scenarios considered: - (i) lower population growth by 0.5 percentage point, - (ii) lower real return on assets by 1 percentage point, - (iii) lower oil price by $10 in 2017-22 and constant thereafter, - (iv) higher oil price by $10 in 2017–22 and increasing by 2 percent per annum in nominal terms thereafter. *Source: IMF staff calculations.* --- ### Annex II. Debt Sustainability Analysis ### Government DSA — Baseline indicators (selected) - Nominal gross government debt (percent): 19.1 (2015); 17.1 (2016); 20.2 (2017); 21.9 (2018); 21.3 (2019); 20.8 (2020); 20.5 (2021); 20.0 (2022); 19.3 (projection year in figure). - Government gross financing needs (percent of GDP): -6.4 (2015); 5.3 (2016); 8.9 (2017); 5.9 (2018); 9.2 (2019); 4.0 (2020); 2.8 (2021); 2.2 (2022); 1.5 (later year shown). - Real GDP growth (percent): 5.1 (2015); 3.8 (2016); 3.0 (2017); 1.3 (2018); 3.4 (2019); 3.2 (2020); 3.1 (2021); 3.1 (2022). - Inflation (GDP deflator, percent): 4.4 (2015); -14.5 (2016); -5.4 (2017); 7.8 (2018); 2.4 (2019); 2.0 (2020); 2.1 (2021); 2.3 (2022); 2.2 (later). - Nominal GDP growth (percent): 10.2 (2015); -11.2 (2016); -2.6 (2017); 9.2 (2018); 5.9 (2019); 5.3 (2020); 5.3 (2021); 5.4 (2022). - Effective interest rate (percent): 7.5 (2015); 5.0 (2016); 4.7 (2017); 5.9 (2018); 3.9 (2019); 4.9 (2020); 5.1 (2021); 5.1 (2022); 5.1 (later). ### Contribution to change in gross government sector debt (selected cumulative and identified flows) - Cumulative change in gross government sector debt (selected years): 0.7 (2015); 2.9 (2016); 3.1 (2017); 1.7 (2018); -0.6 (2019); -0.4 (2020); -0.4 (2021); -0.5 (2022); -0.7; -0.9 (later). - Identified debt-creating flows (sum): -9.6 (2015); 5.2 (2016); 4.7 (2017); 1.4 (2018); 0.4 (2019); -0.2 (2020); -1.1 (2021); -1.8 (2022); -2.5; -3.9 (later). - Primary deficit (percent of GDP): -9.4 (2015); 2.6 (2016); 3.5 (2017); 2.0 (2018); 0.8 (2019); -0.2 (2020); -1.1 (2021); -1.8 (2022); -2.4; -2.7 (later). - Primary (noninterest) revenue and grants (percent of GDP): 35.6 (2015); 29.0 (2016); 28.3 (2017); 27.1 (2018); 27.4 (2019); 27.3 (2020); 27.1 (2021); 26.6 (2022); 26.0; 161.5 (cumulative column). - Primary (noninterest) expenditure (percent of GDP): 26.2 (2015); 31.6 (2016); 31.8 (2017); 29.2 (2018); 28.2 (2019); 27.2 (2020); 26.0 (2021); 24.8 (2022); 23.6; 158.9 (cumulative column). - Automatic debt dynamics (percent): -0.2 (2015); 2.6 (2016); 1.3 (2017); -0.6 (2018); -0.4 (2019); -0.1 (2020); 0.0 (2021); -0.1 (2022); -0.1; -1.3 (later). ### Alternative scenarios and composition (selected) - Baseline projections include composition of government debt by maturity (short-term; medium-and long-term) and by currency (local currency-denominated; foreign currency-denominated). - Constant Primary Balance Scenario: assumes primary balance fixed at -2.0 percent from 2017 through 2022. - Historical Scenario: assumes no new debt issuance if gross financing needs are negative. ### Stress test scenarios — Fiscal risks and impacts (from Figure 3) 1. Lower oil prices (oil price lower by $10 in 2017-22): - Primary balance would deteriorate to 0.3 percent of GDP in 2022. - Government debt rising to 30.1 percent of GDP in 2022. - Gross financing needs rising to 9 percent of GDP in 2022. 2. GRE contingent liability (20 percent of GRE debt taken over by government in 2017-22): - Primary balance would deteriorate to 1.4 percent of GDP in 2022. - Government debt rising to 25.6 percent of GDP in 2022. - Gross financing needs rising to 5.7 percent of GDP in 2022. 3. Combined scenario (oil price shock + GRE contingent liability): - Primary balance would deteriorate to -0.8 percent of GDP in 2022. - Government debt rising to 13.2 percent of GDP in 2022. - Gross financing needs rising to 30 percent of GDP in 2022. ### Dubai government’s debt sustainability (selected findings) - While Dubai’s government debt sustainability has improved, debt could still rise sharply under severe shocks: - A sharp decline in GDP growth in 2017 (by ¾ standard deviation from the baseline) and a gradual recovery in 2018–22 would raise the debt-to-GDP ratio by about 14.1 percentage points in 2022 compared to the baseline. - Under a severe global downturn scenario (real GDP shock, lower real interest rates, deterioration in the primary balance), Dubai’s government debt would increase to about 35.7 percent of GDP in 2022. - A scenario combining a global downturn with a real estate shock, under which the government would take over 20 percent of the GREs’ total debt in the medium term, would imply government debt-to-GDP rising to 73.3 percent in 2022. - Dubai government and government-guaranteed debt (selected baseline series, percent of Dubai GDP): 32.0 (2014); 31.3 (2015); 30.6 (2016); 28.7 (2017); 25.9 (2018); 25.3 (2019); 24.3 (2020); 23.3 (2021); 21.6 (2022). *Source: IMF staff calculations; UAE authorities and Fund staff estimates and projections.* --- ### Annex III. External Sector Assessment ### External position and sustainability - Staff estimates UAE’s net international investment position (NIIP) at 167 percent of GDP at end-2016. - NIIP is projected to remain stable over the medium term and is dominated by assets held in sovereign wealth funds (SWFs), which serve precautionary savings and savings for future generations when oil resources are exhausted. - Central Bank of the UAE (CBU) international reserves: - 24 percent of GDP. - 5.3 months of imports. - 111 percent of the combined Fund’s metrics (external short-term debt, other liabilities, broad money, and exports of goods and services) as of end-2016. - External liabilities are estimated at 66 percent of GDP at end-2016. ### Current account assessment - The current account balance appears to be moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Assessment method: external sustainability approach (preferred for major oil-exporting country), based on the permanent income model to reflect intergenerational equity by targeting a constant real per capita annuity. - Current account norm (to provide constant real per capita income after oil revenues exhausted): 4.1 percent of GDP. - Conclusion: This estimate implies a moderately negative current account gap. *Source: IMF staff estimates and calculations.* ### 1.7 percent in 2016. The gap is ### cr17218 - 1.7 percent in 2016. The gap is ### External sustainability and current account assessment - Macroeconomic findings (Macroeconomic balance / External Balance Assessment-Lite): - CA-Actual: 2.4% - CA-Fitted: 0.6% - CA-Norm: 2.9% - Residual: 1.8% - CA-Gap: -0.5% - Policy gap: -2.3% - Interpretation: For 2016, the model estimates the current account norm at 2.9 percent of GDP and a cyclically adjusted current account gap at a negative 0.5 percent of GDP. The small size of the gap suggests that, based on this approach, the current account is not misaligned. The policy gap of negative 2.3 percent mainly reflects the fiscal policy gap due to insufficient saving for future generations. - External sustainability (annuity-based scenarios): - Under the scenario of keeping the annuity constant in percent of GDP, the current account norm is estimated at 8 percent of GDP, implying a negative current account gap of close to 6 percent of GDP. - The gap is attributed to insufficient savings of oil wealth for future generations and is expected to be closed gradually with fiscal consolidation. - Methodological caveat: - The macroeconomic balance approach focuses on traditional competitiveness issues and does not fully capture special features of commodity exporters (e.g., need for intergenerational saving). For oil-producing countries, given oil exports and the high import content of nonoil exports, real depreciation would have only a limited impact on external competitiveness and would affect the external position mainly through the fiscal balance and import compression. ### Exchange rate, REER, and capital flows - Exchange rate regime and recent movements: - The dirham has been pegged to the dollar at a rate of 3.67 since November 1997. - The real effective exchange rate (REER) appreciated by 2.3 percent in 2016 and was 12 percent stronger than a decade ago. - The recent appreciation was driven mostly by the U.S. dollar nominal appreciation vis-à-vis trading partners’ exchange rates. - Misalignment estimates: - External sustainability approach: REER gap in a range of 2.5 percent to 8.3 percent (moderately overvalued). - Macroeconomic balance approach: REER gap estimated at 0.7 percent (suggests not misaligned). - Note: Similar to other oil-exporting countries, exchange rate movements have limited impact on the current account. - Capital flows and external position: - The UAE is a net supplier of capital. - Capital and financial accounts are open; domestic capital markets are the most developed in the Middle East and North Africa region. - Capital inflows dominated by stable FDI, inflows to the banking sector (mostly medium-term), and external debt issuance. - Outflows are largely trade credits and portfolio investment. - Risks of a reversal in bank inflows are mitigated by the UAE’s long-standing safe-haven status. - Steps to attract further FDI inflows are ongoing. ### Energy efficiency, emissions, and policy (Annex IV) - Context and priorities: - High energy consumption rates amid expanding economic activity, urbanization, and rapid population growth make improving energy efficiency a priority for the UAE. - UAE Energy Plan 2050 released to intensify efforts to raise energy efficiency and reduce the share of carbon in the total energy mix. - Key instruments: technological improvements, price adjustments, tariff reform, and demand-side management measures. - Energy consumption and efficiency indicators: - Energy consumption per capita in the UAE is among the highest in the world. - Most of the UAE’s population lives in urban areas; the population has more than tripled since 1995. - Overall electricity consumption has doubled over the past decade. - Efficiency (total energy consumption relative to economic activity) has improved but remains relatively high; the ratio remains significantly below the GCC average yet above the world average. - UAE has reduced the carbon intensity of its total energy consumption over the last decade in part by shifting from oil to natural gas. - Clean energy and emissions targets: - In the 2015 Paris Agreement, the UAE committed to increase the share of zero-carbon energy from 0.2 percent of the total energy mix in 2014 to 24 percent by 2021 (per INDC). - The UAE will achieve most of its zero-carbon energy target through nuclear power. - The first of the four units in Barakah nuclear power plant is scheduled to become operational in 2017 and is expected to reach full capacity by 2020. - The national clean energy target has been raised since the INDC submission; the target is now 27 percent, with the additional portion coming from solar energy (most from the Mohammed bin Rashid Solar Park, expected to be the largest solar park on a single plot in the world when completed in 2020). - UAE Energy Plan 2050 targets: - Energy mix by 2050: 44 percent clean energy, 38 percent gas, 12 percent clean coal and 6 percent nuclear. - Strategy aim: slash residential energy consumption by 40 percent. - Ministry of Energy is working on demand-side management measures to support the 2050 strategy. - Demand-side and Emirate-level initiatives: - Dubai Clean Energy Strategy 2050: reduce energy and water consumption by 30 percent each by 2030 via building regulations, tariff changes, standards and labels, district cooling, and building retrofits. - DEWA smart meter program: aim to introduce 1 million smart meters by 2020. - Etihad Energy Service Company (ESCO) established in 2013 to develop energy efficiency projects, focusing on district cooling and retrofitting 30,000 buildings by 2030. - Abu Dhabi Comprehensive Cooling Plan: reduce cooling related energy consumption by 15 percent by 2030. - Masdar City: centralized test bed for renewable energy and technology companies; each building designed to lower energy consumption by 40 percent. - Tariff and fuel-price reforms: - Dubai implemented initial electricity and water reforms in 2008 and made further reforms in 2011. - Abu Dhabi increased tariffs in January 2015 (by 170 percent for water and by 40 percent for electricity). - Water and electricity tariffs were increased again by 23-28 percent in January 2017. - Utility fees for expatriates are about three times the rate paid by locals. - Expatriates make up 90 percent of the UAE’s population. - Electricity tariff reform raised prices to close to cost-recovery levels for expatriates. - In 2015, the UAE reformed its fuel pricing policy by adopting a mechanism to adjust monthly gasoline and diesel prices against international prices and eliminated subsidies on gasoline and diesel prices. - Policy recommendations and options: - Consider further price adjustments to complement other efforts: price reform reduces use of energy-consuming products, promotes energy efficiency, and raises revenue. - Continuous improvements in efficiency of final energy use and reductions in carbon intensity of energy supply and consumption are needed to meet INDC and UAE Energy Plan for 2050 goals. - Suggested additional measures: - Higher utility fees, including those applying to locals. - Stepped-up communications to persuade society. - Further focus on research and technology to benefit from new technologies. - Continued targeting of emissions from the building sector through green building regulations and efficiency standards. - Measures to move towards district cooling systems to improve energy-use efficiency further. *Source: IMF staff estimates.* ### References ### cr17218 - References (Informational Annex excerpts) ### Fund relations: membership, financial positions, and exchange arrangement - Membership Status: Joined 9/22/72; accepted Article VIII status in February 1974. - General Resources Account (SDR Million / Percent Quota): - Quota: 752.50 / 100.00 - Fund holdings of currency: 749.41 / 99.59 - Reserve tranche position: 3.62 / 0.48 - SDR Department (SDR Million / Percent Allocation): - Net cumulative allocation: 568.41 / 100.00 - Holdings: 542.53 / 95.45 - Outstanding Purchases and Loans: None - Latest Financial Arrangements: None - Projected Payments to Fund (Charges/interest): - Forthcoming: 0.01 (2016), 0.03 (2017), 0.03 (2018), 0.03 (2019), 0.03 (2020) - Total: 0.01 (2016), 0.03 (2017), 0.03 (2018), 0.03 (2019), 0.03 (2020) - Exchange Arrangement: - AED 4.76190 = SDR 1 (official peg from November 1980 to February 2002—de facto pegged to the dollar) - Since February 2002: conventional peg to the U.S. dollar with midpoint fixed at AED 3.6725 = US$1 - The U.A.E. has accepted the obligation of Article VIII, Sections 2, 3, and 4. No restrictions on payments and transfers for current international transactions except those notified for security reasons under Executive Board Decision No. 144 (52/51). ### Article IV consultations, FSAPs, and technical assistance - Article IV Consultation: - Consultation cycle: annual - Previous consultation discussions: April 26—May 9, 2016 - Article IV consultation concluded: July 20, 2016 - Staff report published: July 27, 2016 - FSAP participation: FSAPs conducted in 2003 and 2007. - Technical Assistance (selected): - STA Multi-sector: April 2008 - STA Balance of Payments: March-April 2009 - MCM Macroprudential Tools and Liquidity Management: January 2011 - STA National Accounts: September 2011 - MCM Payment Systems: November 2011 - STA Balance of Payments Statistics: June 2012 - FAD Fiscal Coordination: June 2012 - STA Government Finance Statistics: April 2013 - STA National Accounts Statistics: May 2013 - STA International Investment Position: January 2014 - FAD Fiscal Coordination: January 2014; March 2014 - STA Fiscal Information and Coordination: May 2014 - STA Consumer Price Index: November 2014 - STA Government Finance Statistics: January 2015 - FAD Fiscal Coordination: January 2015 - STA Monetary and Financial Statistics: November 2015 - STA Balance of Payments Statistics: November 2015 - STA National Account Statistics: April 2016 - MCM Bank Liquidity Risk Management and Liquidity Forecasting: March 2017 - STA Business Conditions Survey: March 2017 - STA Monetary and Financial Statistics: April 2017 - Resident Representative: None ### World Bank relations: cooperation, projects, and planned support - Historical cooperation: technical cooperation began in the 1980s on health assessment and government computer center restructuring; later work on water resource management, debt market development, and labor market development. - Recent outputs: national reports on health insurance schemes, private education improvement governance assessment, upgrading public finance laws, and Public Expenditure Reviews (PER) in health, education, higher education and public works. - Sub-national assistance: Abu Dhabi, Dubai, Sharjah, Ajman on regulatory environment for private sector development, mobile savings and retirement options for expatriate workers, Doing Business, and institutional strengthening. - World Government Summit partnership: - 2016: World Bank became a key partner of the World Government Summit. - 2017: launched a permanent Education Platform at the Summit. - Forward support areas: fiscal coordination among the Emirates, diversification, education, efficiency and effectiveness of public resource utilization, planning and visioning exercises. - Selected active/closed projects and basic data: - Ministry of Finance — PFM Legislation Review (P157431) - Project Dates: 12/8/15 to 12/31/16 - TTL: Manuel Vargas - Budget: $0.3 million - Status: Outputs delivered and activity closed. - Ministry of Finance — Fiscal Coordination Program (FCP) (P158089) - Project Dates: 12/15/15 to 3/20/17 - TTL: Sahar Hussain - Budget: $1.37 million - Objectives: stocktaking fiscal coordination mechanisms; preparing a fiscal coordination manual and medium term implementation plan; developing a fiscal framework for analysis of fiscal sustainability at every level. - Status note: Mission scheduled May 8-12 to focus on MTFF. PM and TTL to address the Fiscal Coordination Council May 10. - Dubai PMO Office — World Government Summit (P162153) - Project dates: 10/25/16 to 04/25/17 - TTL: Edward Dahdah - Budget: 0.3 million - Status note: PMO asked to extend the agreement (will close before end FY) to do a few more items; dialogue underway to prepare a new 3 year engagement. - Ongoing dialogues for possible cooperation: - Ministry of Finance: proposal to review and support implementation of Education PER recommendations. - PMO: dialogue for a 3 year support to WGS in Governance, Education Platform, and SDGs. - Ministry of Education: dialogue to prepare a National Education Strategy (May). - Ajman: dialogue to start mid May on Economic Development and later Urban Development. - Abu Dhabi Department of Economic Development: dialogue to start mid May on economic modeling, planning, and PPP issues; update Doing Business sub-national report requested. ### Statistical issues: data adequacy, quality, and priorities for improvement - Assessment summary: - General: Data provision has some shortcomings but is broadly adequate for surveillance. Substantial shortcomings on dissemination of accounts of government-related entities (GREs), including limited data on GRE debt and contingent liabilities to the government. - Federal and emirate agencies have improved availability and quality, but more progress is needed. - National Accounts: - Methodology: broadly conforms to the 1993 SNA. - Frequency/timeliness: GDP is compiled annually with a lag of around 5 months. - Compilers: Federal Competitiveness and Statistics Authority (FCSA), Statistics Center of Abu Dhabi (SCAD), and Dubai Statistics Center (DSC). - Structural issue: FCSA compiles estimates only for the Northern Emirates (UAE excluding Abu Dhabi and Dubai); national GDP derived by summing GVA from the three agencies—this practice is not advisable and should be discontinued. - Compilation inconsistency: agencies use different data sources and compilation techniques for the same activities. - Base year for GDP estimates: 2010. - Price statistics: - Data published with a delay of one month. - Consumer price indexes need further harmonization at the federal level. - Government Finance Statistics (GFS): - April 2017: authorities recommenced reporting high frequency data for budgetary central government for the first time since 2012. - UAE has submitted general government fiscal accounts for the GFS Yearbook from 2012, after implementation of GFSM 2001 in 2009 by federal and several emirate governments. - Recommendation: establish debt management units at emirate and federal levels to improve fiscal balance sheet data. - Anticipated: remaining smaller emirates expected to start producing GFS data from 2017 to allow inclusion in consolidated general government data. - Monetary statistics: - Central Bank of the UAE (CBU) started disseminating SRF based monetary data in September 2016, monthly frequency, timeliness of less than one month. - April 2017 STA mission assisted CBU in developing report forms for Other Financial Corporations (OFCs) to enable compilation of monetary data for OFCs. - Financial sector surveillance: - CBU reports quarterly FSIs to the Fund, disseminated on IMF’s FSI website. - Reported FSIs currently include the 12 core FSIs for deposit takers. - STA recommended compiling and reporting encouraged FSIs for deposit takers and other sectors. - External sector statistics: - CBU introduced an international transactions reporting system to improve source data for balance of payments compilation. - Authorities continue a project to compile the IIP, which will close an important statistical gap. - Current shortcomings: balance of payments information, especially the financial account; many components of IIP data missing or incomplete due to lack of surveys or unpublished government foreign asset data. - Feasibility: development of a comprehensive BOP and IIP is feasible if CBU, FCSA, and Ministry of Economy strengthen capacity and receive high-level support. - Data Standards and Quality: - Participant in the GDDS/e-GDDS since July 31, 2008. - Metadata updated in June 2013. - No Data ROSC is available. ### Key data and indicator reporting (UAE: Table of Common Indicators Required for Surveillance, as of June 12, 2017) - Exchange Rates: - Date of latest observation: Real time - Date received: Real time - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: - Date of latest observation: 03/17 - Date received: 04/17 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Reserve/Base Money: - Date of latest observation: 03/17 - Date received: 04/17 - Frequency: M / M / M - Broad Money: - Date of latest observation: 03/17 - Date received: 04/17 - Frequency: M / M / M - Central Bank Balance Sheet: - Date of latest observation: 03/17 - Date received: 04/17 - Frequency: M / M / M - Consolidated Balance Sheet of the Banking System: - Date of latest observation: 03/17 - Date received: 04/17 - Frequency: M / M / M - Interest Rates: - Date of latest observation: Real time - Date received: Real time - Frequency: D / D / D - Consumer Price Index: - Date of latest observation: 03/17 - Date received: 05/17 - Frequency: M / M / M - Revenue, Expenditure, Balance and Composition of Financing – Central Government: - Date of latest observation: 12/16 - Date received: 05/17 - Frequency: Q / Q / Q - Stocks of Central Government and Central Government-Guaranteed Debt: - Date of latest observation: 12/16 - Date received: 05/17 - Frequency: A / A / NA - External Current Account Balance: - Date of latest observation: 2016 - Date received: 05/17 - Frequency: A / A / A - Exports and Imports of Goods and Services: - Date of latest observation: 2016 - Date received: 05/17 - Frequency: A / A / A - GDP/GNP: - Date of latest observation: 2016 - Date received: 05/17 - Frequency: A / A / A - Gross External Debt: - Date of latest observation: ... / Date received: ... / Frequency: NA / NA / NA - International Investment Position: - Date of latest observation: ... / Date received: ... / Frequency: NA / NA / NA *International Monetary Fund — UNITED ARAB EMIRATES: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17218.pdf_