## UNITED ARAB EMIRATES: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (cr1935) ## Source details **Canonical URL:** [UNITED ARAB EMIRATES: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (cr1935)](https://www.imf.org/-/media/files/publications/cr/2019/cr1935.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1935.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1935.pdf.json) --- ### Outlook and risks - Non-oil growth projections: - 2019: 3.9 percent - 2020: 4.2 percent - Overall real GDP growth: around 3.7 percent for 2019–20 - Inflation: expected to remain low despite VAT introduction in 2018. - External risks increased: tightening global financial conditions, heightened volatility in emerging markets, geopolitical tensions, rising protectionism. - External position: - Current account surplus: nearly doubled last year to 6.9 percent of GDP and expected to rise to nearly 8 percent of GDP by 2019; projected to settle at a lower level over the medium term as oil prices soften. - Banking sector and macro-financial stability: downside external risks warrant heightened supervisory vigilance. ### Fiscal policy and public finances - Fiscal stance: - Fiscal easing underway with a planned fiscal stimulus over the next three years to augment investment (including ahead of Expo 2020). - Fiscal consolidation expected to resume as private sector activity picks up and stimulus measures are phased out. - Overall fiscal balance: projected to turn to a surplus next year and remain positive over the medium term. - Selected fiscal indicators (2019 unless otherwise indicated): - Revenue: 31.6 percent of GDP - Taxes: 16.8 percent of GDP - Other revenue: 14.5 percent of GDP - Expenditures: 29.8 percent of GDP - Expense: 26.7 percent of GDP - Net acquisition of nonfinancial assets: 3.1 percent of GDP - Net lending(+)/borrowing(-): 1.8 percent of GDP - Adjusted nonoil primary balance (in percent of nonoil GDP): -27.0 - Gross general government debt: 20.5 percent of GDP - Net of government deposits in the banking system: 3.4 percent of GDP - Fiscal priorities and recommendations: - Support short-term growth and resume consolidation once recovery takes hold. - Raise spending efficiency, continue diversifying revenues, anchor fiscal policy, improve coordination and fiscal risk management. - Strengthen fiscal policy frameworks to realize Vision 2021. - In Abu Dhabi: finalize and frontload stimulus plans, channel expenditure to high growth multipliers, select projects via rigorous cost-benefit analysis, abstain from competitiveness-reducing measures, coordinate with monetary authorities. - In Dubai: exercise prudence given large public-sector debt; avoid revenue-reducing measures that raise risks; contain current expenditure growth and execute planned investment efficiently. - Recommended consolidation pace: average annual rate of 0.5 pp of GDP to close estimated gap by 2029. ### Financial sector and monetary policy - Banking sector health: - Capital adequacy ratio: remained above 18 percent in Q2 2018. - Bank profitability improved reflecting higher interest margins; return on assets and equity improved (see Financial Soundness Indicators). - NPLs: rose to 7 percent of total loans in Q2 2018 (from 6.4 percent at end-2017); increases recently driven by GREs and other large corporates; NPLs remain fully provisioned. - Transition to IFRS9 has prompted higher provisioning without apparent impact on NPLs. - Wholesale funding: edged down to below 13 percent of total funding by Q2 2018. - Bank liquidity improved with increased oil prices. - Monetary and banking indicators (selected): - Credit to private sector growth: 4.6 percent (2019) - Broad money: 7.1 percent (2019) - Net foreign assets: 18.5 (annual percent change, 2019) - Net domestic assets: 1.5 (annual percent change, 2019) - Broad money (M2) growth (annual percent change): 2019: 7.1; 2020: 6.5; 2021: 7.0; 2022: 6.5; 2023: 5.2 - Credit to private sector (annual percent change): 2019: 5.4; 2020: 6.0; 2021: 5.4; 2022: 5.1; 2023: 4.9 - Financial sector policy recommendations: - Increase supervisory vigilance and strengthen management of contingent liabilities from GRE borrowing, guarantees, and PPPs. - Commence issuance of domestic debt securities and strengthen the central bank’s liquidity management framework. - Enhance effectiveness of the AML/CFT regime; finalize national risk assessment and improve supervision of remittances and FX offices. - Design stringent stress-testing scenarios including for GREs; resist relaxing prudential limits on real estate lending. - Prepare a new bank resolution regime and contingency plans for abrupt tightening of financial conditions. ### External sector and reserves - External developments and projections (selected, 2019 unless otherwise indicated): - Exports of oil (incl. oil products and gas): 84.9 (billions of U.S. dollars, 2019) - Average crude oil export price: 72.3 (U.S. dollar per barrel, 2019) - Crude oil production: 3.1 (millions of barrels per day, 2019) - Exports and re-exports of goods: 343 (billions of U.S. dollars, 2019) - Nonoil exports, excluding re-exports: 106 (2019) - Imports of goods: 246 (2019) - Current account balance: 35.9 (billions of U.S. dollars, 2019) - Current account balance (in percent of GDP): 7.9 (2019) - Gross official reserves: 129.5 (billions of U.S. dollars, 2019) - Reserves in months of next year's imports of goods & services, net of re-exports: 7.6 (2019) - Exchange rate: dirham pegged to the U.S. dollar; peg continues to serve UAE well. - External outlook and vulnerabilities: - Current account surplus: expected above 7.5 percent of GDP in 2019; projected to decline to around 4 percent of GDP by 2023. - External position assessment: moderately weaker than level consistent with saving of nonrenewable resource revenues; gap could close with fiscal adjustment. - Gross international reserves: rose by $10 billion to $95 billion as of end-2017 and expected to rise further in 2018. - NIIP: staff estimates 149 percent of GDP at end-2017. - External debt dynamics (selected percent of GDP): - External debt: 2017: 73.5; 2018: 66.9; 2019: 64.3; 2020: 62.9; 2021: 61.1; 2022: 60.1; 2023: 59.5 ### Structural reforms and diversification - Reform progress: - Announced measures in 2018: lowering fees, easing business licensing and registration, liberalizing foreign business ownership in selected sectors, long-term residence visas for professionals and retirees, reduction in electricity tariffs for industrial sector. - New Law on Foreign Direct Investment adopted in November 2018 allowing majority foreign ownership in selected sectors. - Structural reform priorities: - Increase competition, improve financial inclusion, reduce labor market fragmentation, promote talent and inclusiveness. - Continue implementation of Vision 2021–related reforms. - Strengthen synergies between GREs, privatize nonstrategic GREs, bring GREs under competition laws, integrate domestic financial markets. - SME and private sector development: - SMEs account for estimated 40 percent of nonoil GDP in 2016; Vision 2021 target 70 percent. - SMEs receive 6.6 percent of business loans vs. 45 percent OECD average. - Policy recommendations to boost SME finance: simplify registration and bank account opening, improve entrepreneurs’ financial skills, operationalize bankruptcy regime, issue domestic government bonds, promote private equity and venture financing, encourage competition among SME lenders, explore securitization of SME loans. - Risks: regulatory forbearance (e.g., lower risk weights) is not advisable as it could undermine financial stability. - Fintech: - Fintech nurtured in ADGM and DIFC; crowdfunding platforms (Beehive, Eureeca) and onshore crowdfunding regulation under development. - Recommendations: coordinate on-shore and off-shore regulators; finalize onshore crowdfunding regulations; strengthen legal framework to encourage fintech onshore presence. ### Banking sector health and asset quality (detailed) - Nonperforming loans: - NPL ratio: 7.0 percent (Q2 2018) - NPLs were 6.4 percent at end-2017; increases in 2017 led by SMEs and households; latest increase mostly GREs and large corporates. - NPLs remain fully provisioned; IFRS9 increased provisioning. - Capital and profitability: - Regulatory Capital to Risk-Weighted Assets: around 18 percent (Q1 2018 and Q2 2018 entries show above 18 percent in Q2 2018). - Return on assets: 1.7 (2018 Q1) - Return on equity: 12.2 (2018 Q1) - Interest margin to gross income: 70.6 (2018 Q1) - Prudential measures and supervisory actions: - CBU plans to move to risk-based supervision in 2019. - Supervisors required banks to strengthen provisioning/capital and limit dividends. - Recommendations: design stringent stress tests (including GREs), maintain real estate lending limits (20 percent of deposits cap), differentiated LTV and DTI ratios, and minimum financing requirements for developers. ### VAT implementation and revenue diversification (Annex II) - GCC decision: VAT at 5 percent agreed in June 2016. - UAE rollout: - Excise taxes: October 2017 - VAT: January 2018 - VAT design and operations: - Threshold: AED 375,000 (about $100K) - Registrations in 2018: 296,534 firms - Allocation rule: 30 percent of collected VAT revenue to federal government, rest to emirate governments - Revenue distribution not yet undertaken; collection data not released - Projection: annual VAT revenues projected to reach 2 percent of GDP over coming years - Exemptions and zero-rate treatments specified (real estate, most financial services, trade in free zones; zero-rate for certain transport, telecom, health, education, exports, medical equipment, oil/gas, investments in precious metals) - May 2018 clarification on wholesale VAT for gold and diamonds intended for resale - VAT refunds for UAE tourists expected to start in November - Concerns: private sector worries about growth and competitiveness impact; inflation impact limited and mostly dissipated by mid-year. ### Fiscal and debt sustainability (Annex III) - Long-term fiscal sustainability: - Main finding: government saving of exhaustible oil revenue remains below the PIH benchmark. - Gap: widened to 7 percent of nonoil GDP in 2017; projected to peak at 11.5 percent of nonoil GDP in 2019 before declining to 6.5 percent in the medium term under current policies. - Dubai DSA (selected outcomes): - Baseline: additional borrowing ahead of Expo 2020 likely to raise government debt ratio to just under 30 percent of GDP. - Scenario results: - Real GDP growth shock: debt-to-GDP ratio reaches 32.7 percent by 2023. - Global downturn scenario: 34.3 percent by 2023. - Real estate shock combined with global downturn (government assumes 20 percent of GREs debt): 44 percent by 2023. - GREs combined debt: about 70 percent of Dubai’s GDP. - Specific borrowing: $3.9 billion for airport expansion and $1.1 billion for metro expansion in 2017; metro financing increased to $2.4 billion in 2018. - UAE general government DSA: - Nominal gross government debt (selected): 2016: 20.0; 2017: 19.4; 2018: 21.8 (projected); 2019: 20.9; 2020: 20.5; 2021: 20.7; 2022: 20.4; 2023: 19.9 - Stress tests: oil price shock ($10 lower in 2018-23), GRE contingent liability (20 percent of GRE debt assumed by government), combined scenario. - Combined scenario results: Primary balance series notably weaker (e.g., -0.8 in 2019; -2.3 in 2020). ### External sector assessment (Annex IV) - Staff assessment: external position moderately weaker than level consistent with medium-term fundamentals and desirable policies. - NIIP: 149 percent of GDP at end-2017 (staff estimate) and projected stable over medium term. - CBU reserves: ¼ of GDP at end-2017; equivalent to 6 months of prospective imports (excluding re-exports) and 81 percent of the IMF Reserve Adequacy metric. - Current account norms and gaps: - External sustainability approach CA-norm: 5.4 percent of GDP in 2017; implies positive CA gap ~1.5 percent of GDP in 2017 but gap expected to become negative ~2.5 percent of GDP over medium term absent fiscal consolidation. - Macroeconomic balance (EBA-Lite) CA-norm: 6.8 percent of GDP in 2017; implies CA gap 0.2 percent of GDP. - REER and exchange rate assessments: - REER: almost 20 percent stronger than 2014; recent appreciation driven by U.S. dollar. - REER gap assessed in ranges: external sustainability approach REER gap 0.1 percent to 8.4 percent; macro balance approach REER gap -0.2 percent; staff medium-term REER gap 2 to 5 percent. - REER appreciation between Sep 2018 and Dec 2017: 3.8 percent (noting period phrasing in source). ### Statistics, data, and capacity building - Recent improvements: - Implementation of e-GDDS in June 2018 with IMF TA. - Reconciliation of national and emirate-level GDP data. - Project to improve balance-of-payments statistics using SWIFT transactions data. - Authorities intend to work towards joining the SDDS in coming years. - Remaining gaps and priorities: - Quarterly GDP production in progress. - Significant room to improve fiscal, external, and labor statistics. - Non-provision of gross external debt and IIP to the Fund due to capacity limitations. - Need for cooperation and information-sharing between federal and emirates’ statistical agencies, uniform methodologies, and enhanced resources. - Policy recommendations specific to statistics: - Improve capacity while sharing available data on external public-sector assets and liabilities. - Enhance cooperation and information-sharing between federal and emirates’ statistical agencies. - Develop consistent statistical methodologies across jurisdictions. - Prioritize producing quarterly GDP, IIP, and external debt statistics. ### Key macroeconomic indicators (selected levels and projections) - Nominal GDP: - 2019: 1,673 (billion UAE dirhams) - 2019: 456 (billion U.S. dollars) - 2020: 1,744 (billion UAE dirhams); 2020: 475 (billion U.S. dollars) - Real GDP growth (annual percent change): - 2019: 3.7 - 2020: 3.6 - 2021: 3.2 - 2022: 3.0 - 2023: 2.8 - Real oil GDP: 3.1 (2019) - Real nonoil GDP: 3.9 (2019) - CPI inflation (average): - 2019: 1.9 - 2020: 2.2 - 2021: 2.1 - 2022: 1.9 - 2023: 1.9 - Gross domestic investment: 23.1 percent of GDP (2019) - Total fixed capital formation: 21.0 percent of GDP (2019) - Public: 8.7 percent of GDP (2019) - Private: 12.3 percent of GDP (2019) - Gross national saving: 31.0 percent of GDP (2019) - Public: 6.8 percent of GDP (2019) - Private: 24.2 percent of GDP (2019) - External and reserves (selected): - Gross official reserves: 129.5 (billions of U.S. dollars, 2019) - Current account balance: 35.9 (billions of U.S. dollars, 2019); 7.9 percent of GDP (2019) *International Monetary Fund. Staff report for the 2018 Article IV Consultation (cr1935).* ### 2020. Non-oil growth is projected to rise to 3.9 percent in 2019 and 4.2 percent in 2020. The oil ### UNITED ARAB EMIRATES: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION ### Outlook and risks - Non-oil growth is projected to rise to 3.9 percent in 2019 and 4.2 percent in 2020. - The oil sector’s prospects have improved with higher oil prices and output. - Overall real GDP growth is projected at around 3.7 percent for 2019–20. - Inflation is expected to remain low, notwithstanding the introduction of the value-added tax (VAT) earlier in 2018. - Downside external risks have increased, driven by tightening global financial conditions, heightened volatility in emerging markets, geopolitical tensions, and rising protectionism. - The external position has strengthened: the current account surplus nearly doubled last year to 6.9 percent of GDP and is expected to rise further to nearly 8 percent of GDP by 2019; over the medium term the current account surplus is projected to settle at a lower level as oil prices soften. ### Fiscal policy and public finances - Fiscal easing is underway to facilitate the recovery; authorities announced plans for a fiscal stimulus over the next three years, augmenting planned increases in investment (including ahead of Expo 2020). - As private sector activity picks up and stimulus measures are phased out, fiscal consolidation is expected to resume to save oil wealth for future generations. - The overall fiscal balance is projected to turn to a surplus next year on higher oil prices and remain positive over the medium term. - Selected fiscal indicators (2019, unless otherwise indicated): - Revenue: 31.6 percent of GDP - Taxes: 16.8 percent of GDP - Other revenue: 14.5 percent of GDP - Expenditures: 29.8 percent of GDP - Expense: 26.7 percent of GDP - Net acquisition of nonfinancial assets: 3.1 percent of GDP - Net lending(+)/borrowing(-): 1.8 percent of GDP - Adjusted nonoil primary balance (in percent of nonoil GDP): -27.0 - Gross general government debt: 20.5 percent of GDP - Net of government deposits in the banking system: 3.4 percent of GDP - Key fiscal policy priorities identified: - Support economic growth in the short term and resume fiscal consolidation once recovery takes hold. - Raise spending efficiency, continue diversifying revenues, firmly anchor fiscal policy, and improve policy coordination and management of fiscal risks. - Strengthen fiscal policy frameworks and coordination to realize Vision 2021 and improve risk management. ### Financial sector and monetary policy - Although nonperforming loans rose during the slowdown, banks remain liquid and well capitalized. - Bank credit to the private sector has started to recover; credit growth has been recovering, especially to construction, trade, and manufacturing, since Q3 2017. - Broad money growth and banking indicators: - Credit to private sector growth: 4.6 percent (2019) - Broad money: 7.1 percent (2019) - Net foreign assets: 18.5 (annual percent change, 2019) - Net domestic assets: 1.5 (annual percent change, 2019) - Financial sector policy recommendations: - Increase supervisory vigilance and strengthen management of contingent liabilities from borrowing by government-related enterprises, government guarantees, and public-private partnerships. - Commence issuance of domestic debt securities and strengthen the central bank’s liquidity management framework. - Enhance the effectiveness of the AML/CFT regime. ### External sector and reserves - External sector developments and projections: - Exports of oil (incl. oil products and gas) (in billions of U.S. dollars): 84.9 (2019) - Average crude oil export price (in U.S. dollar per barrel): 72.3 (2019) - Crude oil production (in millions of barrels per day): 3.1 (2019) - Exports and re-exports of goods: 343 (billions of U.S. dollars, 2019) - Nonoil exports, excluding re-exports: 106 (2019) - Imports of goods: 246 (2019) - Current account balance: 35.9 (billions of U.S. dollars, 2019) - Current account balance (in percent of GDP): 7.9 (2019) - Gross official reserves: 129.5 (billions of U.S. dollars, 2019) - Reserves in months of next year's imports of goods & services, net of re-exports: 7.6 (2019) - The exchange rate peg to the U.S. dollar continues to serve the UAE well. ### Structural reforms and diversification - Creating a vibrant, diversified, and knowledge-based economy requires continued reforms to boost the role of the private sector and promote talent and inclusiveness. - Authorities announced reforms including the liberalization of foreign investment; Directors encouraged swift implementation and broader policy initiatives to improve productivity and competitiveness. - Structural measures highlighted: - Increase competition, improve financial inclusion, reduce labor market fragmentation, and promote talent. - Continue implementation of Vision 2021–related reforms. ### Selected macroeconomic indicators (annual percent change / levels from table) - Nominal GDP (in billions of UAE dirhams): 1,673 (2019) - Nominal GDP (in billions of U.S. dollars): 456 (2019) - Real GDP: 3.7 (2019) - Real oil GDP: 3.1 (2019) - Real nonoil GDP: 3.9 (2019) - CPI inflation (average): 1.9 (2019) - Gross domestic investment: 23.1 percent of GDP (2019) - Total fixed capital formation: 21.0 percent of GDP (2019) - Public: 8.7 percent of GDP (2019) - Private: 12.3 percent of GDP (2019) - Gross national saving: 31.0 percent of GDP (2019) - Public: 6.8 percent of GDP (2019) - Private: 24.2 percent of GDP (2019) - External debt (in percent of GDP): 64.2 (2019) - Real estate and activity developments noted: - Real nonoil GDP growth fell to 2.5 percent in 2017 and was expected 2.9 percent in 2018 from a peak of 6.4 percent in 2014. - Employment growth slowed from 3.5 percent in 2017 to less than one percent (y-o-y) in August 2018. ### Executive Board and policy assessment - Executive Directors commended authorities for strong policy response: introduction of VAT, stepped up structural reforms, upgrading of the prudential framework. - Directors stressed increased external downside risks and encouraged continued efforts to bolster economic growth and safeguard macro-financial stability. - Emphasis on improving economic statistics (labor, fiscal, national accounts, and international investment position statistics) to facilitate decision-making and enhance transparency. *International Monetary Fund. Staff report for the 2018 Article IV Consultation.* ### 6. Bank profitability, liquidity, and capital buffers remain strong, despite an uptick in ### 6. Bank profitability, liquidity, and capital buffers remain strong, despite an uptick in ### Banking sector health and asset quality - Bank profitability has improved, reflecting higher interest margins. - The capital adequacy ratio has remained above 18 percent in Q2 2018. - Wholesale funding, mostly at medium-term maturities, edged down to below 13 percent of total funding by Q2 2018, in part owing to rising US interest rates. - Bank liquidity has improved further with increased oil prices. - Non-performing loans (NPLs) rose, reaching 7 percent of total loans in Q2 2018 (from 6.4 percent at end-2017). - While SMEs and households led the NPL increases in 2017, the latest increase was mostly driven by GREs and other large corporates. - Despite the increase, NPLs remain fully provisioned. - Transition to IFRS9 has prompted banks to increase provisioning, although it has not had an apparent impact on NPLs. ### Financial conditions and market indicators (as presented) - Stock Market Indices, 2016–November 2018 (Index, January 1, 2016=100): MSCI EM; Dubai; Abu Dhabi (figure referenced). - Change in Stock Market Index and Bond Yields (January 1, 2018 - November 2, 2018): Dubai; Abu Dhabi; EM (figure referenced). - UAE Equity and Bond Flows (Millions of US dollars): Equity Flows; Bond Flows; EM Equity Flows (RHS); EM Bond Flows (RHS) (figure referenced). - Banking Sector Developments (Percent): NPL ratio; Deposit growth (right axis); Private credit growth (right axis) (figure referenced). - Financial Conditions Index components 2013–2018: House Prices; M3; Stock Market; Real CD Rate; REER (figures referenced). ### External position and international reserves - The current account surplus nearly doubled last year to 6.9 percent of GDP in 2017 as oil revenues rose and imports remained flat. - The current account is expected to strengthen further to 7.1 percent of GDP in 2018 owing to higher oil prices. - The financial account registered smaller net outflows than the current account surplus in 2017. - Gross international reserves rose by $10 billion to $95 billion as of end-2017 (6 months of prospective imports, excluding re-exports), and are expected to rise further in 2018. - External buffers have remained adequate for external stability, especially in the context of the government’s large stock of foreign assets held in sovereign wealth funds (SWFs). - The real effective exchange rate (REER) was stable in 2017, but appreciated by 3.8 percent between September 2018 and December 2017, in line with the US dollar. ### Structural reforms and growth outlook - Authorities announced structural reforms in 2018: lowering fees; easing business licensing and registration; liberalization of foreign business ownership in selected sectors; introduction of long-term residence visas for professionals and retirees; reduction in electricity tariffs for the industrial sector (details and timelines yet to be released). - Nonoil growth projections: - Projected to rise to 3.9 percent in 2019 and 4.2 percent in 2020 with higher oil prices, increased investment, improved growth prospects in trading partners relative to 2017, and a boost to tourism from Expo 2020. - Expected to average 3.5 percent in 2021–23 after fiscal stimulus is phased out and Expo 2020 ends. - Oil output projections: - In line with the June 2018 OPEC+ Agreement, oil output is projected to rise to 3.1 mbd in H2 2018 and reach 3.4 mbd over the medium term with expanding capacity. - Public investment and fiscal projections: - Staff expects the nonoil primary deficit to decline to 27 percent of nonoil GDP in 2019. - Recording and distribution of the 2018 VAT revenue in 2019 will temporarily improve the nonoil primary deficit by 3.0 pp of nonoil GDP in 2019. - Fiscal consolidation is expected to resume after 2020; the overall balance will turn to a surplus next year and is projected to remain positive over the medium term, at about 1 percent of GDP. - ADNOC plans referenced: ADNOC plans to invest up to $45 billion in expansion of its refining and petrochemical capacity over the next six years, including construction of the world’s largest integrated refining and production facility. ### External outlook and vulnerabilities - Current account expectations: - Strengthening import growth notwithstanding, higher oil revenues will likely raise the current account surplus above 7.5 percent of GDP in 2019. - By 2023, the current account surplus is projected to decline to around 4 percent of GDP. - Trade risks: - Recent US tariff hikes may slow aluminum exports (accounting for $1.3 billion in 2017 or 1 percent of total nonoil exports), with limited impact on overall nonoil exports. - External position assessment: - The external position appears moderately weaker than the level that would be consistent with sufficient saving of nonrenewable resource revenues to maintain intergenerational equity (Annex IV). - The gap would be closed if fiscal adjustment to the benchmarks were to be completed over the longer term (Annex III). - The peg, supported by sizable buffers and external surpluses, remains sustainable. ### Risks (RAM highlights) - Global energy price deviations: Medium likelihood/Short-to-medium-term; High expected impact. - Policy response: Use existing buffers to avoid pro-cyclical fiscal contraction; fiscal/monetary coordination; stepped up monitoring of banking risks and availing CBU liquidity facilities to banks in distress. - Rising protectionism and retreat from multilateralism: High likelihood/Short-to-medium-term; High expected impact. - Policy response: As above, and ensure effectiveness of the AML/CFT framework. - Slippages in the reform agenda: Low likelihood/Medium-term; High expected impact. - Policy response: Sustained structural reforms; ensure competitiveness and private sector productivity. - Excessive risk-taking by GREs: Medium likelihood/Medium-term; Medium expected impact. - Policy response: Strengthen monitoring and control over quasi-fiscal liabilities and the overall framework for managing fiscal risks. - Policy and geopolitical uncertainties: High likelihood/Short-to-medium-term; Medium/Low expected impact. - Policy response: Depends on shock nature; fiscal response may be warranted and ensure financial stability. - Sharp tightening of global financial conditions: High likelihood/Short-term; Medium/Low expected impact. - Policy response: Carefully calibrate the fiscal position and limit new debt accumulation; strengthen management of fiscal risks and oversight of GREs. ### Policy discussions and recommendations - Temporary fiscal easing supported by staff given spare capacity, large buffers, and tightening financial conditions. - In Abu Dhabi: finalize and frontload stimulus plans; channel expenditure into areas with high growth multipliers; select projects based on rigorous cost-benefit analysis; abstain from competitiveness-reducing measures (such as wage hikes); coordinate fiscal and monetary authorities during implementation and phasing out of stimulus. - In Dubai: prudence urged given large public-sector debt; be cautious implementing revenue-reducing measures while containing current expenditure growth and executing planned investment efficiently. - Resuming fiscal consolidation once recovery gains momentum to support intergenerational equity and debt sustainability. - Staff estimates the nonoil primary deficit is some 7 pp of nonoil GDP above the benchmark needed to ensure sufficient saving for future generations. - Recommended consolidation pace: an average annual rate of 0.5 pp of GDP would allow the gap to be closed by 2029 while mitigating adverse impact on growth. - This approach aligns with authorities’ goals: increasing intergenerational savings by the Abu Dhabi government and achieving and maintaining a primary balance by the Dubai government. *International Monetary Fund — Chapter 6, United Arab Emirates Article IV Consultation (excerpts).* ### 16. There was an agreement that government spending needs to be prioritized towards ### 16. There was an agreement that government spending needs to be prioritized towards ### Fiscal priorities and spending efficiency - Government spending should be prioritized towards realizing the Vision 2021 of developing a diversified, robust, knowledge-based economy. - Continued spending reviews and priority budgeting would help realize Vision 2021 in a cost-effective manner. - Staff welcomed the authorities’ intention to contain the government wage bill and other current expenses as a share of nonoil GDP over the medium term, to strengthen the fiscal position while improving competitiveness. - Continued energy and water subsidy reforms would rationalize private consumption and reduce the burden on public finances. - The authorities clarified that the purpose of the recently announced cuts in federal electricity tariffs is to encourage industries to set up new operations; staff urged the authorities to ensure that these tariff cuts would preserve cost recovery and, and if not, phase them out. ### Public investment, productivity, and reallocation - Over past decades, the UAE's large and wide-ranging public investment has created state-of-the-art infrastructure, attracted foreign talent, improved productivity, and made the country one of the premier destinations for foreign investment. - As a sign of a maturing economy, marginal productivity of investment has declined along with trend nonoil growth, raising the bar for future policies to deliver a sustained expansion of capacity through technological advancement and reallocation of resources to more productive sectors. ### Revenue reform and VAT implementation - Transforming fiscal revenue systems is important to strengthen the link between nonoil growth and fiscal revenues over time. - Staff commended the authorities for their successful introduction of VAT in 2018. - To ensure smooth functioning of VAT, staff recommended finalizing arrangements for timely distribution of VAT refunds and revenue. - In the longer term, consideration could be given to gradually broadening the VAT base and developing more efficient revenue systems over time. - The current system of numerous government fees is regressive and costly to administer; fixed fees are more burdensome for smaller enterprises. - Over 900 different fees were collected by ministries and departments in the UAE in 2014 (the latest year for which data are available). - In Dubai, fees accounted for over half of government revenues in 2017. - The authorities have initiated a comprehensive review of fees with a view to rationalizing them; staff recommended a complementary study assessing potential economic distortions from fees and exploring alternative revenue models, such as corporate income taxation. ### Fiscal framework, anchors, and risk management - Firmer anchoring of fiscal policy would facilitate decisions on how much government revenues to spend and how much to save for future generations. - Authorities have progressed in strengthening the fiscal framework, including transitioning to GFSM-reporting and medium-term budgeting by the federal government and some emirates. - Staff pointed to the need for further strengthening policy anchors to avoid procyclicality and to prevent expenditures drifting away from long-term benchmarks for intergenerational equity and debt sustainability. - Priority areas for strengthening the fiscal framework: - Refining fiscal anchors to balance short- and long-term objectives; fiscal policy should target sufficient savings to preserve debt sustainability or—to ensure intergenerational equity in oil-exporting emirates—targeted savings of oil revenue and limits on public sector debt in other emirates. - Developing a consolidated fiscal framework for the UAE that would define a near-term fiscal stance and medium-term fiscal path and align spending priorities with structural policies underpinning Vision 2021; the framework would facilitate cash management by fiscal entities and liquidity management by the CBU. - Strengthening fiscal risk management by requiring formal reporting by all GREs, maintaining a database of their financial indicators, and constructing aggregate public-sector balance sheets for emirates and the UAE. - Data limitations hinder estimation of contingent government liabilities; bank data show continued reduction in GRE’s domestic loans in 2017; Dealogic data point to a reduction in GRE debt, while balance sheet data by Orbis and staff’s contingent claims analysis suggest GRE liabilities have risen over the past several years. - Improving policy coordination among fiscal authorities (federal and emirates’ governments, GREs, and SWFs) and the CBU by creating a High-Level Financial Policy Coordination Council supported by a technical Secretariat to oversee coordination of the medium-term fiscal framework, fiscal risk management, and other policies to attain nonoil growth and diversification objectives. - Authorities plan to continue strengthening the fiscal framework and coordination; they intend to identify specific steps for improving policy coordination at the upcoming Annual Meetings of the UAE Government. - To strengthen risk management, authorities are considering launching a project to analyze fiscal risks and construct a UAE public-sector balance sheet, with technical assistance from the IMF. ### External and financial stability - The longstanding exchange rate peg continues to serve the UAE well by anchoring prices; the peg is supported by comfortable external financial buffers (including central bank reserves and SWFs) and open and flexible labor markets. - The current account surplus is moderately below the level needed to ensure sufficient savings for future generations; the negative current account gap is expected to close as desirable policy settings are reached (as the fiscal balance improves to the levels consistent with intergenerational equity). - The authorities remain committed to maintaining the peg; there have not been recent changes to the system of exchange controls. ### Banking supervision, prudential policy, and liquidity management - Increased risks warrant heightened supervisory vigilance. - Supervisors have enforced prudential norms by requiring banks to strengthen provisioning and/or capital, to limit dividend distribution; the CBU plans to move to risk-based supervision in 2019. - Collaboration between bank supervisors and the Financial Stability Department has strengthened to enhance stress-testing and better identify pockets of vulnerability and emerging risks, including from GREs. - Staff recommended designing sufficiently stringent stress-testing scenarios, including for GREs, and following up with banks on stress-testing results. - Given the risk of spillovers from declining real estate prices, staff urged the CBU to resist calls for relaxing prudential limits on real estate lending. - A 20 percent (of deposits) cap on real estate lending, differentiated loan-to-value and debt-to-income ratios, and requirements for minimum financing for developers limit risk from exposures of banks to the real estate sector. - Authorities are preparing to develop a new bank resolution regime; staff encouraged the CBU to discuss contingency plans for banks in case of abrupt tightening of financial conditions or other adverse shocks. - The CBU has progressed in modernizing the regulatory framework in line with its medium-term agenda; operational, market, and interest rate risk regulations are awaiting publication; work on remaining Basel III capital standards is nearing finalization within targeted timeframes. - Initiating issuance of domestic government securities in tandem with upgrading the CBU’s liquidity management framework would help banks manage risks and promote financial market development. - Introducing new dirham-denominated government and CBU market securities would help banks manage liquidity and complement Basel III liquidity requirements. - Issuance of government bonds would facilitate development of domestic capital markets and broaden financing options for corporates, including SMEs. - With the recent approval of the federal debt law, authorities plan operational arrangements to reflect the CBU’s role as the issuing agent of government debt and modernize the CBU’s liquidity management framework. - Closer information exchange between the CBU and fiscal authorities would help the CBU forecast liquidity in the banking system and enable fiscal authorities to calibrate debt issuance plans to market conditions. ### AML/CFT and correspondent banking - Progress has been made in strengthening the AML/CFT regime. - Authorities upgraded legislative and regulatory framework, including amendments to the AML/CFT Law in November 2018. - Authorities aim to finalize a national risk assessment by early 2019. - The CBU is enhancing AML/CFT supervision of banks, remittances, and foreign exchange offices, and stepping-up efforts to analyze suspicious transactions and respond to foreign requests of information. - Staff urged continued improvement in understanding ML/TF risks, including those related to nonresident financial flows, and communicating national risk assessment results to stakeholders. - Recommendations to mitigate ML/TF risks: - Enhance identification of beneficial owners of banks’ customer accounts and bolster ongoing monitoring and reporting of suspicious transactions. - Maintain close supervision of the high-risk remittance sector in coordination with relevant agencies to ensure service providers implement AML/CFT requirements and minimize migration of remittances to informal channels. - Enhance transparency of legal persons and arrangements by ensuring adequate and accurate beneficial ownership is available in a timely manner to the authorities. - To detect potential pressure on correspondent banking relationships, banks should continue to be closely monitored; although no correspondent banking withdrawals have been recently detected, staff recommended continued monitoring and maintaining close communication between domestic and foreign banks and regulators. ### Diversification, SMEs, and private sector development - Realizing Vision 2021 requires further reforms to boost the role of the private sector and improve competitiveness. - Strengthening synergies between GREs from different emirates would improve efficiency by realizing economies of scale and scope. - Integrating domestic financial markets would increase market liquidity and expand the investor base. - Privatizing nonstrategic GREs and bringing them within the scope of competition laws and regulations would boost efficiency and productivity growth. - Building on the recently adopted FDI Law, liberalizing foreign investment outside the free zones could bring in new capital, spur diversification and innovation, increase liquidity in stock markets, and facilitate GRE privatization. - Creating an ecosystem conducive to SME development would boost diversification, innovation, and job creation. - The SME Council and the newly created high-level committee on SME financing are already moving in this direction. - Improved coverage by credit bureaus and collateral registries is a welcome step towards improving currently low access of SMEs to bank finance; implementing the new bankruptcy law would support these efforts. - Relaxing risk weights on SME loans or other regulatory forbearance by the CBU could undermine financial stability. - Beyond bank finance, fostering development of domestic capital markets and coordinating on fintech regulation between on-shore and off-shore regulators would broaden SME sources of capital while mitigating financial risks. - Any direct government support for SMEs, including grants and guarantees, needs to be reflected in the budget. ### Talent, labor markets, and inclusiveness - Promoting talent and inclusiveness is a priority. - Building on the introduction of long-term visas for highly-qualified expats, further steps to reduce fragmentation between national and expat labor markets would support Emiratization while continuing to attract expat talent. - Controlling the size of the civil service and bringing its wages and allowances more in line with the private sector would increase incentives for nationals to apply for private sector jobs or explore business opportunities, while supporting fiscal consolidation. - Strengthening education and training in areas demanded by the private sector is important. - While the gender gap is the second lowest in the GCC, it is still far higher than global comparators. - Staff welcomed the adoption of the Equal Pay and Gender Equality Law in May 2018, which requires equal wage and nonwage benefits to be accorded to male and female employees in the national and expat labor force. - Consideration could be given to introducing gender budgeting in the coming years. *UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND* ### 29. Continued improvement in statistics would facilitate decision-making, policy ### 29. Continued improvement in statistics would facilitate decision-making, policy ### Recent statistical improvements and initiatives - Implementation of the Enhanced General Data Dissemination Systems (e-GDDS) in June 2018, with IMF TA support. - Reconciliation of national and emirate-level GDP data. - Ongoing project to improve balance-of-payments statistics using SWIFT transactions data. - Authorities’ intention to work towards joining the SDDS in the next few years. - With support from IMF TA, the authorities are striving to address gaps in fiscal, external, and labor statistics. ### Remaining gaps and capacity constraints - Production of quarterly GDP remains in progress. - Significant room exists for improving fiscal, external, and labor statistics. - Non-provision of data on gross external debt and the IIP to the Fund is due to capacity limitations. - Need for close cooperation and information-sharing between federal and emirates’ statistical agencies. - Need for development of consistent methodologies and enhancement of statistical agencies’ resources and capacity. ### Broader economic context relevant to statistics - The economy has been adapting to the prolonged decline in oil prices since 2014, amid heightened risks. - Factors that reduced nonoil GDP growth since 2014: continued corporate restructuring, decline in real estate prices, slowdown in government investment, and tightening global financial conditions. - Growth momentum is expected to strengthen in the next few years with increased investment, improved prospects in trading partners, and a boost to tourism from Expo 2020. - Oil sector prospects improved with higher oil prices and the OPEC+ agreement to raise output. - Downside risks include: increased volatility in emerging markets, escalating geopolitical tensions, and rising protectionism. - Fiscal history and priorities noted: - Significant fiscal adjustment in 2015–16. - Fiscal easing in 2017; near-term sustaining of easing recommended given spare capacity, large buffers, and tightening financial conditions. - Importance of resuming fiscal consolidation in the medium term to ensure sufficient savings of exhaustible oil revenue and debt sustainability. - Structural and policy priorities referenced: - Realize Vision 2021 by prioritizing government spending towards a diversified, robust, knowledge-based economy. - Transform and diversify fiscal revenue systems to strengthen the link between nonoil growth and fiscal revenues. - Refine fiscal anchors, develop a consolidated medium-term fiscal framework for the UAE, avoid policy procyclicality, improve fiscal risk management, and strengthen policy coordination. - Heightened supervisory vigilance to support external and financial stability; continue initiatives to upgrade the regulatory framework, conduct stringent stress tests, and follow up with banks. - Initiate issuance of domestic government securities in tandem with upgrading the CBU’s liquidity management framework. - Continue strengthening the AML/CFT framework. - Boost private sector role: clarify specifics of announced policy measures, strengthen synergies between GREs, privatize non-strategic GREs, and bring GREs under competition laws and regulations. - Promote SME development to diversify the economy, foster innovation, and create jobs. - Promote talent and inclusiveness: build on long-term visas for highly-qualified expats; reduce fragmentation between national and expat labor markets; control civil service size and align wages/allowances with the private sector; consider gender budgeting following the Equal Pay and Gender Equality Law. ### Policy recommendations specific to statistics - Improve capacity while sharing available data on external public-sector assets and liabilities in the meantime. - Enhance cooperation and information-sharing between federal and emirates’ statistical agencies. - Develop consistent statistical methodologies across jurisdictions. - Enhance statistical agencies’ resources and capacity to enable timely progress. - Prioritize producing quarterly GDP, IIP, and external debt statistics. *UNITED ARAB EMIRATES — STAFF APPRAISAL* ### 37. It is recommended that the next Article IV consultation takes place on the standard ### 37. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Recent Economic Developments - Oil output is beginning to recover amid rising oil prices. - Non-oil growth has continued to slow, opening non-oil output gaps. - Slowdown drivers: softer real estate markets, slower growth in transport services, and construction activity. - Selected charted datapoints and trends: - Crude oil output series shown for 16Q1–18Q2 (charted; values in figures). - Traffic at Dubai International Airport, 2015–18: year-on-year growth rates shown for Cargo and Passengers. - Residential Real Estate Sales and Rental Price Index, August 2013–August 2018 (Index, April 2012 = 100) charted for Dubai and Abu Dhabi. - Construction Sector Real Growth, 2014–17: UAE, Abu Dhabi, Dubai (annual percent change). ### Real and Fiscal Sector Developments and Outlook - Growth is expected to recover in both oil and non-oil sectors, helped by higher oil price and fiscal impulse. - Overall fiscal balance projected to turn positive in 2019. - Inflation expected to decline after a brief increase in 2018 (due to VAT introduction). - Fiscal and oil-price interactions: - Real GDP Growth projections charted for 2015–23. - Adj. non-oil primary balance (% of non-oil GDP) and Overall fiscal balance (% GDP) charted for 2015–23. - Actual and Fiscal Breakeven Oil Price, 2015–23 (U.S. dollars per barrel) charted. - Selected figures from Table 1 (annual levels/projections): - Exports of oil (incl. oil products and gas) (in billions of U.S. dollars): 2015: 61.5; 2016: 46.5; 2017: 58.1; 2018: 75.4; 2019: 84.9; 2020: 83.3; 2021: 82.0; 2022: 81.5; 2023: 81.7. - Average crude oil export price (in U.S. dollar per barrel): 2015: 52.4; 2016: 44.0; 2017: 54.4; 2018: 71.9; 2019: 72.3; 2020: 69.4; 2021: 66.8; 2022: 65.0; 2023: 63.9. - Crude oil production (in millions of barrels per day): 2015: 2.9; 2016: 3.0; 2017: 2.9; 2018: 3.0; 2019: 3.1; 2020: 3.2; 2021: 3.3; 2022: 3.4; 2023: 3.4. - Nominal GDP (in billions of UAE dirhams): 2015: 1,315; 2016: 1,311; 2017: 1,405; 2018: 1,589; 2019: 1,673; 2020: 1,744; 2021: 1,812; 2022: 1,882; 2023: 1,959. - Real GDP growth (annual percent change): 2015: 5.1; 2016: 3.0; 2017: 0.8; 2018: 2.9; 2019: 3.7; 2020: 3.6; 2021: 3.2; 2022: 3.0; 2023: 2.8. - CPI inflation (average): 2015: 4.1; 2016: 1.6; 2017: 2.0; 2018: 3.5; 2019: 1.9; 2020: 2.2; 2021: 2.1; 2022: 1.9; 2023: 1.9. - Overall fiscal balance (Revenue minus expenditures, percent of GDP): 2015: -3.4; 2016: -2.0; 2017: -1.6; 2018: -1.6; 2019: 1.8; 2020: 0.2; 2021: 0.6; 2022: 0.7; 2023: 0.9. - Adjusted nonoil primary balance (percent of nonoil GDP): 2015: -27.7; 2016: -21.9; 2017: -25.7; 2018: -30.0; 2019: -27.0; 2020: -28.4; 2021: -26.3; 2022: -24.7; 2023: -23.5. ### Monetary and Financial Sector Developments - Banking sector liquidity continues comfortable; deposits and private sector growth on the rise. - Credit remains below trend despite some easing of credit standards; Dubai sees higher spreads. - Interest rate environment: - U.S. Fed funds rate, interbank rate (1-week), LIBOR (1-week), CD rate, EIBOR-LIBOR spread charted for Oct-2014–Oct-2018. - Selected monetary and banking indicators (Table 4 and Figure notes): - Broad money (M2) growth (annual percent change): 2015: 5.5; 2016: 3.3; 2017: 4.1; 2018: 3.6; 2019: 7.1; 2020: 6.5; 2021: 7.0; 2022: 6.5; 2023: 5.2. - Credit to private sector (annual percent change): 2015: 8.4; 2016: 5.8; 2017: 0.7; 2018: 5.4; 2019: 5.4; 2020: 6.0; 2021: 5.4; 2022: 5.1; 2023: 4.9. - Bank liquidity (Billions of Dirham): Foreign assets, CDs held by banks, CB deposits charted for Aug-2011–Aug-2018. - Bank Deposits and Credit to the Private Sector contributions to y-o-y growth charted for 2012Q2–2018Q2. - Change in Credit Standards, 2017: index shows tightening for All firms, SMEs, Large firms. - 10-Year Bond Spreads over Corresponding U.S. T-Bonds charted for Dubai and Abu Dhabi. ### External Sector Developments - Current account expected to remain in surplus, helped by a higher oil price. - Non-oil external deficits are projected to decrease. - Non-oil export destinations are diversified. - Net foreign direct investment has been gradually recovering. - Selected external figures (Table 2 and Figure notes): - Current account balance (billions of U.S. dollars): 2015: 17.6; 2016: 13.2; 2017: 6.5; 2018: 30.5; 2019: 35.9; 2020: 30.3; 2021: 26.2; 2022: 23.4; 2023: 21.9. - Current account balance (percent of GDP): 2015: 4.9; 2016: 3.7; 2017: 6.9; 2018: 7.1; 2019: 7.9; 2020: 6.4; 2021: 5.3; 2022: 4.6; 2023: 4.1. - Exports (billions of U.S. dollars): 2015: 300.5; 2016: 295.0; 2017: 308.5; 2018: 329.0; 2019: 342.9; 2020: 346.8; 2021: 347.3; 2022: 348.7; 2023: 350.9. - Re-exports (billions of U.S. dollars): 2015: 134.8; 2016: 145.1; 2017: 146.6; 2018: 149.0; 2019: 152.4; 2020: 156.7; 2021: 157.6; 2022: 158.2; 2023: 158.6. - Oil and oil products exports (billions of U.S. dollars): 2015: 53.8; 2016: 40.4; 2017: 50.6; 2018: 65.7; 2019: 74.9; 2020: 73.6; 2021: 72.5; 2022: 72.1; 2023: 72.3. - Oil Production, January 2016–August 2018 series charted (Millions of barrels per day): Jan-2016 to Jul-2018 values shown between 2.4 and 3.4 in figure axis. - Foreign Direct Investment, 2008–18 (Billions of US dollars): FDI Inflows, FDI Abroad, Net FDI series charted. - Non-Oil Exports: Top 10 Partners, 2014–17 charted (shares by country). ### Business Environment and Governance Indicators - UAE ranks favorably on a number of governance and competitiveness indicators, yet scope for improvement exists (insolvency resolution; credit rights and information; education policies). - World Governance Indicators, 2016 (Percentile rank) shown for Voice & Accountability; Political Stability; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption for UAE, GCC, Singapore. - World Bank Doing Business, 2018: Distance to frontier charts for a range of indicators (Starting a Business; Dealing with Construction Permits; Getting Electricity; Registering Property; Getting Credit; Protecting Investors; Paying Taxes; Trading Across Borders; Enforcing Contracts; Resolving Insolvency) comparing UAE, GCC, Advanced Economies. - Global Competitiveness Index, 2017–18: component scores (Value, 1=minimum, 7=maximum) and category ranks (current rank, previous rank in parentheses) charted. Examples: - Total score entries and category ranks shown (e.g., Institutions, Infrastructure, Macroeconomic environment, Health and primary education, Higher education and training, etc.). - PISA Student Performance Scores in Math and Science, 2015 charted for UAE vs. comparators. ### Selected Macroeconomic Indicators (Table 1 highlights) - Nominal GDP (in billions of U.S. dollars): 2015: 358; 2016: 357; 2017: 383; 2018: 433; 2019: 456; 2020: 475; 2021: 493; 2022: 513; 2023: 533. - Gross domestic investment (percent of GDP): 2015: 25.8; 2016: 27.1; 2017: 21.6; 2018: 22.5; 2019: 23.1; 2020: 22.7; 2021: 22.6; 2022: 22.4; 2023: 22.2. - Gross national saving (percent of GDP): 2015: 30.7; 2016: 30.8; 2017: 28.5; 2018: 29.6; 2019: 31.0; 2020: 29.1; 2021: 27.9; 2022: 27.0; 2023: 26.3. - Gross general government debt (percent of GDP): 2015: 16.7; 2016: 19.4; 2017: 21.8; 2018: 20.9; 2019: 20.5; 2020: 20.7; 2021: 20.4; 2022: 19.9; 2023: 19.8. - Gross official reserves (billions of U.S. dollars): 2015: 94.0; 2016: 85.4; 2017: 95.4; 2018: 111.2; 2019: 129.5; 2020: 145.2; 2021: 156.9; 2022: 164.2; 2023: 168.4. - Current account balance (in percent of GDP) and external debt (in percent of GDP) also reported (see Table 1 entries above). ### Balance of Payments (Table 2 highlights) - Trade balance (billions of U.S. dollars): 2015: 76.6; 2016: 68.5; 2017: 79.3; 2018: 88.8; 2019: 97.3; 2020: 94.1; 2021: 93.3; 2022: 95.2; 2023: (charted). - Services, net (percent of GDP): services credits and debits charted; services net figures in Table 2 show widening debits over time. - Transfers, net (billions of U.S. dollars): 2015: -39.6; 2016: -39.1; 2017: -41.2; 2018: -43.9; 2019: -46.5; 2020: -49.5; 2021: -52.3; 2022: -55.1; 2023: -58.0. - Financial account balance (billions of U.S. dollars): 2015: -3.2; 2016: -19.3; 2017: -17.0; 2018: -14.7; 2019: -17.5; 2020: -14.5; 2021: -14.5; 2022: -16.2; 2023: -17.7. - Overall balance and change in central bank reserves series presented (Overall balance: 2015: 15.3; 2016: -7.1; 2017: 9.9; 2018: 15.8; 2019: 18.3; 2020: 15.7; 2021: 11.7; 2022: 7.3; 2023: 4.3). ### General Government Finances (Table 3 highlights) - Total revenue (billions of UAE dirhams): 2015: 381.4; 2016: 378.5; 2017: 404.4; 2018: 448.5; 2019: 528.8; 2020: 515.1; 2021: 521.9; 2022: 533.7; 2023: 545.3. - Total expenditures (billions of UAE dirhams): 2015: 425.6; 2016: 404.9; 2017: 427.3; 2018: 474.6; 2019: 498.3; 2020: 510.7; 2021: 510.7; 2022: 519.5; 2023: 526.4. - Net lending(+)/borrowing(-) (Revenue minus expenditures, billions of dirhams): 2015: -44.2; 2016: -26.5; 2017: -22.9; 2018: -26.1; 2019: 30.5; 2020: 4.4; 2021: 11.2; 2022: 14.2; 2023: 18.8. - Fiscal breakeven oil price (US $ per barrel): 2015: 64.7; 2016: 51.1; 2017: 60.7; 2018: 78.0; 2019: 64.7; 2020: 68.4; 2021: 64.2; 2022: 61.8; 2023: 59.7. - Memorandum items include Oil revenue, Nonoil revenue, Investment income from SWF, Abu Dhabi capital transfers, and Adjusted nonoil primary balance (percent of nonoil GDP): 2015: -27.7; 2016: -21.9; 2017: -25.7; 2018: -30.0; 2019: -27.0; 2020: -28.4; 2021: -26.3; 2022: -24.7; 2023: -23.5. ### Monetary Survey (Table 4 highlights) - Net foreign assets (billions of UAE dirhams): 2015: 246; 2016: 259; 2017: 328; 2018: 434; 2019: 515; 2020: 586; 2021: 642; 2022: 683; 2023: 713. - Broad money (M2) levels (billions of UAE dirhams): 2015: 1,187; 2016: 1,225; 2017: 1,276; 2018: 1,322; 2019: 1,416; 2020: 1,508; 2021: 1,613; 2022: 1,718; 2023: 1,808. - Claims on private sector (billions of UAE dirhams): 2015: 1,040; 2016: 1,100; 2017: 1,108; 2018: 1,168; 2019: 1,222; 2020: 1,287; 2021: 1,356; 2022: 1,425; 2023: 1,495. - Memorandum ratios: - Foreign currency deposits/total deposits (percent): 21.7 (2015); 23.3 (2016); 22.4 (2017–2023 series shown as 22.4). - NFA/M2 (percent): 20.8 (2015); 21.1 (2016); 25.7 (2017); 32.9 (2018); 36.3 (2019); 38.8 (2020); 39.8 (2021); 39.7 (2022); 39.4 (2023). ### Maturing Bonds, Syndicated and Bilateral Loans in the Non-Financial Public Sector (Table 5 highlights) - Abu Dhabi (as of end-2017) totals 2018–23: - Bonds (2018–23 sum): 7,000 (2018–23 bonds total shown); Beyond and Unallocated values charted; Total 2018-23: 9,112 (bonds+loans+guarantees tabled). - Total (2018-23) for Government plus GREs with >50% government ownership: 49,620 (2018–23). - All Abu Dhabi GREs: bonds and loans (2018–23): 51,825; Government-owned banks: bonds and loans (2018–23): 12,488. - Dubai (as of end-August 2018) selected totals: - Total (2018-23) Government plus GREs with >50% government ownership: 47,391 (bonds and loans). - Government plus GREs with >50% government ownership, including subsidiaries debt guaranteed by parent GRE: 75,469 total (2018-23) and beyond/unallocated totals shown. - In percent of Dubai 2017 GDP: totals summarized as 28.6, 8.3, 10.2, 7.3, 8.9, 4.2 for years 2018–2023 and aggregate 67.5 for 2018-23; 109.6 quoted for a memorandum entry. - Federal government, GREs and Northern Emirates entries provided with year-by-year bonds, loans, and totals. ### Financial Soundness Indicators (Table 6) - Regulatory Capital to Risk-Weighted Assets: 2014: 18.1; 2015: 18.3; 2016: 18.9; 2017 Q1: 18.1; 2017 Q2: 17.5; 2018 Q1: 18.1. - Regulatory Tier 1 Capital to Risk-Weighted Assets: 2014: 16.2; 2015: 16.5; 2016: 17.3; 2017 Q1: 16.6; 2017 Q2: 16.0; 2018 Q1: 16.6. - Non-performing Loans to Total Gross Loans 1/: 2014: 6.7; 2015: 6.0; 2016: 6.1; 2017 Q1: 6.4; 2017 Q2: 6.9; 2018 Q1: 7.0. - Return on Assets: 2014: 1.9; 2015: 1.6; 2016: 1.5; 2017 Q1: 1.5; 2017 Q2: 1.5; 2018 Q1: 1.7. - Return on Equity: 2014: 14.5; 2015: 12.2; 2016: 10.7; 2017 Q1: 10.8; 2017 Q2: 10.5; 2018 Q1: 12.2. - Interest Margin to Gross Income: 2014: 68.2; 2015: 69.6; 2016: 68.9; 2017 Q1: 66.5; 2017 Q2: 69.6; 2018 Q1: 70.6. - Non-interest Expenses to Gross Income: 2014: 36.4; 2015: 38.0; 2016: 38.0; 2017 Q1: 39.1; 2017 Q2: 36.2; 2018 Q1: 37.7. - Net Open Position in Foreign Exchange to Capital: 2014: 9.4; 2015: 20.7; 2016: 9.4; 2017 Q1: 14.5; 2017 Q2: 20.1; 2018 Q1: 21.2. *Source: IMF staff report (figures, tables, and text as provided in the content unit).* ### Annex I. Status of the 2017 Article IV Recommendations ### Annex I. Status of the 2017 Article IV Recommendations ### Fiscal - Recommendation: Raise nonoil tax revenue through VAT and excises. - Status: Excise taxes introduced in October 2017, VAT in January 2018. - Recommendation: Contain growth of public spending and improve its efficiency. - Status: Spending growth was stable in 2017. Spending reviews initiated by Abu Dhabi’s government. - Recommendation: Strengthen coordination among governments, GREs, SWFs, and the CBU to facilitate cash management and liquidity forecasting. - Status: The authorities are taking steps to strengthen policy coordination, with inputs from IMF staff. - Recommendation: Continue to diversify the economy and increase the role of the private sector. - Status: Wide-ranging policy measures to improve business environment announced in 2018. - Recommendation: Strengthen government financing and debt management. - Status: IMF TA provided during 2017–18. A law allowing federal government borrowing has been approved. Abu Dhabi is considering issuing domestic debt. ### Monetary - Recommendation: Approval of the draft Central Bank and Banking Law consistent with best practices. - Status: The law was approved in late October 2018. - Recommendation: Sustain progress in strengthening the AML/CFT regime. - Status: A national risk assessment is underway. Further improvements are needed in implementation. ### Structural - Recommendation: Approve Foreign Companies Law allowing full foreign ownership of domestic companies. - Status: A new Law on Foreign Direct Investment, adopted in November 2018, put in place a framework for allowing majority foreign ownership in selected sectors. - Recommendation: Encourage synergies in investment among emirates, and foster competition, including for GREs. - Status: Fiscal Policy Coordination Council has been coordinating government spending plans across emirates. ### Statistics - Recommendation: Further strengthen economic statistics. - Status: The national e-GDDS page was launched in June 2018, with IMF assistance. *Italic line: Annex I content above.* ### Annex II. VAT: Historic Milestone Toward Revenue Diversification ### Key facts and implementation - GCC decision: In June 2016, GCC member states agreed to introduce a value-added tax at the rate of 5 percent in all countries. - Rollout timing: - The UAE introduced excises in October 2017. - Saudi Arabia and the UAE introduced VAT in January 2018. - Other GCC states expected to follow by end-2019. - VAT design and exemptions: - Exemptions: most real estate and financial services, trade in free zones, local passenger transport and charitable organizations. - Zero rate applies to certain transport, telecom, health and education services, as well as exports, medical equipment, oil/gas, and investments in precious metals (for example, gold). - May 2018 clarification: wholesale VAT does not apply to gold and diamond sales to VAT-registered businesses, if gold and diamonds are intended for resale. - Registration and compliance: - Threshold: AED 375,000 (about $100K). - Registrations: 296,534 firms were registered so far in 2018. - Filing: filing deadlines were staggered; large net payers (mostly GREs) filing first and net refund claimants (mostly SMEs) filing last. - Compliance: Compliance has reportedly been high. - Revenue allocation and projection: - Allocation rule: 30 percent of collected VAT revenue will be allocated to the federal government and the rest to emirate governments. - Status: Revenue distribution has not taken place yet, and collection data has not been released. - Projection: Annual VAT revenues are projected to reach 2 percent of GDP, over the coming years. - Economic impact: - Private sector concerns about impact on growth and competitiveness amid slow recovery of the nonoil sector. - Impact on inflation: limited, with a small increase in January largely dissipating by mid-year. - VAT refunds for UAE tourists are expected to start in November. *Italic line: Annex II content above.* ### Annex III. Fiscal and Debt Sustainability Assessments ### A. Long-term Fiscal Sustainability - Main finding: Government saving of exhaustible oil revenue remains below the PIH benchmark. - Gap: The gap between the nonoil primary budget deficit and the PIH benchmark widened to 7 percent of nonoil GDP in 2017. - Projection under current policies: gap expected to peak at 11.5 percent of nonoil GDP in 2019 before declining to 6.5 percent of nonoil GDP in the medium term. - Note: More positive (negative) underlying assumptions/scenarios would imply a smaller (larger) gap. ### B. Dubai’s Debt Sustainability Assessment - Recent trajectory: - Dubai’s government debt declined in percent of GDP in 2017, but is expected to rise in 2018–19. - Baseline: Additional borrowing ahead of Expo 2020 likely to raise the ratio to just under 30 percent of GDP—the operational target. - Scenario results: - Real GDP growth shock (decline of growth by ¾ standard deviation from the baseline in 2018): debt-to-GDP ratio reaches 32.7 percent of GDP by 2023. - Global downturn scenario (real GDP shock combined with larger deterioration in primary balance and a real lower interest rate): 34.3 percent debt-to-GDP ratio in 2023. - Real estate shock combined with global downturn (government assumes 20 percent of GREs debt): debt-to-GDP ratio reaches 44 percent by 2023. - GREs exposure: - GREs carry a combined debt of about 70 percent of Dubai’s GDP. - Specific borrowing amounts cited: - Dubai borrowed $3.9 billion for airport expansion and $1.1 billion for metro expansion in 2017. Financing for the latter was increased to $2.4 billion in 2018. ### C. UAE Debt Sustainability Assessment (General Government) - Overall outlook: - With improved fiscal prospects (higher oil output and prices), general government debt is expected to remain stable in percent of GDP. - Assumptions: Abu Dhabi is assumed to save a large part of its oil windfall while Dubai is assumed to increase borrowing in part for Expo 2020. - Risks and recommended risk management measures: - Main vulnerabilities: lower oil prices and contingent liabilities from GREs. - Policy recommendations to strengthen risk monitoring and management: - Collect information for fiscal risk analysis—with formal reporting requirements for GREs. - Enhance mechanisms to improve control over contingent liabilities by: - Requiring approval of GREs’ annual borrowing/investment plans by finance authorities. - Setting up predictable dividend payout rules. - Establishing clear criteria (based on credit risk assessments) for issuance of guarantees. - Putting in place guidelines for allocation of risks in private-public partnerships (PPPs). - Selected quantitative indicators (as of December 31, 2017 and projections): - Nominal gross government debt: 20.0 (2016); 19.4 (2017); projected 21.8 (2018); 20.9 (2019); 20.5 (2020); 20.7 (2021); 20.4 (2022); 19.9 (2023); 19.8 (2023 later table). - Government gross financing needs: -3.6 (2016); 4.5 (2017); 5.0 (2018); 5.4 (2019); 1.7 (2020); 2.9 (2021); 2.5 (2022); 2.4 (2023). - Real GDP growth (percent): 3.2 (2016); 3.0 (2017); 0.8 (2018); 2.9 (2019); 3.7 (2020); 3.6 (2021); 3.2 (2022); 2.8 (2023). - Inflation (GDP deflator, in percent): 2.3 (2016); -3.2 (2017); 6.3 (2018); 9.8 (2019); 1.6 (2020); 0.6 (2021); 0.6 (2022); 0.8 (2023); 1.2 (2023 note). - Cumulative change in gross government sector debt (2016–23): identified debt-creating flows total -9.5; primary deficit contribution -10.4; primary (noninterest) revenue and grants 174.3 (cumulative); primary (noninterest) expenditure 164.0 (cumulative). - Stress test scenarios and assumptions: - Oil price scenario: oil price is lower by $10 in 2018-23. - GRE contingent liability scenario: 20 percent of GRE debt is assumed to be taken over by the government in 2018-23. - Combined scenario: combines the oil price and the GRE contingent liability scenarios. - Tabled scenario outcomes (selected): - Baseline: Real GDP growth 2.9 (2018), 3.7 (2019), 3.6 (2020), 3.2 (2021), 3.0 (2022), 2.8 (2023); Primary balance -0.4 (2018), 3.1 (2019), 1.6 (2020), 1.9 (2021), 2.0 (2022), 2.3 (2023). - Oil Price Scenario: Primary balance -0.4 (2018), 0.6 (2019), -1.0 (2020), -0.6 (2021), -0.5 (2022), -0.2 (2023). - GRE Contingent Liability Scenario: Primary balance -0.4 (2018), 1.7 (2019), 0.3 (2020), 0.7 (2021), 0.9 (2022), 1.3 (2023). - Combined Scenario: Primary balance -0.4 (2018), -0.8 (2019), -2.3 (2020), -1.8 (2021), -1.6 (2022), -1.2 (2023). *Italic line: Annex III content above.* ### Annex IV. External Sector Assessment ### Overview and main assessment - Staff assessment: The external position is assessed to be moderately weaker than the level consistent with medium-term fundamentals and desirable policies. - Drivers: - Improvement in 2017 mostly due to recovery in oil prices. - Current account surplus is moderately below the level needed to ensure sufficient savings for future generations. ### External buffers and stock variables - NIIP: staff estimates the UAE’s net international investment position at 149 percent of GDP at end-2017 and projects it to be stable over the medium term. - Composition: External assets are dominated by assets held by SWFs, serving both precautionary purposes and savings for future generations. - Central Bank of the UAE reserves (CBU): - CBU’s international reserves are at ¼ of GDP at end-2017. - Equivalent to 6 months of prospective imports (excluding re-exports). - Equivalent to 81 percent of the IMF’s Reserve Adequacy metric. - External liabilities: estimated at 61 percent of GDP at end-2017. ### Current account assessment - External sustainability approach (preferred for oil exporters): - Assumes annuity constant in real per capita terms. - Current account norm estimated at 5.4 percent of GDP in 2017. - Implies a positive current account gap of around 1.5 percent of GDP in 2017. - Projection: gap expected to become negative over the medium term at around 2.5 percent of GDP and will require sustained fiscal consolidation to close over time (see Annex III). - Macroeconomic balance approach (EBA-Lite CA model): - Suggests the current account was broadly in line with fundamentals in 2017. - Model estimates the current account norm at 6.8 percent of GDP, implying a positive gap of 0.2 percent of GDP. *Italic line: Annex IV content above.* *Italic line: Source — cr1935 - Annex I. Status of the 2017 Article IV Recommendations (excerpt).* ### 3. Since 2014, the real exchange rate appreciation was driven by the U.S. dollar. The ### 3. Since 2014, the real exchange rate appreciation was driven by the U.S. dollar. The ### Exchange rate developments and external position - The dirham has been pegged to the dollar at a rate of 3.67 since November 1997. - The real effective exchange rate (REER) mostly stayed the same in 2017 and was almost 20 percent stronger than 2014. - The recent appreciation has been driven mostly by the U.S. dollar nominal appreciation vis-à-vis trading partners’ exchange rates. - External sustainability approach: - Suggests the exchange rate is moderately overvalued. - REER gap in a range of 0.1 percent to 8.4 percent. - Consistent with the negative current account gap over the medium term in the permanent income model. - Macroeconomic balance approach: - Suggests the exchange rate is not misaligned (the REER gap estimated at -0.2 percent). - Like in other oil exporting countries, exchange rate movements have limited impact on the current account. - Overall staff assessment: - External position is moderately weaker than the level consistent with fundamentals and desirable policies. - Medium-term current account gap assessed at -1 to -2.5 percent of GDP. - Medium-term REER gap assessed at 2 to 5 percent (taking into account uncertainty). ### Capital flows and financial openness - The UAE is a net supplier of capital. - Capital and financial accounts are open and domestic capital markets are the most developed in the Middle East and North Africa region. - Capital inflows are 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. - Reforms to attract further FDI inflows are underway. ### Selected current account and macro-balance figures (Macrobalance Approach, 2017) - CA-Actual 6.9% - CA-Fitted 6.7% - CA-Norm 6.8% - Residual 0.2% - CA-Gap 0.2% - Policy gap 0.0% _Source: IMF staff estimates._ ### External debt sustainability (selected indicators and dynamics) - Table 1 highlights external debt dynamics 2013–2023 (percent of GDP unless otherwise indicated). - Baseline: External debt - 2013 50.0 - 2014 53.0 - 2015 67.6 - 2016 70.8 - 2017 73.5 - 2018 66.9 - 2019 64.3 - 2020 62.9 - 2021 61.1 - 2022 60.1 - 2023 59.5 - Change in external debt (selected years) - 2013 -0.2 - 2014 3.0 - 2015 14.6 - 2016 3.2 - 2017 2.7 - 2018 -6.5 - 2019 -2.7 - 2020 -1.4 - 2021 -1.8 - 2022 -1.0 - 2023 -0.5 - Identified external debt-creating flows (4+8+9) (selected) - 2013 -21.5 - 2014 -15.2 - 2015 3.7 - 2016 -2.7 - 2017 -11.0 - 2018 -8.6 - 2019 -9.8 - 2020 -8.2 - 2021 -6.8 - 2022 -5.9 - 2023 -5.3 - Current account deficit, excluding interest payments (line 4) (selected) - 2013 -20.7 - 2014 -15.3 - 2015 -7.3 - 2016 -6.6 - 2017 -10.2 - 2018 -10.7 - 2019 -12.0 - 2020 -10.7 - 2021 -9.3 - 2022 -8.4 - 2023 -7.9 - Exports (line 6) (selected) - 2013 100.6 - 2014 99.6 - 2015 100.9 - 2016 101.0 - 2017 99.1 - 2018 93.2 - 2019 92.0 - 2020 89.8 - 2021 87.0 - 2022 85.2 - 2023 83.6 - Imports (line 7) (selected) - 2013 74.9 - 2014 79.2 - 2015 85.4 - 2016 86.9 - 2017 82.1 - 2018 76.5 - 2019 74.7 - 2020 74.0 - 2021 72.2 - 2022 70.9 - 2023 69.6 - Net non-debt creating capital inflows (line 8) (selected) - 2013 -0.5 - 2014 -0.1 - 2015 1.9 - 2016 0.8 - 2017 0.6 - 2018 0.4 - 2019 0.4 - 2020 0.4 - 2021 0.5 - 2022 0.5 - 2023 0.6 - Automatic debt dynamics (line 9) (selected) - 2013 -0.3 - 2014 0.1 - 2015 9.0 - 2016 3.1 - 2017 -1.4 - 2018 1.8 - 2019 1.8 - 2020 2.1 - 2021 2.0 - 2022 1.9 - 2023 2.0 - External debt-to-exports ratio (in percent) (selected) - 2013 49.7 - 2014 53.2 - 2015 67.0 - 2016 70.1 - 2017 74.2 - 2018 71.8 - 2019 69.8 - 2020 70.0 - 2021 70.2 - 2022 70.5 - 2023 71.2 - Gross external financing need (in billions of US dollars) (selected) - 2013 -45.9 - 2014 -25.2 - 2015 14.5 - 2016 23.1 - 2017 11.4 - 2018 11.6 - 2019 7.5 - 2020 13.5 - 2021 18.5 - 2022 21.6 - 2023 23.6 ### External debt stress tests and scenarios (Figure 1 highlights) - Baseline external debt level: 49 (percent of GDP) in figure labels. - Scenario shocks shown include: - Interest-rate shock - Non-interest current account shock (Non-interest Current Account Shock: 6.4, 6.6, 4.1 shown as baseline/scenario/historical in figure notes) - Growth shock (Growth Shock: 3.2, 1.5, 2.9 shown as baseline/scenario/historical) - Combined shock (Combined shock: 63 indicated) - Real depreciation shock: One-time real depreciation of 30 percent occurs in 2019 (Real depreciation shock 30 % depreciation 71 baseline label) - Notes: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance for some tests. ### Anchoring fiscal policy and strengthening coordination (Annex V) - Coordination priorities: - Joint policy formulation across national and emirate stakeholders given the UAE’s decentralized federation, pegged exchange rate, and large fiscal transfers. - Coordination should cover all policymaking stages: understanding economic prospects and risks; exchanging information; discussing consistency with socio-economic goals; periodic assessment and recalibration. - Policy framework improvements: - Common baseline complemented with risk assessment, cyclical position, and consistency checks of fiscal stance. - Anchor fiscal policy on long-term goals of debt sustainability and intergenerational equity and near-term macro stabilization. - Calibration of anchors for individual emirates and the UAE; Fund stands ready to provide further TA. - Trade-offs: - Short-term stabilization requires countercyclical fiscal policy (e.g., offsetting nonoil sector impact when oil prices fall). - When oil prices rise, fiscal policy should prioritize savings to prevent overheating. - Emirates must balance short-term stabilization with long-term goals: intergenerational saving (Abu Dhabi) and debt sustainability (Dubai and other emirates). - Institutional coordination: - Agree on structure covering top-level strategizing, high-level decision-making, operational coordination, and technical work. - Align emirates' and federal medium- and near-term fiscal planning processes; ensure timely and comprehensive data collection and sharing with CBU and fiscal arms. - Quick wins recommended: - Augment the Financial Policy Coordination Council—to include heads of ministry of finance, central bank and departments of finance—and expand its mandate to include assessment of the UAE’s fiscal stance and recommending fiscal policy adjustments. - Launch a UAE-wide medium-term fiscal framework (MTFF) process with participation of all emirates’ fiscal units. - Agree on three-year fiscal targets for the UAE based on emirates’ MTFFs. - Develop clear short- and long-term fiscal anchors for each emirate and the UAE. - Construct a UAE-wide balance sheet to enable analysis of fiscal risks. ### Strengthening regulatory and supervisory framework (Annex VI) - CBU 2018 reform agenda built around five pillars: (i) risk management, (ii) Basel III, (iii) controls/compliance, (iv) resolution and (v) market development, plus corporate governance. - Risk management pillar: - Completed in 2018 with a new risk management framework comprising five regulations covering overall risk management, operational risk, market risk, interest rate risk, and country and transfer risk. - Basel III pillar: - New regulatory standards supporting the Basel 2017 capital regulation (leverage ratio, CCR, OTC and CVA) to be published in 2018. - Basel III liquidity regulations were issued in 2015. - All banks in the UAE currently comply with the Basel III regulatory requirements; CBU expects compliance with the new standards. - Controls and compliance pillar: - Largely completed in 2018 with regulations on internal controls, compliance and internal audit; financial reporting and external audit; and a regulation on dormant accounts. - Update of AML/CFT regulatory framework nearing completion; pillar expected to be fully completed in 2019 with two further regulations on major acquisitions and significant ownership transfer. - Market development pillar: - 2018 regulation for nonbank financial institutions establishing a framework for finance companies. - Regulation on crowd-funding nearly completed; strategy to support SME financing further developed. - In 2019 CBU plans further work on regulations relating to payments and fintech. - Corporate governance: - New corporate governance framework for banks expected by end-2018 introducing sector-wide policies such as inclusion of independent directors, mandatory committees, reinforced fit-and-proper processes, and minimum disclosure requirements. - 2019 plans: - Regulatory development on the resolution pillar (recovery and resolution planning). - Progress in consumer protection and a new regulatory framework on Islamic finance. ### Promoting Small and Medium-Size Enterprises (Annex VII) - Role and targets: - SMEs can create jobs, diversify the economy, and promote innovation. - SME Law of 2014 established the national SME program; SME Council adopted an SME definition in 2016. - SMEs’ contribution to UAE nonoil GDP estimated at 40 percent in 2016, lower than the 60 percent average in advanced economies and the 70 percent target in Vision 2021. - Access to finance: - SMEs receive only 6.6 percent of business loans in the UAE compared to the 45 percent average in OECD countries. - Issues: limited credit history, poor quality of financial statements, lack of immovable collateral, and high bank servicing costs due to enhanced AML/CFT due diligence. - Bankruptcy and recovery: - Recovery rate on loans in default is only 30 cents per dollar in the UAE, versus 70 cents in advanced economies. - Many banks experienced large losses on SME portfolios during 2015–16 as expat SME owners left the country to avoid criminal punishment for bounced checks used as collateral. - The 2017 Bankruptcy Law has not been tested in courts and does not offer protection for personal loans often used to finance SMEs. - Market structure: - High interest rate margins and low degree of banking competition discourage banks from lending to SMEs. - Cost of starting a business: - Cost of starting a business in the UAE is higher than in advanced economies (2018 World Bank Doing Business Guide). - Authorities’ actions (2018 developments): - SME Council developed a federal procurement program requiring at least 10 percent of federal government contracts be awarded to SMEs (owned by nationals). - High-level committee created a working group to boost SME financing. - Al Etihad credit bureau is gradually increasing SME coverage. - Creation of a single registry for movable collateral announced. - Securities and Commodities Authority (SCA) developing crowdfunding regulations and platforms for venture capital financing. _Source: IMF staff estimates._ ### 7. Policymakers could consider further steps to promote bank and nonbank financing of ### cr1935 - 7. Policymakers could consider further steps to promote bank and nonbank financing of ### Recommendations to promote SME financing - Simplify SME registration and bank account opening to lower the cost of starting a business and banking for SMEs. - Provide courses to entrepreneurs in finance and accounting to improve the quality of financial statements. - Make the new bankruptcy regime operational to facilitate loan restructuring. - Issue domestic government bonds to pave the way for the development of corporate bond markets, helping expand sources of financing for SMEs. - Promote private equity and venture financing as viable options to diversify SME funding sources. - Encourage competition among SME lenders (example: United Kingdom experience) to increase financing availability. - Explore securitization of SME loans (example: China) to help lenders expand the volume of SME lending and reduce the cost of lending to SMEs. ### Risks and limits of regulatory measures - Supporting SME lending through regulatory forbearance (for example, via lower risk weights) is not advisable because this could create risks for financial stability. - Setting lending targets is unlikely to help increase new lending and could raise credit risks. - Using interest rate caps has been shown in other countries to have a negative effect on lending due to lower credit supply and approval rates for small and risky borrowers. - There is merit in encouraging banks to create SME units so they could better understand the nature of lending to smaller enterprises. - Successful credit guarantee schemes require: - establishment as an independent entity with clearly defined objectives, - adequate funding, - sound governance structure, - strong credit risk management practices, - regular public disclosure of performance. ### Evidence and international experience cited - Interest rate caps: Ferrari, A., Masetti, O. and Ren, J., Interest Rate Caps: The Theory and The Practice, World Bank Policy Research Working Paper 8398, 2018. - United Kingdom: successful experience in developing alternative sources of SME financing by encouraging competition among SME lenders. - China: securitization of SME loans helped lenders expand SME lending volume and reduce the cost of lending to SMEs. ### Figure — Constraints to SME Development (as presented) - Cost to Start a Business (Percent of income per capita) - Axis ticks shown: 0 5 10 15 20 - Comparators: UAE, AE, EMDE - Time to Resolve Insolvency (Years) - Axis ticks shown: 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 - Comparators: UAE, AE, EMDE - Strength of Legal Rights (Index, 0 - 12) - Axis ticks shown: 0 1 2 3 4 5 6 7 - Comparators: UAE, AE, EMDE - Recovery Rate (Cents on the dollar) - Axis ticks shown: 0 10 20 30 40 50 60 70 80 - Comparators: UAE, AE, EMDE *Source: Doing Business; and IMF staff calculations.* ### 9. Fintech can play a catalytic role. The UAE has been successfully nurturing fintech ### 9. Fintech can play a catalytic role. The UAE has been successfully nurturing fintech ### Fintech ecosystem and supportive initiatives - Fintech companies are being nurtured in free financial zones in Abu Dhabi and Dubai (ADGM and DIFC, respectively). - The free zones developed targeted programs supporting SMEs and are hosting SME crowdfunding platforms (Beehive and Eureeca). - The Securities and Commodities Authority (SCA) is developing regulations to promote crowdfunding onshore. - Dubai and Abu Dhabi have launched accelerator programs through DIFC and ADGM, along with the International Financial Centre in Abu Dhabi. ### Potential benefits for SMEs and financial sector - Fintech companies have potential to boost SME lending by enriching credit information and enhancing competition in financial services. - Improving conditions for SMEs, including by strengthening the legal framework and reducing the cost of doing business, would allow fintech companies to increase their presence onshore. - The goal of financial regulators is to develop new regulations for Fintech entities, and to provide a platform for start-ups to develop ideas and obtain support that increases their contributions to non-energy growth and employment. ### Regulatory and supervisory considerations - Given the UAE’s decentralized structure, a coordinated approach between on-shore and off-shore regulators in the fintech area could help maximize gains for SMEs without compromising safety and stability of the financial system. - The Securities and Commodities Authority (SCA), the Insurance Authority, along with the Central Bank, are the three on-shore regulators for all banking and financial activities and work in tandem with financial free zones to provide oversight for the financial industry. - The Central Bank is preparing to develop regulations related to payments and Fintech in the near future. ### Policy implications and enabling actions - Strengthen the legal framework and reduce the cost of doing business to facilitate greater onshore presence of fintech firms. - Coordinate regulatory approaches across on-shore and off-shore regulators to balance innovation, SME access to finance, and financial system safety and stability. - Finalize and implement onshore crowdfunding regulations (SCA) and support development of credit information enhancements to enable fintech-driven SME lending. *Source: UNITED ARAB EMIRATES — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1935.pdf_