## 1. Changing Global Financial Conditions ## Source details **Canonical URL:** [1. Changing Global Financial Conditions](https://www.imf.org/-/media/files/publications/cr/2022/english/1uaeea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1uaeea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1uaeea2022001.pdf.json) --- ### Recent macroeconomic developments - Public health and policy response - Nearly 85 percent of the population fully inoculated (as of October 2021). - Announced fiscal measures: 2.5 percent of GDP. - Macro-financial support under the Targeted Economic Support Scheme (TESS): 19.5 percent of GDP; some measures extended to 2022-23 (Annex I). - Output and labor market - Real GDP contracted by 6.1 percent in 2020. - Oil GDP declined by 6.0 percent in 2020. - Non-oil GDP declined by 6.2 percent in 2020. - UAE population fell by 2.3 percent in 2020, with large temporary departures of expatriate workers. - Inflation and external sector - Overall inflation remained in negative territory until recently. - Current account surplus declined by about 3 percentage points to 5.8 percent of GDP in 2020. - REER weakened by 7.5 percent on average (as of end-September 2021, in line with the US dollar). - External position broadly consistent with medium-term fundamentals and desirable policies (Annex IV). - Fiscal developments - General government (GG) fiscal balance: surplus of 0.6 percent of GDP in 2019 → deficit of 5.1 percent of GDP in 2020. - GG debt increased by 12.3 percentage points to 39.4 percent of GDP in 2020 (including increased financing needs). - Financial sector - Tier 1 capital ratio: 16.4 percent in 2021Q2. - NPL ratio: about 8.2 percent between 2020Q4 and 2021Q2 (end-2019: 6.5 percent). - Banks’ ROA: 1 percent in 2020 Q2 (end-2019: 1.6 percent). - Deposit growth slowed in late 2020 then recovered somewhat; banks’ net foreign assets increased via holdings of foreign securities (mostly HQLA). - Market financing and debt issuance - 2020: Abu Dhabi, Dubai, and Sharjah raised a combined $19.25 billion. - 2021: Abu Dhabi issued $5 billion; Sharjah issued $2 billion. - Federal government issued external debt for the first time: $4 billion in October 2021. - Debt maturity profile lengthened since 2015 (from around 5 to 10 years). ### Outlook and key projections - Near-term and 2021 projections - Non-oil growth: 3.2 percent in 2021. - Oil GDP growth: close to zero in 2021 (production cuts under OPEC+). - Real GDP growth: 2.2 percent in 2021. - 2022 and medium-term projections - Real GDP growth: 3.5 percent in 2022. - Non-oil growth: 3.4 percent in 2022. - Non-oil output gap expected to close by 2026. - Oil GDP expected to grow by 3.5 percent on average in the medium-term as production increases toward authorities’ plan of producing 5.0 mb/d by 2030. - Inflation: muted in 2021; accelerate to an average around 2 percent over the medium-term. - Fiscal and external medium-term outlook - Overall fiscal deficit projected to narrow to 0.7 percent of GDP in 2021 and shift into a modest surplus by 2024. - Adjusted non-oil primary deficit: 26.7 percent of non-oil GDP in 2021 → 22.1 percent of non-oil GDP in 2026. - Current account surplus projected to increase to pre-crisis levels in 2021 and remain positive at around 8.5 percent of GDP in the medium-term. - Gross reserves projected to increase in 2021 by $13.6 billion (3.4 percent of GDP), including SDR allocation of SDR 2.2 billion (0.8 percent of GDP). Authorities have not decided on use of the SDR allocation. - Investment plans - ADNOC plans to spend $122 billion over 5 years to increase crude oil production capacity to 5.0 mb/d by 2030 (about 30 percent of 2019 GDP); this target is 80 percent higher than 2020 production levels. ### Risks - Short-run risks - Resurgence of the global pandemic could reduce global demand and oil prices, increase fiscal and corporate pressures, and tighten financial conditions. - Medium-term risks - Potential long-lasting effects in hard-hit sectors could lower potential growth. - Long-term global oil market prospects: technological change and climate efforts could reduce oil demand and prices faster than anticipated, posing fiscal and diversification challenges. - Upside risk - Strong reform momentum could raise growth above baseline. ### Channels of exposure and implications (Changing Global Financial Conditions box) - Capital flows - Higher global interest rates could increase the UAE’s interest rate differential with other economies and lead to capital flow reversals. - Recent portfolio inflows averaged about AED 4 bn per year, about half of pre-GFC flows. - Debt-service costs - About 30 percent of the debt stock of both Abu Dhabi and Dubai is set to mature over 2022-25. - GREs must roll over around 45 percent of their aggregate debt stock by 2025 (Annex III); higher global rates would increase rollover costs. - Banking sector - Higher rates could raise interest margins but dampen credit demand, undermining gains to profitability and potentially raising asset-quality risks. - Policy implication - Authorities should remain vigilant; close monitoring of financial-stability risks and readiness to act are important given potential intensified impacts on debt service and bank balance sheets. ### Policy discussions and recommendations - Near-term priorities - Continue strong vaccination efforts for all nationals and residents. - Maintain targeted support to those most in need; keep policies flexible to respond to recurrent outbreaks via health, economic, and fiscal contingency plans. - Macroeconomic policy mix - Current mix appropriate until recovery firmly entrenched. - Gradually re-target support toward viable firms and future engines of growth; transparently address nonviable entities via strengthened bankruptcy framework. - Reassess generous support to non-strategic GREs to promote private-sector-led growth and reduce fiscal burdens. - Structural reform and stimulus sequencing - Implement UAE 2050 Strategy initiatives (including the first thirteen projects of the UAE Projects of the 50) to attract skilled professionals, enhance human capital, boost private-sector workforce, encourage business dynamism, attract foreign investment, and support green and advanced technology adoption. - Careful sequencing and prioritization of reforms to ensure stronger growth outcomes and lift potential growth. - Communication and coordination - Gradual withdrawal of COVID-19 measures as recovery gains momentum, with clear communication and coordination between fiscal and monetary authorities. - Coordinate unwinding of macro-financial support with new stimulus measures; calibrate to avoid cliff effects and preserve financial stability. - Contingent measures if downside risks materialize - Extend targeted fiscal and macro-financial support to those most in need and to viable and systemic firms expected to drive productivity growth; base systemic enterprise decisions on objective criteria and robust governance. - Consider front-loading fiscal stimulus tied to structural reforms (UAE Projects of the 50), including larger public capital expenditure and additional stimulus in digital, green, and ICT sectors to support renewables and green products and technologies. - Further extend the TESS program, particularly the Recovery program, to enhance financial-system support capacity; monitor take-up and asset quality closely and maintain a well-calibrated macroprudential framework. ### Authorities’ near-term stance and financial stability safeguards - Near-term policy stance and priorities - Authorities agreed with the thrust of the near-term recommendations. - Emphasis on early and strong progress on protecting public health and priority to maintain these efforts for all nationals and residents. - Supportive fiscal and macro-financial policies remain appropriate to ensure the recovery and should continue to be targeted to viable sectors, those most in need, and future engines of growth. - Additional targeted policy support would be warranted if the recovery stalls. - Safeguarding financial stability - Close monitoring of asset quality and supervisory vigilance required; COVID-19 effects and withdrawal of loan payment deferral measures could compound asset quality risks. - Banks remain well capitalized but: - Further close monitoring and forward-looking assessments of asset quality necessary, especially among smaller banks. - Supervisory vigilance to encourage prompt recognition of asset quality deterioration and adequate provisions. - CBUAE should consider encouraging banks to actively address pre-crisis legacy NPLs, including by writing off fully provisioned NPLs, to free up balance sheet space. - Macroprudential and regulatory framework actions: - Continue efforts to strengthen the stress-testing framework, including with the inclusion of climate change risks. - Swift implementation of the new regulatory framework on real estate exposure is needed, as banks, particularly Islamic banks, remain highly exposed to the real estate sector. - Monitor risks arising from high concentrations in loans even as Basel III implementation proceeds. - Complete drafting and implementation of the Resolution and Recovery Framework as soon as possible, and align the Bankruptcy Framework to it, if necessary. - Complete reforms in the regulation and supervision of the insurance sector and close capacity gaps quickly. - Continue and expand collaboration with free zone Financial Authorities to avoid potential spillovers and spillbacks with financial institutions operating in these zones. - Dirham Monetary Framework (DMF) and federal debt issuance - DMF, when fully implemented, will contribute to efficiency gains in liquidity management by banks and the CBUAE. - Streamlining of standing facilities and open market operations strengthens monetary policy implementation. - Publication of the DMF online is encouraged to increase transparency and build trust. - DMF should support money market development and local currency debt through creation of a risk-free short-term yield curve. - Planned federal debt issuance in Dirham will complement the establishment of the yield curve at longer maturities. - As the CBUAE will be the issuing agent, coordination between the CBUAE and the federal government will be needed to mitigate any monetary repercussions. - Digital innovation and payments - Promote digital innovation cautiously to balance opportunities and risks. - CBUAE is increasing regulatory clarity and strengthening supervision, and conducting exploratory efforts with innovative settlement assets. - Continued effective supervision of new fintech actors and close monitoring of potential side effects is critical to ensure financial stability. - AML/CFT improvements - Major efforts undertaken to improve the AML/CFT regime should be continued. - UAE created a Supranational Independent Federal body to oversee implementation of the National AML/CFT strategy and action plan. - A dedicated AML/CFT unit was established in the CBUAE to operationalize a new risk-based supervisory framework. - New legislation requires submission of beneficial ownership information by all legal entities registered in the UAE; ongoing monitoring is needed to ensure accurate and up-to-date beneficial ownership information is available to competent authorities on a timely basis. - Further efforts needed to improve understanding of ML/TF risks from new technologies and non-resident flows, strengthen oversight over DNFBPs, and enhance law enforcement efforts. ### Fiscal policy frameworks and consolidation pathways - Need to strengthen public finances once recovery firms to adapt to lower eventual oil revenue and ensure intergenerational equity and medium-term sustainability. - Staff consolidation guidance - Medium-term fiscal path consistent with intergenerational equity could be achieved with an average annual consolidation of the non-oil primary fiscal balance deficit by 0.5-0.8 percent of non-oil GDP (0.4-0.6 percent of overall GDP), taking it to the benchmark balance by 2030-35. - Staff estimates that the non-oil primary deficit is some 7.6 percentage points of non-oil GDP above the benchmark needed to ensure sufficient saving for future generations. - Policy mix and reform recommendations to achieve consolidation - Deliver a growth-friendly consolidation via fiscal restraint and reforms, including: - Proceed with planned public wage and employment reform. - Strengthen non-oil tax revenue by broadening the tax base and increasing the VAT and excise taxes, and improve the efficiency of tax collection, including by strengthening tax administration. - Phase out burdensome and regressive fees and gradually remove subsidies, including energy and water subsidies, alongside measures to shield the most vulnerable. - Improve efficiency of targeted spending. - Consider exploring alternative revenue models, including introducing a progressive federal corporate income tax on non-oil companies, which would be easier to administer than the current system of fees and more conducive to SME development. ### Fiscal sustainability scenarios (Box 2 and Annex III projections) - Illustrative additional adjustment scenario - Additional fiscal adjustment of 4 percent of GDP (beyond the baseline) can be achieved by 2026 through accelerated revenue mobilization and fiscal expenditures reforms. - Assumed measures in the illustrative scenario: - Additional 0.6 percent of non-oil GDP gain from excise taxes on vehicles. - Introduction of a federal CIT of 10 percent on all non-oil UAE resident companies. - Reduction of subsidies of 1.1 percent of non-oil GDP. - Capping growth in public wage bill at nominal GDP growth rate. - 10 percent reduction in incentives and fees in the long-term. - The bulk of additional fiscal gain would come from the introduction of the CIT. - Reforms would help bring non-oil revenue as a share of GDP closer to the OECD or EU average of 30-40 percent. - Debt sustainability projections (as of October 15, 2021) - Nominal gross government debt (percent of GDP): 2019 = 19.0; 2020 = 27.1; 2021 = 39.4; 2022 = 39.3; 2023 = 40.4; 2024 = 40.1; 2025 = 39.3; 2026 = 38.1. - Real GDP growth (percent): 2019 = 3.8; 2020 = 3.4; 2021 = -6.1; 2022 = 2.2; 2023 = 3.5; 2024 = 3.6; 2025 = 3.7; 2026 = 3.9; 2027 = 4.0. - Inflation (GDP deflator, percent): 2019 = 2.3; 2020 = -4.4; 2021 = -8.4; 2022 = 11.2; 2023 = 1.8; 2024 = 0.9; 2025 = 1.1; 2026 = 1.3; 2027 = 1.5. - Primary (noninterest) revenue and grants (percent of GDP): 2019 = 30.6; 2020 = 28.4; 2021 = 24.0; 2022 = 27.7; 2023 = 27.6; 2024 = 27.1; 2025 = 26.5; 2026 = 26.1; cumulative through 2026 = 160.7. - Primary (noninterest) expenditure (percent of GDP): 2019 = 30.1; 2020 = 29.4; 2021 = 31.7; 2022 = 30.2; 2023 = 29.9; 2024 = 29.1; 2025 = 28.4; 2026 = 27.6; cumulative through 2026 = 172.0. - Primary balance (percent of GDP): 2019 = -0.4; 2020 = 0.9; 2021 = 7.7; 2022 = 2.6; 2023 = 2.3; 2024 = 2.0; 2025 = 1.9; 2026 = 1.5; cumulative = 11.2. - Effective interest rate (percent): 2019 = 4.9; 2020 = 4.1; 2021 = 3.4; 2022 = 3.2; 2023 = 3.3; 2024 = 4.6; 2025 = 5.6; 2026 = 6.4; 2027 = 7.1. - Stress-test scenarios (selected outcomes) - Oil Price Scenario (oil price lower by $10 in 2022-26): - Real GDP growth under shock (2021–2026): 2.2; 0.0; 0.2; 0.3; 0.4; 0.6. - Primary balance (2021–2026): -2.6; -4.9; -4.7; -4.6; -4.1; -3.7. - GRE Contingent Liability Scenario (20 percent of GRE debt taken over by government in 2022-26): - Primary balance (2021–2026): -2.6; -3.6; -4.0; -4.1; -3.1; -2.4. - Effective interest rate increases in projection years. - Combined Scenario (Oil price shock + GRE contingent liability): - Real GDP growth (2021–2026): 2.2; 0.0; 0.2; 0.3; 0.4; 0.6. - Primary balance (2021–2026): -2.6; -6.2; -6.6; -6.8; -5.8; -5.1. ### GREs’ performance, risks, and policy responses - GRE debt levels and composition - Abu Dhabi GREs’ debt increased by 32.1 percent between 2017 and 2020 to about $64.2 billion. - Dubai GREs’ debt decreased by 11 percent between 2017 and 2020 to $51 billion. - In 2020, staff estimates show Abu Dhabi GREs’ debt rose by 1.7 percentage points to 17.9 percent of GDP; Dubai GREs’ debt remained almost unchanged at 14.4 percent of GDP. - Borrowing shifted from loans to bonds: bonds comprised 86 percent of new borrowing in public markets in 2020, compared to 15 percent during 2015–17. - Issuance with maturity longer than 10 years increased to 62 percent in 2020 (from 27 percent in 2015–17); debt with maturity shorter than 5 years decreased to 2 percent (from 19 percent). - Short-term rollover exposures and risks - Combined short-term rollover exposure: $68.8 billion debt, including $51.9 billion of nonbank GRE debt due in 2021-23. - Staff estimates of debt maturing in 2021-23: Dubai GREs: $31.8 billion; Abu Dhabi GREs: $37 billion. - Deterioration in GRE financial performance - SOEs Health Check on 24 nonbank GREs: share of GREs with “high” and “very high” risk ratings increased sharply in 2020. - Share of loss-making GREs increased in 2020; liquidity and solvency risks increased despite TESS and government support. - Comparative metrics and bank exposures - Median total debt-to-EBITDA for GREs rose from 3 in 2015-2017 to 4.4 in 2020. - “Debt-at-risk” (ICR < 1.5) for nonbank GREs nearly doubled to about $30 billion in 2020 compared to 2019. - Domestic bank credit to GREs increased to 17 percent of GDP in 2020 (about 14 percent of total domestic credit); GREs account for about 14 percent of banks’ deposits. - Policy recommendations and mitigation measures - Strengthen data, transparency, and reporting for GREs; formal reporting requirements and standardized financial disclosures. - Integrate GREs into public debt and fiscal risk management; control leverage build-up and enhance liquidity monitoring. - Strengthen corporate governance, develop performance-based contracts, consider private-sector participation, and delineate commercial vs noncommercial operations. - Implement prudent fiscal policies and an integrated approach to mitigate contingent fiscal risks from GREs. ### Exchange rate, reserves, monetary policy, and data needs - Exchange rate and reserves - Exchange rate peg remains appropriate and provides a credible policy anchor and stability. - More flexible exchange rate could support non-oil tradable sector over the longer-term, but a near-term move away from the peg is not warranted. - International reserves and official foreign currency assets remain comfortable and are more than adequate to maintain the peg. - Monetary framework and transparency - Staff encourages DMF publication online to increase transparency and build trust. - DMF should support money market development and local currency debt through creation of a risk-free short-term yield curve. - Coordination needed between CBUAE and federal government as CBUAE will be issuing agent for federal Dirham debt. - Data issues and statistical capacity - Coverage, timeliness and availability of statistics should be improved. - Ongoing work: finalizing revisions to CPI basket weights; developing a residential property price index; completing the UAE Administrative Census 2020 Project. - Further efforts needed under e-GDDS for external sector statistics, quarterly GDP, annual national accounts, and a comprehensive Balance of Payments and IIP. - Authorities have requested IMF TA; staff ready to provide Capacity Development (CD). - UAE continues working toward subscribing to the SDDS. ### Staff appraisal — key messages - Pandemic response and recovery - Authorities’ strong actions have been effective; recovery gaining momentum due to vaccination program, accommodative policies, and increased activity related to Expo 2020. - Near-term recommendation: continue vaccination and testing efforts, maintain supportive policies, and shift policies to target viable sectors and firms; additional targeted support if recovery stalls. - Financial sector resilience - Banking system remains adequately capitalized and liquid; continue monitoring financial stability risks and strengthening macroprudential and regulatory frameworks. - Risks: balance sheet risks from weaker asset quality; high exposure to real estate sector could weigh on credit growth. - Recommendations: consider an FSAP update; swiftly address nonviable entities under enhanced bankruptcy framework; continue to enhance AML/CFT; ensure DMF transparency and coordination with issuance plans. - Fiscal reforms and low-carbon transition - Accelerate fiscal reforms to adjust to a low-carbon future and rebuild fiscal buffers. - Recommended measures: expand non-oil revenue, increase expenditure efficiency, establish credible MTFFs, coordinate emirate and federal fiscal anchors, expand Fiscal Coordination Council mandate, and improve fiscal data collection and dissemination. - Structural reforms to raise potential growth - Prioritize and sequence reforms to lift productivity and potential growth in areas including business environment, level playing field, digital and fintech adoption, trade and investment openness, and labor market modernization. - Implementation requires integration across government levels, enhanced emirate collaboration, and timely high-quality economic data. ### Sustainable Development Goals and climate change (Annex VI) - SDG progress and climate action - UAE made significant progress on health, education, and industry; positive trends on gender equality and clean energy affordability. - Additional efforts needed on clean water and sanitation, responsible consumption and production, and climate action. - Climate vulnerabilities and targets - Growing heat stress; agriculture accounts for about 85 percent of total water consumption. - UAE carbon emissions per capita remain 2.5 times larger than in OECD. - Second NDC (December 2020): committed to economy-wide emission reduction target of 23.5 percent relative to business-as-usual in 2030. - Net-zero carbon emission goal set for 2050. - Energy strategy and investments - National Energy Strategy 2050 targets: increase share of clean energy to 50 percent of the installed power capacity mix by 2050; reduce final energy demand by 40 percent by 2050. - Clean energy capacity growth: from just above 100 megawatts (MW) in 2015 to 2.4 GW in 2020. - UAE aims to invest $163 billion in clean energy by 2050 under its 2050 Energy Strategy and Net-Zero goals. - Adaptation and sectoral policies - UAE Water Security Strategy 2036 aims to reduce potable water consumption by 20 percent and increase reuse of treated water to 95 percent by 2036. - National Adaptation Program, Green Agenda 2030, National Food Security Strategy, and UAE Circular Economy Policy 2021-2031 guide resilience and sustainable consumption/production actions. *Source: IMF staff report, “1. Changing Global Financial Conditions.”* ### 1. Changing Global Financial Conditions ___________________________________________________________ 9 ### 1. Changing Global Financial Conditions ### Recent macroeconomic developments - Public health and policy response - Nearly 85 percent of the population fully inoculated (as of October 2021). - Announced fiscal measures: 2.5 percent of GDP. - Macro-financial support under the Targeted Economic Support Scheme (TESS): 19.5 percent of GDP; some measures extended to 2022-23 (Annex I). - Output and labor market - Real GDP contracted by 6.1 percent in 2020. - Oil GDP declined by 6.0 percent in 2020. - Non-oil GDP declined by 6.2 percent in 2020. - UAE population fell by 2.3 percent in 2020, with large temporary departures of expatriate workers. - Inflation and external sector - Overall inflation remained in negative territory until recently. - Current account surplus declined by about 3 percentage points to 5.8 percent of GDP in 2020. - REER weakened by 7.5 percent on average (as of end-September 2021, in line with the US dollar). - External position broadly consistent with medium-term fundamentals and desirable policies (Annex IV). - Fiscal developments - General government (GG) fiscal balance: surplus of 0.6 percent of GDP in 2019 → deficit of 5.1 percent of GDP in 2020. - GG debt increased by 12.3 percentage points to 39.4 percent of GDP in 2020 (including increased financing needs). - Financial sector - Tier 1 capital ratio: 16.4 percent in 2021Q2. - NPL ratio: about 8.2 percent between 2020Q4 and 2021Q2 (end-2019: 6.5 percent). - Banks’ ROA: 1 percent in 2020 Q2 (end-2019: 1.6 percent). - Deposit growth slowed in late 2020 then recovered somewhat; banks’ net foreign assets increased via holdings of foreign securities (mostly HQLA). - Market financing and debt issuance - 2020: Abu Dhabi, Dubai, and Sharjah raised a combined $19.25 billion. - 2021: Abu Dhabi issued $5 billion; Sharjah issued $2 billion. - Federal government issued external debt for the first time: $4 billion in October 2021. - Debt maturity profile lengthened since 2015 (from around 5 to 10 years). ### Outlook and key projections - Near-term and 2021 projections - Non-oil growth: 3.2 percent in 2021. - Oil GDP growth: close to zero in 2021 (production cuts under OPEC+). - Real GDP growth: 2.2 percent in 2021. - 2022 and medium-term projections - Real GDP growth: 3.5 percent in 2022. - Non-oil growth: 3.4 percent in 2022. - Non-oil output gap expected to close by 2026. - Oil GDP expected to grow by 3.5 percent on average in the medium-term as production increases toward authorities’ plan of producing 5.0 mb/d by 2030. - Inflation: muted in 2021; accelerate to an average around 2 percent over the medium-term. - Fiscal and external medium-term outlook - Overall fiscal deficit projected to narrow to 0.7 percent of GDP in 2021 and shift into a modest surplus by 2024. - Adjusted non-oil primary deficit: 26.7 percent of non-oil GDP in 2021 → 22.1 percent of non-oil GDP in 2026. - Current account surplus projected to increase to pre-crisis levels in 2021 and remain positive at around 8.5 percent of GDP in the medium-term. - Gross reserves projected to increase in 2021 by $13.6 billion (3.4 percent of GDP), including SDR allocation of SDR 2.2 billion (0.8 percent of GDP). Authorities have not decided on use of the SDR allocation. - Investment plans - ADNOC plans to spend $122 billion over 5 years to increase crude oil production capacity to 5.0 mb/d by 2030 (about 30 percent of 2019 GDP); this target is 80 percent higher than 2020 production levels. ### Risks - Short-run risks - Resurgence of the global pandemic could reduce global demand and oil prices, increase fiscal and corporate pressures, and tighten financial conditions. - Medium-term risks - Potential long-lasting effects in hard-hit sectors could lower potential growth. - Long-term global oil market prospects: technological change and climate efforts could reduce oil demand and prices faster than anticipated, posing fiscal and diversification challenges. - Upside risk - Strong reform momentum could raise growth above baseline. ### Box: Changing Global Financial Conditions — channels of exposure and implications - Key channels of transmission - Capital flows: Higher global interest rates could increase the UAE’s interest rate differential with other economies and lead to capital flow reversals. Recent portfolio inflows averaged about AED 4 bn per year, about half of pre-GFC flows. - Debt-service costs: About 30 percent of the debt stock of both Abu Dhabi and Dubai is set to mature over 2022-25. GREs must roll over around 45 percent of their aggregate debt stock by 2025 (Annex III); higher global rates would increase rollover costs. - Banking sector: Higher rates could raise interest margins but dampen credit demand, undermining gains to profitability and potentially raising asset-quality risks. - Policy implication - Authorities should remain vigilant; close monitoring of financial-stability risks and readiness to act are important given potential intensified impacts on debt service and bank balance sheets. ### Policy discussions and recommendations - Near-term priorities - Continue strong vaccination efforts for all nationals and residents. - Maintain targeted support to those most in need; keep policies flexible to respond to recurrent outbreaks via health, economic, and fiscal contingency plans. - Macroeconomic policy mix - Current mix appropriate until recovery firmly entrenched. - Gradually re-target support toward viable firms and future engines of growth; transparently address nonviable entities via strengthened bankruptcy framework. - Reassess generous support to non-strategic GREs to promote private-sector-led growth and reduce fiscal burdens. - Structural reform and stimulus sequencing - Implement UAE 2050 Strategy initiatives (including the first thirteen projects of the UAE Projects of the 50) to attract skilled professionals, enhance human capital, boost private-sector workforce, encourage business dynamism, attract foreign investment, and support green and advanced technology adoption. - Careful sequencing and prioritization of reforms to ensure stronger growth outcomes and lift potential growth. - Communication and coordination - Gradual withdrawal of COVID-19 measures as recovery gains momentum, with clear communication and coordination between fiscal and monetary authorities. - Coordinate unwinding of macro-financial support with new stimulus measures; calibrate to avoid cliff effects and preserve financial stability. - Contingent measures if downside risks materialize - Extend targeted fiscal and macro-financial support to those most in need and to viable and systemic firms expected to drive productivity growth; base systemic enterprise decisions on objective criteria and robust governance. - Consider front-loading fiscal stimulus tied to structural reforms (UAE Projects of the 50), including larger public capital expenditure and additional stimulus in digital, green, and ICT sectors to support renewables and green products and technologies. - Further extend the TESS program, particularly the Recovery program, to enhance financial-system support capacity; monitor take-up and asset quality closely and maintain a well-calibrated macroprudential framework. *Source: IMF staff report, “1. Changing Global Financial Conditions.”* ### 19. The authorities agreed with the thrust of the near-term recommendations. They ### 1uaeea2022001 - 19. The authorities agreed with the thrust of the near-term recommendations. They ### Near-term policy stance and priorities - Authorities agreed with the thrust of the near-term recommendations. - Emphasis on early and strong progress on protecting public health and priority to maintain these efforts for all nationals and residents. - Supportive fiscal and macro-financial policies remain appropriate to ensure the recovery and should continue to be targeted to viable sectors, those most in need, and future engines of growth. - Additional targeted policy support would be warranted if the recovery stalls. ### Safeguarding Financial Stability - Ensuring financial stability requires close monitoring of asset quality and supervisory vigilance. - The COVID-19 pandemic could have long-lasting effects on borrowers’ financial health, compounding asset quality risks from the withdrawal of loan payment deferral measures and any potential tightening in global financial conditions. - Overall, banks remain well capitalized but: - Further close monitoring and forward-looking assessments of asset quality remain necessary, especially among smaller banks. - Supervisory vigilance should continue to encourage prompt recognition of asset quality deterioration and adequate provisions. - The CBUAE should consider encouraging banks to actively address pre-crisis legacy NPLs, including by writing off fully provisioned NPLs, to free up balance sheet space. - Macroprudential and regulatory framework actions: - Continue efforts to strengthen the stress-testing framework, including with the inclusion of climate change risks. - Swift implementation of the new regulatory framework on real estate exposure is needed, as banks, particularly Islamic banks, remain highly exposed to the real estate sector. - Monitor risks arising from high concentrations in loans even as Basel III implementation proceeds. - Complete drafting and implementation of the Resolution and Recovery Framework as soon as possible, and align the Bankruptcy Framework to it, if necessary. - Complete reforms in the regulation and supervision of the insurance sector and close capacity gaps quickly. - Continue and expand collaboration with free zone Financial Authorities to avoid potential spillovers and spillbacks with financial institutions operating in these zones. - Dirham Monetary Framework (DMF) and federal debt issuance: - The DMF, when fully implemented, will contribute to efficiency gains in liquidity management by banks and the CBUAE. - Streamlining of standing facilities and open market operations strengthens monetary policy implementation. - Publication of the DMF online is encouraged to increase transparency and build trust. - The DMF should support money market development and local currency debt through creation of a risk-free short-term yield curve. - Planned federal debt issuance in Dirham will complement the establishment of the yield curve at longer maturities. - As the CBUAE will be the issuing agent, coordination between the CBUAE and the federal government will be needed to mitigate any monetary repercussions. - Digital innovation and payments: - Promote digital innovation cautiously to balance opportunities and risks. - CBUAE is increasing regulatory clarity and strengthening supervision, and conducting exploratory efforts with innovative settlement assets. - Continued effective supervision of new fintech actors and close monitoring of potential side effects is critical to ensure financial stability. - AML/CFT improvements: - Major efforts undertaken to improve the AML/CFT regime should be continued. - UAE created a Supranational Independent Federal body to oversee implementation of the National AML/CFT strategy and action plan. - A dedicated AML/CFT unit was established in the CBUAE to operationalize a new risk-based supervisory framework. - New legislation requires submission of beneficial ownership information by all legal entities registered in the UAE; ongoing monitoring is needed to ensure accurate and up-to-date beneficial ownership information is available to competent authorities on a timely basis. - Further efforts needed to improve understanding of ML/TF risks from new technologies and non-resident flows, strengthen oversight over DNFBPs, and enhance law enforcement efforts. ### Authorities’ views on financial stability - Authorities agreed with recommendations to further enhance financial stability monitoring. - Emphasized robust levels of capital and liquidity for the overall banking system but concurred on need for continued close monitoring of asset quality and supervisory vigilance. - Agreed on the importance of further strengthening macroprudential and regulatory frameworks, including to meet needs of an increasingly digitalized financial system. - On the New Dirham Framework, authorities noted the importance of ensuring high coordination with the federal government to facilitate the development of the dirham yield curve. ### Strengthening Fiscal Policy Frameworks - Once the recovery firms, public finances must be strengthened to adapt to lower eventual oil revenue and ensure intergenerational equity and medium-term sustainability. - The pandemic has hastened the global move to a more sustainable future, including lower demand for hydrocarbon energy, increasing urgency to limit decline in the UAE’s public net financial assets and stabilize them over the long run. - A gradual, but determined, fiscal consolidation in the context of a credible medium-term fiscal framework (MTFF) is recommended. - Staff estimates: - The medium-term fiscal path consistent with intergenerational equity could be achieved with an average annual consolidation of the non-oil primary fiscal balance deficit by 0.5-0.8 percent of non-oil GDP (0.4-0.6 percent of overall GDP), taking it to the benchmark balance by 2030-35. - Staff estimates that the non-oil primary deficit is some 7.6 percentage points of non-oil GDP above the benchmark needed to ensure sufficient saving for future generations. - Policy mix and reform recommendations to achieve consolidation: - Deliver a growth-friendly consolidation via fiscal restraint and reforms, including: - Proceed with planned public wage and employment reform. - Strengthen non-oil tax revenue by broadening the tax base and increasing the VAT and excise taxes, and improve the efficiency of tax collection, including by strengthening tax administration. - Phase out burdensome and regressive fees and gradually remove subsidies, including energy and water subsidies, alongside measures to shield the most vulnerable. - Improve efficiency of targeted spending. - Consider exploring alternative revenue models, including introducing a progressive federal corporate income tax on non-oil companies, which would be easier to administer than the current system of fees and more conducive to SME development. ### Fiscal sustainability and reform scenarios (Box 2) - While the UAE has substantial public sector assets, near- and medium-term fiscal challenges remain and should be addressed. - Current policies assume gradual annual fiscal consolidation of 0.4-0.6 percent of GDP over the next 10–15 years, but more is needed in the near-term to fully rebuild fiscal buffers and bring them to pre-pandemic levels. - Illustrative scenario for additional fiscal adjustment: - Additional fiscal adjustment of 4 percent of GDP (beyond the baseline) can be achieved by 2026 through a combination of accelerated revenue mobilization and fiscal expenditures reforms. - The illustrative scenario assumes an additional 0.6 percent of non-oil GDP gain from excise taxes on vehicles; the introduction of a federal CIT of 10 percent on all non-oil UAE resident companies; a reduction of subsidies of 1.1 percent of non-oil GDP; capping growth in public wage bill at nominal GDP growth rate; and a 10 percent reduction in incentives and fees in the long-term. - The bulk of additional fiscal gain would come from the introduction of the CIT. - Extra savings could be achieved by broadening the tax base, including by enhancing tax administration. - The reforms under the illustrative scenario would help bring non-oil revenue as a share of GDP closer to the OECD or EU average of 30-40 percent. - Governance and institutional recommendations: - Adopt a transparent, rules-based UAE-wide fiscal framework that aggregates emirate-specific frameworks with credible long-term fiscal anchors. - Enhance emirate-specific frameworks first and then coordinate to ensure a unified national stance. - Establish and ensure timely data sharing and harmonized statistics across emirates and publish detailed annual budgets discussing short-term policy priorities and medium-term fiscal paths. - Consider expanding the mandate of the Fiscal Coordination Council to include assessment of the UAE fiscal stance and recommending fiscal policy adjustment based on the fiscal anchors. - Improve coordination among fiscal authorities (federal and emirate governments, GREs, and SWFs) and the CBUAE to consolidate the UAE’s overall policy stance and address possible impacts of increased federal debt issuance on CBUAE cash flow management and risk management practices. - Data and transparency needs: - Further progress in fiscal data collection and publication is needed. - Data limitations on general government statistics, including on contingent liabilities (government guarantees, GRE debt, PPPs), hinder accurate assessment of fiscal operations. - Encourage regular and timely publication of consolidated general government budget plans, revenue and expenditure outcomes with sufficient details and reconciliation with budgeted amounts, and data on government sectoral spending and information by emirate. - Greater focus on monitoring and reporting contingent liabilities in line with international best practice is warranted. - IMF stands ready to provide technical assistance in these areas. ### Authorities’ views on fiscal frameworks - Authorities acknowledged recommendations on enhancing medium-term fiscal frameworks but felt current policies were sufficient to achieve any needed future consolidation. - Noted importance of enhancing emirate-specific fiscal anchors and coordinating them at emirate and federal levels. - Authorities expect the non-oil revenue base to widen over time with dynamic private sector growth. ### Reviving economic diversification and fostering higher productivity growth - COVID-19 amplified pre-crisis constraints to growth and increased risks of long-lasting economic effects; UAE potential growth has been on a downward trend since the Global Financial Crisis. - Momentum from recent reform efforts and the UAE 2050 Strategy must be strengthened; achieving outcomes requires prioritization, sequencing of reforms, greater integration of strategies/policies across government levels, and enhanced collaboration across emirates and the federal level. - Policy objective: reallocate resources to more productive sectors and firms. - Three prioritized areas of structural reform: Increasing Productivity - Continue improving the business environment and competitiveness: - Fully implement recent reforms: allowing full foreign ownership of onshore companies, expanding residency permits, attracting talent, supporting private sector employment of nationals, increasing scope for personal choices, and encouraging start-ups. - Reduce costs to open a business and encourage business dynamism and start-ups. - Fully deploy amendments to the UAE Insolvency Law to address nonviable firms quickly and transparently. - Ensure a level playing field for all companies: - Consider commercializing nonstrategic GREs and bringing them within scope of competition laws and regulations. - Re-assess fiscal costs from expansive incentives and tax exemptions (including in Special Economic Zones) within upgraded fiscal frameworks. - Harness digital solutions and fintech: - Adopt advanced technologies (cloud computing, Big Data and Machine Learning/Artificial Intelligence, and 5G) and further SMEs digitalization to enhance resilience, access to finance, and adaptability. - UAE Data Law supports higher digitalization by protecting privacy and limiting entities’ use of personal data for profit. - Fintech to play catalytic role. - Advance technology creation and adoption: - Consider welfare-improving government subsidies and funding of research and development in cutting edge technologies and encourage growth of ICT industries. - Government initiatives welcomed: Fourth Industrial Revolution Network project, Tech Drive program, and “Project 5Bn”; their implementation should be closely monitored to ensure efficiency. Modernizing the Labor Market - Ensure more flexible and equitable labor markets: - Invest in education and training in emerging fields to enhance human capital. - Modernize visa and work permits to contribute to market flexibility, adaptability, and up-skilling. - Government initiatives to incentivize national employment in the private sector should reduce fragmentation between national and expatriate labor markets. - Further efforts needed to reduce size of civil service, better align public and private wages, and incentivize active labor market policies, including for expatriate workers. - Adopt gender-positive recovery policies and practices: - Despite efforts to promote female employment, female labor force participation declined. - Policies, including more progress through gender budgeting, are needed to address crisis impacts on female employment and gender balance, in line with UAE progress under the SDGs. Investing in Green Energy and Future Infrastructure - Strengthen sustainable and green infrastructure: - Progress under UAE Green Agenda 2030, UAE Energy Strategy 2050 and SDGs is welcome, but need to speed up planned mitigation measures and actionable adaptation plans to reach announced targets in carbon emission and clean energy. - Strengthen climate-risk disclosure frameworks to ensure institutions are well-positioned to manage transition risks. - Build further adaptive capacity across public and private sectors to enhance climate resilience, especially in utilities, construction, and transportation. *Source: 1uaeea2022001 (IMF country report excerpt).* ### 30. These efforts would maintain the UAE’s long-term competitiveness and resilience to ### 1uaeea2022001 - 30. These efforts would maintain the UAE’s long-term competitiveness and resilience to ### Exchange rate, reserves, and monetary policy - The exchange rate peg remains appropriate and provides a credible policy anchor and stability. - A more flexible exchange rate could over the longer-term support the development of the non-oil tradable sector and would enable the CBUAE to follow an independent monetary policy. - In the near term, a move away from the peg is not warranted as it would be destabilizing, remove a credible monetary anchor, and have limited benefits for competitiveness. - Staff views the exchange rate regime as appropriate. - International reserves and official foreign currency assets remain comfortable and are more than adequate to maintain the peg. ### Authorities’ views on reform priorities and the peg - Authorities noted the importance of prioritizing and sequencing the ambitious reform agenda. - Key priorities identified by authorities: - Ensuring integration of strategies and policies at different levels of government. - Further improving the business environment. - Focusing on high value-added activities. - Harnessing the benefits of digitalization and advanced technology. - Modernizing labor markets to deliver sustainable growth and lift medium-term potential. - Authorities emphasized the importance of enhancing collaboration and cooperation across individual emirates. - Authorities underscored their strong commitment to the exchange rate peg. ### Data issues and statistical capacity - Coverage, timeliness and availability of statistics for policy making should be improved. - Ongoing data improvements noted: - Finalizing revisions to the CPI basket weights. - Developing a residential property price index. - Completing the UAE Administrative Census 2020 Project. - Further efforts needed to improve the scope, timeliness, and quality of statistics under the Enhanced Data Dissemination Systems (e-GDDS), including of external sector statistics. - Production of quarterly GDP and annual national accounts on a timely basis should be improved. - Despite progress on outward Foreign Direct Investment (FDI) statistics, development of a comprehensive Balance of Payments and International Investment Position (IIP) data requires the CBUAE, the Federal Competitiveness Statistics Centre (FCSC), and the Ministry of Economy to further strengthen capacity and coordination, including with high-level government support. - Significant room exists for completing the harmonization and dissemination of fiscal statistics. - Authorities have requested IMF technical assistance (TA) to advance progress on external sector statistics. - Staff encourages regular and timely publication of central government and consolidated general government finance statistics and stands ready to support authorities through Capacity Development (CD). - Authorities remain fully committed to the e-GDDS, adopted in June 2018. - FCSC and CBUAE actions: - FCSC and CBUAE are working to enhance the coverage of external sector statistics. - FCSC is developing plans to enhance national accounts and price statistics, demographic, and labor market data. - The UAE continues to work toward subscribing to the Special Data Dissemination Standards (SDDS) in the coming years. ### Staff appraisal — pandemic response and recovery - Authorities’ strong actions to address the health and economic effects of the pandemic are proving effective. - Economic recovery is gaining momentum, spurred by: - The successful vaccination program. - Accommodative policies. - Increased activity related to the delayed Expo 2020. - Recommendations for the near term: - Continue vaccination and testing efforts and maintain supportive policies to ensure the recovery firms. - Shift policies increasingly to be targeted to viable sectors and firms and support those most in need. - If the recovery stalls, additional targeted policy support would be warranted. ### Staff appraisal — financial sector resilience - Ensuring the health and resilience of the financial system is critical to the recovery and medium-term growth. - Although the overall banking system remains adequately capitalized and liquid, ongoing efforts to monitor financial stability risks and strengthen macroprudential and regulatory frameworks should be maintained. - Risks noted: - Balance sheet risks from weaker asset quality. - High exposure to the real estate sector could emerge, weighing on credit growth and limiting banks’ ability to support economic growth. - Recommendations: - Authorities are encouraged to request a Financial Sector Assessment Program (FSAP) update. - Swiftly address nonviable entities under the enhanced bankruptcy framework. - Continue to enhance the AML/CFT framework. - Ensure the DMF is transparent and well-coordinated with government issuance plans to enhance control of domestic monetary conditions and facilitate domestic capital market development. ### Staff appraisal — fiscal reforms and low-carbon transition - Fiscal reforms should be accelerated to ensure a smooth adjustment to a low-carbon future. - Rationale: - Strains from the crisis and a need to ensure financial wealth for future generations call for a gradual, but determined, fiscal consolidation. - Policy measures recommended: - Reforms to expand non-oil revenue and increase expenditure efficiency. - Establish credible medium-term fiscal frameworks. - Careful coordination of emirate and federal fiscal anchors. - Expand the mandate of the Fiscal Coordination Council. - Enhance the collection and dissemination of emirate- and federal-level fiscal data to improve transparency and governance. - Assess generous support to non-strategic GREs to promote private-sector-led growth and reduce fiscal burdens. ### Staff appraisal — structural reforms to raise potential growth - Prioritizing and sequencing the ambitious structural reform agenda would help lift productivity and potential growth. - Recommended reform areas: - Further improve the business environment. - Ensure a level playing field for all companies. - Harness benefits of digital solutions and fintech to attract high skilled talent and investment. - Continue to open the economy to trade and investment. - Modernize labor markets to boost female labor participation and deliver more efficient educational outcomes, particularly in science and technology. - Implementation requirements: - Enhanced integration of strategies and policies at different levels of government. - Increased collaboration across the individual emirates. - Ensure adequate coverage and quality of economic data, and timely collection and dissemination to support reforms. *Source: 1uaeea2022001 - 30.* ### 38. Staff recommend that the next Article IV consultation be held on the standard 12- ### Staff recommend that the next Article IV consultation be held on the standard 12-month cycle. ### Recent economic developments - Oil sector and activity: Figures present trends in Real GDP Growth for UAE, Abu Dhabi, and Dubai; Oil Output and Prices; Traffic at Dubai International Airport; Merchandise Goods Trade; Inflation Composition; and Residential Property Prices. - Data sources cited: Country authorities; OPEC; Haver Analytics; IMF Direction of Trade Statistics; and IMF staff estimates. - Time markers visible in charts include periods through 2021 and H1 2021. ### Real and fiscal sector developments and outlook - Figures show projections for Consumer Price Index (Y-o-y percentage change), Breakeven Oil price and WEO Brent oil price, Fiscal Balances (Adjusted non-oil primary balance and Overall fiscal balance), General Government Revenue and Expenditure (percent of GDP), and Real GDP and its oil and non-oil components. - Fiscal presentation notes: 1/ Excludes staff estimates of SWF investment income. - Charts display projection horizon through 2026. ### Monetary and financial sector developments - Financial indicators illustrated include stock market indices (MSCI EM Dubai, Abu Dhabi), Credit to GDP Gap and Log Credit to GDP, Credit Sentiment Survey net balance for All firms / Small and medium enterprises / Large firms, Long-term Bond Spreads (Abu Dhabi 2047 USD, Dubai 2043 USD, J P Morgan EMBIG Sovereign Spread), Banks' Net Foreign Assets (Billions of Dirham), and various interest rates (U.S. Fed funds rate, EIBOR (1-week), LIBOR (1-week), 1-week CD Rate, O/N Deposit Facility). - Sources: Country authorities; Haver Analytics; Bloomberg LP; and IMF staff calculations. - Credit Sentiment Survey note: Net balance is calculated as the weighted percentage of respondents reporting an increase in demand for loans (or tightening of credit standards) minus the weighted percentage of respondents reporting a decrease in demand for loans (or easing of credit standards). ### External sector developments - Export composition, current account balance components (Goods Trade Balance, Services Balance, Net Transfers and Income), top non-oil export partners and products, nominal and real effective exchange rates (NEER and REER), Real oil price (2010 US$/bbl), and Central Bank Reserves and FDI are charted with projections through 2026. - Sources: Country authorities; and IMF staff calculations and estimates. ### Competitiveness and governance indicators - Charts and indicators include Worldwide Governance Indicators (Voice & Accountability; Political Stability, No Violence; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption), TIMMS Student Performance Scores in Math and Science (2019), Fixed Broadband and Internet Usage (2020 or latest), Internet Speeds (2021), Human Capital Index (2020), and Patent applications per million population (2019). - Notes explain limitations of survey-based governance indicators and define the Human Capital Index. ### Key statistics and fiscal/financial tables (selected highlights from tables and notes) - Staff recommendation on consultation timing: standard 12-month cycle. - Table and data features include: Selected Economic Indicators (2016–26); Balance of Payments (2016–26); Government Finances (Consolidated, Central, Abu Dhabi, Dubai; 2016–26); Monetary Survey (2016–26); Maturing Bonds, Syndicated and Bilateral Loans in the Non-Financial Public Sector (as of October 15, 2021); Financial Soundness Indicators of the Banking Sector. - Monetary and external memorandum item explicitly notes: Excludes staff estimates of foreign assets of sovereign wealth funds; includes the SDR allocation of SDR 2.2 billion. - Debt maturity data reported "as of October 15, 2021" in Table 5. *Source: IMF staff report material (figures and tables) for the United Arab Emirates.* ### Annex I. Policy Measures Adopted and Announced in 2020–21 ### Annex I. Policy Measures Adopted and Announced in 2020–21 ### Fiscal, Monetary, and Financial Measures (UAE-wide and Emirate-level) - UAE-wide fiscal stimulus and relief: - (2020) UAE Cabinet launched economic stimulus package of AED 16bn (1.2 percent of UAE GDP) including exemptions, fee reductions, payment deferrals, subsidies, equity spending, and extended tax deadlines and payments; some measures extended until end-2021. - Emirate-level fiscal measures: - Abu Dhabi: - (2020) launched economic stimulus package of AED 9bn (0.7 percent of UAE GDP). - AFD pledged AED 1 bn to support Emirati-owned businesses. - Permitted commercial and industrial licensees to renew their investment activities’ licenses for a period of 3 years. - Reduces business setup fees by 94 percent. - Plans to invest AED 22 bn in its cultural and creative industries. - Dubai: - (2020) launched four economic stimulus packages of AED 6.8bn (0.5 percent of UAE GDP) to support the education and tourism sectors; reimburse of customs. - (2021) a fifth stimulus package of AED 315mn (0.02 percent of UAE GDP); rent relief for 1,500 businesses totaling AED 200mn; extended a three-year freeze on fees charged for certain government services until 2023. - Rolled out new measures in 2021 to support entrepreneurs. - Announced measures to improve business conditions. - Ras Al Khaimah: - Introduced an economic relief package of AED 50mn for SMEs and industrial companies; reduced trade license renewal fees by up to 50 percent (2020). - Plans to invest USD 136mn in tourism sector and launches e-gaming business package. - Sharjah: - Approved a stimulus package of AED 1bn (0.08 percent of UAE GDP) in 2020. - Established a framework of AED 4 bn (4 percent of Sharjah GDP) to enhance liquidity for the emirate’s banking system and to provide additional financial assistance to all impacted businesses. - CBUAE and monetary/financial support: - (2020) CBUAE announced the AED 256bn (19.5 percent of UAE GDP) Targeted Economic Support Scheme (TESS), providing a number of measures, including: - Zero-interest rate loans to banks, for deferrals (Deferral program: extended till end-2021) and new loans (Recovery program: extended till June 2022); TESS Deferral program provided support up to AED 56bn, of which about 20 percent for individuals and SMEs. - Capital, liquidity and stable funding relief through end-2021. - Reduced reserve requirements, Loan-To-Value ratio increase for first time home buyers (end date to be defined). - CBUAE reduced policy rate twice, by 125 basis points (2020). The policy rate was increased by 5 basis points in June 2021. ### Structural Measures and Reforms Announced (UAE-wide and Emirate-level) - UAE-wide structural reforms and policies: - Announced “Projects of the 50” agenda (2021) to boost trade and attract FDI, expand employment of nationals in the private sector, incentivize advance technology creation and adoption. - Modernized visa regulations and work permits: expanded “Golden Visa” for high-skilled, “Green Visa” for expats to sponsor themselves, freelancers visa, remote work visa, multiple-entry tourist visa, and others. - Grant citizenship to investors and professionals. - Allowed full foreign ownership of onshore firms. - Launched the national program to support the stability of the labor market. - Regulator requires listed companies to have at least one female on board. - Emirate-level structural measures: - Abu Dhabi: measures noted above (AFD pledge, license renewals, fee reductions, AED 22 bn cultural investment). - Dubai: announced measures to improve business conditions (see above). - Ras Al Khaimah: USD 136mn tourism investment and e-gaming package. ### Implementation Status of Past Fund Article IV Advice (Annex II) - Fiscal recommendations: - Develop a consolidated fiscal framework for the UAE. Status: In progress. Issuance of the first foreign currency federal bonds in October 2021. - Conduct a study assessing economic distortions from government fees and exploring alternative revenue models more conducive to SME development. Status: Not implemented. - Improve fiscal risk management: strengthen GREs’ reporting requirements; create a database of their financial indicators and public sector balance sheet. Status: Not implemented. - Monetary/Financial recommendations: - Design stringent stress testing scenarios, including for GREs. Status: In progress. Progress has been made to strengthen stress testing, including through a TA mission in July 2021. Further enhancements are planned. - Maintain prudential limits on bank lending to real estate. Status: In progress. Calibration of the new Framework for Bank’s Real Estate Exposure is ongoing. - Continue to strengthen AML/CFT regime. Status: In progress. The UAE has delivered several important legislative and institutional reforms. Further efforts are needed. - Develop domestic debt markets. Status: In progress. The implementation of the new Dirham Monetary Framework in 2021 provided initial support. Further development will arise from the planned issuance of domestic federal debt. - Structural recommendations: - Liberalize foreign investment outside of free zones. Status: Implemented. UAE allowed 100 percent foreign ownership of onshore companies in June 2021. - Bring GREs within the scope of competition laws. Status: Not implemented. - Bring government wages and allowances in line with those in the private sector to facilitate Emiratization. Status: In progress. In mid-2021, the authorities announced salary top-ups, training grants, pension subsidies and child allowances for Emiratis working in the private sector. - Strengthen the important role of SMEs by reducing costs to open a business. Status: In progress. Business setup fees in Abu Dhabi have been reduced by 90 percent since July 2021, and Dubai issued directives to reduce government procedures for doing business by 30 percent. - Building human capital. Status: In progress. New visa regulations have been launched to attract high-skill workers. Programs to develop domestic human capital have been announced. - Statistics recommendations: - Produce and publish external statistics. Status: In progress. TA has been requested. - Produce and publish quarterly GDP data. Status: In progress. An issue of timeliness needs to be addressed. ### Fiscal and Debt Sustainability Assessment — Key Findings (Annex III) - Long-term fiscal sustainability: - Current saving of exhaustible oil revenue is below the level needed to ensure intergenerational equity implied by the Permanent Income Hypothesis (PIH), indicating financial wealth is being eroded. - The gap between the non-oil primary budget deficit and the benchmark consistent with a constant real per capita annuity shrunk to 5.8 percent in 2020 but is expected to widen to about 7.6 percent in 2021. - On current policies, the gap is expected to gradually narrow to 5.8 percent of non-oil GDP in the medium term under the staff projections. - Debt developments and composition: - General government debt-to-GDP increased sharply in 2020 to 39.4 percent of GDP. - Abu Dhabi government debt increased in 2020 by 8.5 percent of UAE GDP to 27.3 percent of UAE GDP. - Dubai government debt increased in 2020 by 3.8 percent of UAE GDP to 12.1 percent of UAE GDP. - The share of Abu Dhabi foreign debt increased from about 16 percent of total Abu Dhabi debt in 2015 to about 50 percent in 2019-2020. - Abu Dhabi and Dubai extended the maturity of their overall debt profiles from about 5 years (median) in 2018 to above 10 years in 2020. - Dubai-specific risks: - Dubai government debt (including guarantees) rose to 12.1 percent of the UAE GDP in 2020 from 10.5 percent of GDP in 2019. - In the medium-term, large financing needs result from the expected repayment of $20 billion by the Dubai Financial Support Fund (DFSF). - Contingent liabilities and GREs: - Majority state-owned non-bank GREs’ debt is estimated at 32.3 percent of GDP in 2020. - Including GREs’ debt exposures brings UAE gross government debt to 71.7 percent of GDP in 2020, of which Abu Dhabi’s debt is about 45.2 percent of UAE GDP, and Dubai’s debt is 26.5 percent of UAE GDP. - For Dubai, once a contingent liability from a majority state-owned bank is taken into consideration, its debt ratio increases to 38.7 percent of UAE GDP. - UAE’s substantial sovereign foreign assets mitigate risks but data are unavailable for a more comprehensive DSA. - Medium-term outlook: - General government debt is expected to decline modestly over the medium-term with improved fiscal prospects from higher oil prices and oil production, largely driven by Abu Dhabi saving a large part of the projected oil windfall. - Dubai is expected to continue borrowing to roll-over debt amassed prior to 2020 and to finance ongoing diversification; increased borrowing will be only partly offset by higher growth starting from 2021. - Policy priorities to mitigate vulnerabilities: - Collect regular and timely 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 and 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). - Consider incorporating GREs in overall fiscal targets in the medium-term to promote greater fiscal discipline and transparency. ### Debt Sustainability Analysis — Projections and Stress Tests (Figures and Scenarios) - Baseline projections and key indicators (as of October 15, 2021): - Nominal gross government debt: 2019 = 19.0; 2020 = 27.1; 2021 = 39.4; 2022 = 39.3; 2023 = 40.4; 2024 = 40.1; 2025 = 39.3; 2026 = 38.1 (percent of GDP). - Real GDP growth (percent): 2019 = 3.8; 2020 = 3.4; 2021 = -6.1; 2022 = 2.2; 2023 = 3.5; 2024 = 3.6; 2025 = 3.7; 2026 = 3.9; 2027 = 4.0. - Inflation (GDP deflator, in percent): 2019 = 2.3; 2020 = -4.4; 2021 = -8.4; 2022 = 11.2; 2023 = 1.8; 2024 = 0.9; 2025 = 1.1; 2026 = 1.3; 2027 = 1.5. - Primary (noninterest) revenue and grants (percent of GDP): 2019 = 30.6; 2020 = 28.4; 2021 = 24.0; 2022 = 27.7; 2023 = 27.6; 2024 = 27.1; 2025 = 26.5; 2026 = 26.1; cumulative through 2026 = 160.7. - Primary (noninterest) expenditure (percent of GDP): 2019 = 30.1; 2020 = 29.4; 2021 = 31.7; 2022 = 30.2; 2023 = 29.9; 2024 = 29.1; 2025 = 28.4; 2026 = 27.6; cumulative through 2026 = 172.0. - Primary balance (percent of GDP): 2019 = -0.4; 2020 = 0.9; 2021 = 7.7; 2022 = 2.6; 2023 = 2.3; 2024 = 2.0; 2025 = 1.9; 2026 = 1.5; cumulative = 11.2. - Effective interest rate (percent): 2019 = 4.9; 2020 = 4.1; 2021 = 3.4; 2022 = 3.2; 2023 = 3.3; 2024 = 4.6; 2025 = 5.6; 2026 = 6.4; 2027 = 7.1. - Alternative scenario assumptions highlighted: - Historical Scenario: Real GDP growth = 3.0 each year 2021–2026; Primary balance = -0.5 each year 2021–2026. - Constant Primary Balance Scenario: Primary balance = -2.6 each year 2021–2026. - Stress test scenarios (Figure 4): - Oil Price Scenario (Oil price lower by $10 in 2022-26): - Real GDP growth path under oil price shock: 2021 = 2.2; 2022 = 0.0; 2023 = 0.2; 2024 = 0.3; 2025 = 0.4; 2026 = 0.6. - Primary balance under oil price shock: -2.6, -4.9, -4.7, -4.6, -4.1, -3.7 (2021–2026). - GRE Contingent Liability Scenario (20 percent of GRE debt is assumed to be taken over by the government in 2022-26): - Primary balance: -2.6, -3.6, -4.0, -4.1, -3.1, -2.4 (2021–2026). - Effective interest rate increases to 3.8, 5.6, 7.1, 7.8, 8.5 in later years (shown for projection years). - Combined Scenario (Oil price shock + GRE contingent liability): - Real GDP growth: 2.2, 0.0, 0.2, 0.3, 0.4, 0.6 (2021–2026). - Primary balance: -2.6, -6.2, -6.6, -6.8, -5.8, -5.1 (2021–2026). ### GREs’ Performance and Risks (Annex III Box I) - GREs’ economic role and size: - Government-related entities (GREs) represent a large share of the UAE economy; nonbank GREs assets in this sample stood at 112 percent of GDP in 2020. - GREs operate across many sectors, including financial services, real estate, utilities, transportation, tourism, and health and education. - GREs as a source of public-sector vulnerability: - GRE shocks can affect government budgets and balance sheets via lower profits (reducing taxes or dividends), provision of government support (loans, assuming liabilities, recapitalization), and meeting budget loans or guarantee calls. - GRE financial difficulties may reflect accumulation of losses and excessive leverage, undermining viability and potentially requiring government support. *Source: Annex I–III, “Annex I. Policy Measures Adopted and Announced in 2020–21”; “Annex II. Implementation of Past Fund Article IV Advice”; “Annex III. Fiscal and Debt Sustainability Assessments”; “Annex III Box I. UAE’s Government Related Entities’ Performance and Risks.”* ### 3. GRE financial performance has been adversely affected by the COVID-19 pandemic. ### 3. GRE financial performance has been adversely affected by the COVID-19 pandemic. ### GRE debt levels and composition - Abu Dhabi GREs’ debt increased by 32.1 percent between 2017 and 2020 to about $64.2 billion. - Dubai GREs’ debt decreased by 11 percent between 2017 and 2020 to $51 billion. - In 2020, staff estimates show Abu Dhabi GREs’ debt rose by 1.7 percentage points to 17.9 percent of GDP; Dubai GREs’ debt remained almost unchanged at 14.4 percent of GDP. - Since 2015, borrowing composition shifted from loans to bonds: - Bonds comprised 86 percent of new borrowing in public markets in 2020, compared to 15 percent during 2015–17. - Maturity structure lengthened: - Issuance with maturity longer than 10 years increased from 27 percent of total in 2015–17 to 62 percent in 2020. - Debt with maturity shorter than 5 years decreased from 19 percent of total to 2 percent between these periods. ### Short-term rollover exposures and risks - Combined short-term rollover exposure: $68.8 billion debt, including $51.9 billion of nonbank GRE debt due in 2021-23. - Staff estimates of debt maturing in 2021-23: - Dubai GREs: $31.8 billion. - Abu Dhabi GREs: $37 billion. - Tightening global financial conditions could make meeting these obligations challenging. ### Deterioration in GRE financial performance (SOEs Health Check findings) - Staff applied the IMF’s SOEs Health Check tool using a sample of 24 nonbank GREs with publicly available information. - The share of GREs with “high” and “very high” risk ratings increased sharply in 2020. - Despite TESS and government COVID-19 support measures, both: - The share of loss-making GREs increased in 2020. - GREs’ liquidity and solvency risks increased in 2020. ### Comparative performance and leverage metrics - UAE GREs compare as follows relative to medians for other groups: - Operate with higher returns on assets and equity than other UAE and GCC corporates, and higher margins than EMs. - Have experienced the fastest debt growth: median total debt-to-EBITDA rose from 3 in 2015-2017 to 4.4 in 2020. - Comparable increases over the same period: other UAE corporates +0.3; GCC corporates +0.8; EM corporates +0.06. - Exhibit better liquidity than other UAE corporates but the highest leverage among the four comparator groups. ### Debt servicing capacity and bank exposures - “Debt-at-risk” (debt with an interest coverage ratio (ICR) < 1.5 times) for nonbank GREs nearly doubled to about $30 billion in 2020 compared to 2019. - Some GREs show high leverage and returns on assets below 2 percent, indicating reduced debt servicing capacity. - Domestic bank credit to GREs increased to 17 percent of GDP in 2020 (about 14 percent of total domestic credit for the banking sector). - As a share of total loans, conventional banks are more involved in GRE lending than Islamic banks. - GREs account for about 14 percent of banks’ deposits. - Concentration risks are significant given GREs’ size, warranting careful and forward-looking monitoring. ### Risk scenarios and implications - A prolonged COVID-19 crisis or tighter global financial conditions could: - Increase GRE leverage and default probabilities. - Raise pressures on financial and fiscal accounts. - Heighten GRE rollover risks amid higher global interest rates and tighter financial conditions. - Bank concentration exposures to GREs could intensify risks to the banking sector if GRE vulnerabilities materialize. ### Policy recommendations and mitigation measures - Strengthen data, transparency, and reporting: - Collect regular and timely information on GREs for fiscal risk analysis, with formal reporting requirements. - Improve GREs’ financial disclosures; standardize accounting, auditing, and financial reporting practices. - Integrate GREs into public debt and fiscal risk management: - Control GREs’ leverage build-up and integrate them into the public debt management framework. - Enhance liquidity management and monitoring. - Continue to enhance macro- and micro-prudential frameworks. - Governance and efficiency measures: - Further strengthen corporate governance and transparency frameworks. - Develop performance-based contracts and consider increasing private sector participation in GRE capital and management. - Clearly delineate between GREs’ commercial and noncommercial operations and clarify support strategies. - Fiscal framework and oversight: - Implement prudent fiscal policies and build an integrated approach to mitigate contingent fiscal risks from GREs. - Strengthen monitoring and control over quasi-fiscal liabilities and increase transparency of GRE balance sheets. - Expose nonstrategic GREs to commercial practices and competition where appropriate. *Prepared by Hatim Bukhari and Yevgeniya Korniyenko; analysis based on IMF staff calculations and the IMF’s SOEs Health Check tool.* ### Annex VI. Sustainable Development Goals and Climate Change ### Annex VI. Sustainable Development Goals and Climate Change ### SDG progress and overall assessment - The UAE has made significant progress and is on track to fulfill important SDGs, including on health, education, and industry. - Indicators of gender equality and availability and affordability of clean energy are trending positively. - Additional efforts are needed in several areas, notably: - availability of clean water and sanitation, - responsible consumption and production, - climate action. - The UAE is actively tackling climate change through measures to reduce carbon emissions, develop resilient infrastructure, and invest in a new energy economy. ### Climate vulnerabilities and risks - Growing heat stress with rising temperatures is a main climate-related concern, affecting infrastructure, human health, and natural habitat. - Agriculture accounts for about 85 percent of total water consumption and is expected to be affected by climate change. - Agriculture and urbanization have increased pressure on non-renewable natural water sources, potentially creating a growing gap in water availability. - Critical infrastructures at risk include desalination and power stations; coastal habitats are at risk from rising sea levels. - UAE carbon emissions per capita remain 2.5 times larger than in OECD. ### Mitigation commitments, targets, and initiatives - National Climate Change Plan launched in 2017. - Second Nationally Determined Contribution (NDC) submitted in December 2020: - committed to an economy-wide emission reduction target of 23.5 percent relative to business-as-usual in 2030. - Net-zero carbon emission goal set for 2050, covering energy, transport, industry, waste, agriculture, and enhancement of carbon sinks. - The UAE is undertaking 14 projects for reducing the emissions of Greenhouse Gases (GHGs) under the umbrella of Clean Development Mechanism projects. - ADNOC has announced plans to reduce GHG emissions intensity by 25 percent by 2030 and to invest in sustainable desalination technologies and expand the share of renewable energy in the process. ### Adaptation frameworks and sectoral policies - National Adaptation Program and the Green Agenda 2030 guide green growth initiatives and enhance climate resilience, including: - construction and transportation sector resilience, - building adaptive capacity across public and private sectors. - UAE Water Security Strategy 2036 aims to: - reduce potable water consumption by 20 percent, - increase reuse of treated water to 95 percent by 2036. - National Food Security Strategy adopted in 2018 promotes climate-smart production methods and agri-tech innovation. - UAE Circular Economy Policy 2021-2031 promotes a regenerative economy and sustainable consumption and production. - A comprehensive climate law is being developed to support mainstreaming of climate objectives and to complement the National Climate Change Plan 2017–2050. ### National Energy Strategy and clean energy progress - National Energy Strategy 2050 targets: - increase share of clean energy to 50 percent of the installed power capacity mix by 2050, - reduce final energy demand by 40 percent by 2050. - Clean energy capacity growth: - from just above 100 megawatts (MW) in 2015, - to 2.4 GW in 2020. - Major projects and developments include solar, waste-to-energy projects, and the Barakah nuclear power plant; the country is on track to meet its energy targets. - UAE scored higher than the world average on 5 categories of the Energy Transition Index, with strong performance on Energy Access and Security. - The UAE is exploring low-carbon green and blue hydrogen development and seeks to establish itself as a green hydrogen hub; ADNOC plans to increase hydrogen production. - Dubai Electricity and Water Authority announced plans to stop building fossil fuel power plants and power the emirate’s electricity grid entirely with renewable energy by 2050. - The UAE aims to invest $163 billion in clean energy by 2050 under its 2050 Energy Strategy and Net-Zero goals. ### Linkages of climate action to SDGs - Climate- and sustainable-energy-related actions are directly relevant to: - SDG 13 Climate Action, - SDG 7 Affordable and Clean Energy. - The National Adaptation Program also contributes to: - SDG 9 Industry, Innovation and Infrastructure (sustainable and resilient infrastructure), - SDG 11 Sustainable Cities and Communities (cities' adaptation to climate change and disaster management), - SDG 14 Life Below Water (strengthening ecosystems' resilience), - SDG 15 Life On Land (sustainable use of terrestrial and inland freshwater ecosystems and combating desertification). *Prepared by Charlotte Sandoz, Hatim Bukhari, and Yevgeniya Korniyenko. Source: Annex VI. Sustainable Development Goals and Climate Change, UAE Staff Report informational annex.* ### 2008. In July 2018, the UAE launched a National ### 1uaeea2022001 - 2008. In July 2018, the UAE launched a National ### Overview - In July 2018, the UAE launched a National Summary Data Page (NSDP), becoming the first Gulf Cooperation Council (GCC) country to implement the recommendations of the Enhanced General Data Dissemination System (e-GDDS). - The UAE continues to work toward subscribing to the Special Data Dissemination Standards (SDDS). - No Data ROSC is available. ### Table of Common Indicators Required for Surveillance (As of October 13, 2021) — key entries and reporting metadata - Reference date: As of October 13, 2021. - Indicator: Exchange Rates - Date of latest observation: Real time - Date received: Real time - Frequency of Data: D - Frequency of Reporting: D - Frequency of publication: D - Indicator: International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Reserve/Base Money - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Broad Money - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Central Bank Balance Sheet - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Consolidated Balance Sheet of the Banking System - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Interest Rates - Date of latest observation: Real time - Date received: Real time - Frequency of Data: D - Frequency of Reporting: D - Frequency of publication: D - Indicator: Consumer Price Index - Date of latest observation: 08/2021 - Date received: 10/2021 - Frequency of Data: M - Frequency of Reporting: M - Frequency of publication: M - Indicator: Revenue, Expenditure, Balance and Composition of Financing – Central and General Government - Date of latest observation: 06/2021 - Date received: 10/2021 - Frequency of Data: Q - Frequency of Reporting: Q - Frequency of publication: Q - Indicator: Stocks of Central Government and Central Government-Guaranteed Debt - Date of latest observation: 12/2016 - Date received: 04/2018 - Frequency of Data: A - Frequency of Reporting: A - Frequency of publication: NA - Indicator: External Current Account Balance - Date of latest observation: 2020 - Date received: 04/2021 - Frequency of Data: A - Frequency of Reporting: A - Frequency of publication: A - Indicator: Exports and Imports of Goods and Services - Date of latest observation: 2020 - Date received: 04/2021 - Frequency of Data: A - Frequency of Reporting: A - Frequency of publication: A - Indicator: GDP/GNP - Date of latest observation: 2020 - Date received: 05/2021 - Frequency of Data: A - Frequency of Reporting: A - Frequency of publication: A - Indicator: Gross External Debt - Date of latest observation: ... - Date received: ... - Frequency of Data: NA - Frequency of Reporting: NA - Frequency of publication: NA - Indicator: International Investment Position - Date of latest observation: ... - Date received: ... - Frequency of Data: NA - Frequency of Reporting: NA - Frequency of publication: NA ### Explanatory notes (footnotes reproduced from source) - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I): Not Available (NA). - Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by means as well as the national values of derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. - Interest rates: Both market-based and officially determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds. - Revenue, expenditure, balance and composition of financing: Foreign, domestic bank, and domestic nonbank financing. - Stocks of central government and central government-guaranteed debt: Including currency and maturity composition. - International Investment Position: Includes external gross financial asset and liability positions vis-à-vis nonresidents. *Italic: UNITED ARAB EMIRATES — IMF document 1uaeea2022001 (excerpt as provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1uaeea2022001.pdf_