## 1. GDP Levels and Growth Rates Post-Pandemic

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### A. Introduction — crisis impact and opportunities
- Non-oil GDP contracted by 6.2 percent in 2020.
- SMEs in high-contact and job-rich sectors (construction, tourism, hospitality, and trade) were particularly hard-hit.
- UAE authorities enacted health and economic measures in 2020-21 to mitigate the pandemic’s impact.
- The recovery is projected to be gradual and faces pre-crisis headwinds from slowing productivity and employment growth.
- The UAE’s 50-year reform agenda emphasizes investment in human capital and advanced technology (including green technology), opening to foreign capital and trade integration, and broader use of digital infrastructure and fintech.

### B. Potential growth and channels for long-lasting damage
- Long-lasting effects defined as prolonged period of economic performance below pre-crisis projections.
- Possible lasting damage channels:
  - TFP losses and spillovers from severe declines in accommodation and food service, wholesale and retail trade, and construction (double-digit growth declines in 2020), with risks to “know-how,” resource allocation, competition, and firm investment in R&D and innovation.
  - Loss of human capital and labor force:
    - UAE population decreased by 2.3 percent in 2020 (the first decline in 20 years).
    - Employment declines have been significant among lower-skilled workers; uneven labor-market effects risk persistent income drops for women and youth.
    - The COVID-19 crisis accelerated automation and digitalization, adding labor market disruption and occupational/gender challenges.
  - Weak investment and resource misallocation: sector-specific stranded capital if high-contact sectors shrink persistently; increased corporate leverage could hamper future investments.
- Macroeconomic stimulus measures and a relatively high level of digitalization are mitigating some risks relative to many EMDEs.
- World output in the medium-term is expected to be about 3 percent lower in 2024 than pre-pandemic projections (as discussed in Chapter 2 of the April 2021 WEO).
- Countries reliant on tourism or high-contact sectors are expected to experience more persistent losses; the UAE’s high reliance on tourism and high-contact sectors underscores vulnerabilities to future global waves of the virus.

### C. Factors of production — empirical findings
- Non-oil potential growth has been on a downward trend over the past twenty years.
- Decomposition (Cobb-Douglas with constant labor share of 0.3; HP filter lambda = 300) attributes declines to:
  - Declining TFP contribution (particularly since the run-up to the Global Financial Crisis).
  - Increasingly lower contributions from labor.
  - A steady decline in capital stock over the entire period.

- TFP
  - Aggregate and firm-level analyses confirm a long-running decline in TFP growth among UAE companies.
  - UAE TFP growth declined by more relative to Germany, Singapore, or USA.
  - TFP growth decreased or remained unchanged for the last 10 years across firms.
  - Emirate heterogeneity: Dubai hosts more productive firms; Northern Emirates have higher density of lower-productive firms.
  - By sector: marketable services have more productive firms, followed by manufacturing and energy; non-marketable services are least productive.
  - Larger investments in intangible capital are correlated with higher TFP growth; higher leverage is associated with lower TFP.

- Labor and skills
  - Population and employment growth largely stagnated after the GFC, with slowdown in construction and oil activities.
  - Private sector reliance on low-skilled foreign labor: approximately 50 percent of males and 40 percent of females employed in elementary occupations, and as craft and related trades workers, plant and machine operators and assemblers.
  - UAE has the 7th highest net migration rate in the world at over 12 percent, and the highest gender imbalance in the world with a male/female ratio of 2.2 (or 2.75 for the 15-65 age group).
  - UAE ranks low on Economic Participation and Opportunity for women; female employment rate remains low.
  - UAE compares favorably regionally in human capital (TIMMS math and science) but lags Advance Economies; youth unemployment remains high.

- Capital, savings, and investment
  - Total capital stock per capita (PPP 2017 current $ per capita) decreased significantly since the 2000s, recovering only gradually after the GFC; UAE capital stock remains above OECD and Norway levels but is constrained by sustainability concerns.
  - National saving rate decreased after the GFC.
  - Investment rate has fluctuated at around 22 percent of GDP for the last 20 years.
  - Private sector investment dropped from around 16 percent of GDP in 2009 to just over 8 percent of GDP in 2019 and remains well below the OECD average of 20 percent.
  - Public investment has trended upward since 2000, hovering around 12 percent of GDP over the last five years; average public investment in OECD countries is around 3 percent of GDP.
  - Sectoral investment composition: majority of post-GFC investments directed to services and manufacturing; investment in these sectors remains lower than in AEs and has stagnated recently due to lower marketable services investment (transportation and storage, and trade).

### D. GREs’ role and financial indicators
- GREs represent a large share of the UAE economy (nonbank GREs assets amount to 112 percent of GDP in 2020 in the sample) and operate across many sectors (financial services, real estate, utilities, transportation, tourism, health, and education).
- GREs’ financial health relative to comparators:
  - GREs show higher return on assets and equity compared to other UAE and GCC corporates, and higher margins than EMs.
  - GRE debt has increased faster: median debt-to-EBITDA rose from 3 percent in 2015-2017 to 4.4 percent in 2020.
  - By comparison, median debt-to-EBITDA increased by 0.3 percent for other UAE corporates, 0.8 percent for GCC corporates, and 0.06 percent for EM corporates.
  - GREs have better liquidity than other UAE corporates but the highest leverage among the four comparator groups.
  - Overall: GREs have relatively low TFP growth, large contingent risks from high and increasing leverage, and comparatively low and declining liquidity and profitability.

### E. Implications for policy and structural reform priorities
- Sustained reform efforts are critical to achieve higher medium-term growth; reforms should aim to:
  - Reverse declining productivity trends (TFP) via support for intangible investment, R&D, and competition-enhancing measures.
  - Facilitate adjustment to a low-carbon future and promote green technology adoption.
  - Deliver a knowledge-based economy through investment in human capital, skills upgrading, and measures to attract high-skilled foreign labor.
  - Accelerate digitalization, fintech, and e-commerce to offset adverse productivity shocks and labor-market disruptions.
  - Address vulnerabilities from GRE concentration by improving corporate governance, monitoring contingent liabilities, and enhancing private sector investment incentives.
  - Prioritize reforms to boost private sector investment (targeting the persistent gap versus OECD private investment levels) and reduce resource misallocation.

### Increasing Productivity (section 7)
- Continue improving the business environment and competitiveness:
  - UAE has one of the most favorable business environments in the region and has undertaken substantial reforms to support SME development and their access to finance.
  - Recently announced reforms include 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 growth of start-ups — these should be fully implemented.
  - Further progress: reduce the costs to open a business, reduce further regressive government fees, and encourage business dynamism and start-ups.
  - Amendments to the UAE Bankruptcy Law should be fully deployed to address nonviable firms quickly and transparently.
- Ensure a level playing field for all companies:
  - Foster reallocation of resources to more productive sectors and firms (logistics, e-commerce, agri-tech, and clean-tech).
  - Consider commercializing nonstrategic GREs and bringing them within the 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 to ensure sustainability.
- Harness digital solutions and fintech:
  - Continue investments in broadening digital infrastructure to ensure access equally across Emirates and income levels.
  - Promote adoption of advanced technologies (cloud computing, Big Data and ML/AI, and 5G) and further SMEs digitalization.
  - Recent adoption of the UAE Data Law will support higher digitalization by protecting privacy and limiting entities’ use of personal data for profit.
  - Develop fintech sector and regulatory framework addressing risks arising from Fintech; regulation and supervision should balance risks and opportunities.
- Advance technology creation and adoption:
  - Consider welfare-improving government subsidies and funding of research and development in cutting edge technologies and encourage higher growth of ICT industries.
  - Government initiatives: Fourth Industrial Revolution Network project, Tech Drive program, and “Project 5Bn” to promote adoption of advanced technologies and entrepreneurship; implementation should be closely monitored to ensure efficiency.

### Modernizing the Labor Market
- Ensure more flexible and equitable labor markets:
  - More efficient and inclusive investments in education and training in emerging fields to enhance human capital and youth opportunities.
  - Modernization of visa and work permits to contribute to market flexibility 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 (upskilling, training/re-training programs), including for expatriate workers.
- Adopt gender-positive recovery policies and practices:
  - Female labor force participation declined by 5 ppts to 47 percent in 2020.
  - All legal restrictions on women’s work have been removed; gender wage equality for the public and private sectors is ensured under a 2019 cabinet resolution.
  - In 2020, the UAE became first Arab country to implement parental leave in both public and private sectors (with 3 paid months, and 5 paid days, respectively).
  - A gender quota was imposed on Federal National Council seats in 2020; women representation on publicly listed company boards has been required since 2021.
  - UAE ranked 18th under the UNDP Gender Inequality Index and 120th under the Global Gender Gap Index from the World Economic Forum.
  - Policies, including more progress through gender budgeting, are needed to address crisis impacts on female employment and gender balance.

### Investing in Green Energy and Future Infrastructure
- Sustainable and green infrastructure:
  - Progress under the 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 and build adaptive capacity across public and private sectors, especially utilities, construction, and transportation.
- Scaling up public and private capital for sustainable investments:
  - UAE 2050 Energy Strategy calls for additional investment of AED 600 billion by 2050 to meet growing energy demand and ensure sustainable growth.
  - The investment target of 25 percent of GDP set out in the UAE strategy seems appropriate given the UAE’s development level, structural characteristics, and external environment.
  - Public sector involvement should have an announced timeframe and a clear exit plan to avoid crowding-out private sector investors and foreign direct investments (FDI).

### Structural reforms: prioritization, sequencing, and coordination
- Reforms will need to be prioritized, sequenced, and better coordinated across emirates and different levels of government.
- IMF framework (IMF 2016) suggests prioritizing:
  - Product and labor market reforms,
  - Investments in R&D and infrastructure,
  - Fiscal structural reforms.
- Reforms to trade and FDI openness and improvement of government effectiveness have largest short-term benefits for multifactor productivity of 0.5 to 1 percent (see Annex II).
- Joint efforts on these reforms could potentially add up to 30 percent to long-term growth and up to 5 ppt to employment growth.
- Guiding framework elements:
  - Identify gaps: comparative economic strengths and existing structural reform gaps relative to UAE historical average and global best practices.
  - Estimate impacts: map announced and planned structural reforms (UAE 2050 Strategy, UAE Green Agenda 2030, UAE Energy Strategy 2050, SDGs) to desired improvements in TFP, labor, capital, and institutions; consider UAE cyclical position, complementarities and trade-offs.
  - Prioritize and sequence based on most lagging areas, cost-benefit analysis, timing of implementation and pay-off, and UAE-specific socio-economic, institutional, and political considerations.

### Estimating Potential Gains from Reforms — Illustrative Scenarios
- Baseline scenario:
  - Assumes TFP growth to average 0.5 percent in 2022-2026 (the authorities’ current target).
  - This would increase non-oil GDP growth to reach 3.6 percent in 2026 (from current level of 3.2 percent in 2021).
  - Higher capital accumulation of 0.3 ppts each year starting in 2022 could add another 0.6 ppts to growth of non-oil GDP by 2026, bringing it to above 4 percent in 2026.
  - The additional capital accumulation could be financed through expected FDI of $12 billion each year under the UAE’s 2050 strategy and increased government project financing.
  - This baseline scenario assumes average labor growth of 2.5 over 2022-2026, in line with October 2021 WEO projections.
- Upside scenario:
  - Assumes higher TFP growth (at the current level of advanced economies) and a higher labor growth rate (to the historical pre-GFC average) relative to the baseline.
  - Requires frontloading structural reforms to boost productivity and modernize the labor market.
  - In this upside scenario, non-oil GDP growth increases to above 5 percent of GDP by 2026.
- Scenarios are illustrative using Cobb-Douglas production function estimates and parameters for the 2000-2019 period.

### Conclusions and policy priorities
- Prioritizing and sequencing the ambitious structural reform agenda would help lift productivity and potential growth.
- Extend reform efforts to:
  - Further improve the business environment,
  - Ensure a level playing field for all companies,
  - Harness benefits of digital solutions and fintech,
  - Attract high skilled talent and investment.
- Continue opening the economy to trade and investment.
- Increased efforts to modernize labor markets are needed, including boosting female labor participation and delivering more efficient educational outcomes, particularly in science and technology.
- Policies should foster reallocation of resources to more productive sectors and firms.
- Achieving outcomes requires enhanced integration of strategies and policies at different levels of government and collaboration across the emirates.
- Ensure timely collection and dissemination of economic data to support reform efforts.

### Annex I. Key Structural Reforms Implemented and Announced During 2020–2021 (selected items)
- Major reforms and announcement dates:
  - September 2020: The UAE loosens Islamic laws on personal behavior.
  - December 2020: The UAE expands golden residency program.
  - March 2020: The UAE adopts remote work visa and multiple-entry tourist visa.
  - June 1, 2021: The UAE allows full foreign ownership of on-shore commercial companies.
  - June, 2021: Abu Dhabi plans to invest $6bn in cultural and creative industries (after already committing $2.3bn).
  - June, 2021: Dubai cut procedures for doing business by 30 percent.
  - July, 2021: Abu Dhabi reduced business setup fees by 94 percent.
- “Projects of the 50” (First 13 Projects) — September 5, 2021 highlights:
  - Green Visa; Freelancers Visa; Economic partnerships (increase trade volume by AED 40bn a year and double the national economy from Dh1.4 trillion to Dh3 trillion over the next decade).
  - UAE Data Law; 100 Coders Every Day (3,000 coders every month); PyCon Summit in H2 2022.
  - 4th Industrial Revolution Network: 500 national technology companies.
  - 10x10: 10 percent annual increase in exports in 10 key markets.
  - Invest.ae portal; Emirates Investment Summit (aim to attract AED 550 bn in FDI over the next nine years).
  - National In-Country Value Program: redirect more than 42 percent of procurement to local products and services by 2025.
  - Project 5bn: allocation of AED 5 bn to support Emirati projects.
  - Tech Drive: AED 5 bn program to support advanced technology adoption.
- Reforms to support employment of nationals in the private sector — September 12, 2021:
  - AED 24bn allocated to create 75,000 new private sector jobs for nationals.
  - AED 1bn fund to grant loans to fresh graduates and university students to start businesses.
  - Early retirement options with financial incentives to start businesses; temporary financial aid for six months for Emiratis who lose private sector jobs.
  - Firms given Emiratization targets–2 percent per annum for 5 years–to reach 10 percent.
  - Retirement fund for Emiratis in the private sector; monthly allowances of AED 800 per child per month, max AED 3,200.
  - Emiratis in specialized private sector fields to get AED 5,000 per month for 5 years.
  - Training support with Dh8,000 per month during training and Dh5,000 per month after training under the Nafis scheme.

### Annex II. Literature Survey: Structural Reforms and Their Short- and Long-Term Impacts (selected findings)
- Examples of reported impacts (preserving reported ranges and values):
  - Reduction in regulatory barriers to competition in network industries: Multifactor Productivity (in %): 0.53; Capital (K/Y) (in %): 6.5; Total effect on GDP (in %): 0.10 0.07 0.72 - 2.09 (reported across sources).
  - Reduction in regulatory barriers to entry in professional services and retail trade: Total effect on GDP (in %): 0.2 - 1.9 and 3.7 - 7.9 (reported ranges).
  - Shift in tax composition from direct to indirect sources: Multifactor Productivity (in %): 1.3 - 4.7; Capital (K/Y) (in %): 1 - 4.5.
  - Raising infrastructure investment or incentives for investment in knowledge-based capital: Multifactor Productivity (in %): 0.36 - 1.2; Labor (L/N) (in ppt): 0.57 - 0.9; Capital (K/Y) (in %): 0.28 to ~1.7.
  - Openness, FDI, technology spillovers: Multifactor Productivity (in %): 0.47 - 0.79; Capital (K/Y) (in %): 0.2 - 2.40.
  - Investment in human capital, decreasing a share of low-skilled workers: Multifactor Productivity (in %): 1.2 -11.3; Labor (L/N) (in ppt): 1.3 to ~2.3; Total effect on GDP (in %): 3.9 - 28.4.
  - Government effectiveness, public administration and judicial system reform: Multifactor Productivity (in %): ~1; Labor (L/N) (in ppt): 0.6 - 0.9; Total effect on GDP (in %): 1 to ~3.5 and 0.6 - 0.9 (reported ranges).

### New Dirham Monetary Framework (DMF)
- Objectives and rationale:
  - DMF endorsed in 2020 to strengthen monetary policy transmission and support capital market development.
  - Aims: align the overnight money market rate with the policy rate (set consistent with the currency peg); enhance CBUAE’s liquidity provision and management; foster capital market development through creation of a local currency short-term yield curve.
  - DMF implementation planned in steps until the first quarter of 2022.
  - DMF design took into account IMF technical assistance in 2017, 2018, and 2021 (liquidity forecasting).

- Key operational features:
  - Floor-rate corridor system anchored by Overnight Deposit Facility (ODF) — the Base Rate.
    - ODF instituted to deposit banks’ overnight excess liquidity.
    - Base Rate anchored to the US Federal Reserve’s Interest on Reserve Balances (IORB), replacing the 1-week CD rate.
    - ODF provides the effective interest rate floor for overnight money market rates.
  - Intraday Lending Facility (ILF) and Marginal Lending Facility (MLF) / Collateralized Mubarah Facility (CMF) provide intraday and overnight loans, respectively; loans are collateralized.
    - ILF access provided at a zero-interest rate (intraday only).
    - Rate on MLF/CMF provides the interest rate ceiling; initial corridor width was reduced from 100 to 50 bps on January 11, 2021 (MLF = Base rate plus 50 bps).
  - Reserve Requirements (RR)
    - RR ratios: 1 percent for time deposits (maturity from 7 days onward), and 14 percent for demand and saving deposits (the latter reduced to 7 percent as part of the TESS program in April 2020).
    - Same RR applies to both local and foreign currency deposits; fulfillment done in Dirham in both cases.
    - Reserves held for RR are not remunerated.
    - Reserve Maintenance Period extended from 7 to 14 days under the new DMF; RR can be averaged over the maintenance period.
    - Penalty rate applied on any shortfall: Base rate plus 400 bps.
  - Open market operations: structural and fine-tuning operations.
    - Structural liquidity absorbing operations via Monetary Bills (M-Bills), maximum maturity of one year.
    - M-Bills allotted with variable rate auction for primary dealers; CBUAE can set the maximum yield on M-Bills offered.
    - M-Bills can be traded on secondary markets; reverse transactions (lending against M-Bills as collateral) possible.
    - Fine-tuning operations via ad-hoc collateralized operations and FX transactions/swaps, conducted exclusively in USD.
  - Liquidity insurance facilities
    - Contingent liquidity insurance facility (back-stop) being implemented to provide term liquidity during exceptional stress against broader eligible collateral; access and rate at CBUAE discretion.

- Targeted implementation timeline (key milestones)
  - 2020Q2: Endorsement of the New Framework & Announcement of its Implementation Timetable to the Market.
  - 2020Q3: Introduce the Overnight Deposit Facility –ODF.
  - 2021Q4: Develop a Liquidity Forecasting Function.
  - 2020Q4: Inauguration of the M-Bills Program.
  - 2021Q1: Introduce the Intraday Lending Facility –ILF.
  - 2021Q3: Restructure the Standing Credit Facilities –MLF/CMF and Introduce the Contingent Liquidity Insurance Facility –CLIF.
  - 2021Q4: Introduce Fine-tuning Open Market Operations.
  - 2022Q1: Establish New Indices to Support the Dirham Monetary Framework.

- Implementation outcomes and market reception:
  - Transition to the new framework has been smooth and well received by market participants.
  - Banks welcomed the framework and did not encounter major difficulties in initial transition to standing facilities and M-Bills issuance.
  - Money market rates remained calm during implementation.
    - Before ODF introduction, CBUAE lowered the policy rate cumulatively by 125 bps and introduced the TESS support package in response to COVID-19.
    - Lowering of RR helped ensure smooth money market conditions.
    - Since ODF introduction, overnight rates have remained close to the Base rate.
    - CBUAE increased the Base rate by 5 bps on June 17, 2021 to align with the US IOER; overnight rates moved accordingly.
    - Volatility of the Emirates Interbank Offered Rate (EIBOR) overnight decreased since ODF introduction.
    - After corridor reduction from 100 to 50 bps on January 11, 2021, EIBOR overnight kept slightly closer to the MLF.

- New money market indices:
  - CBUAE planning to transition from EIBOR to Dirham Overnight Index Average (DONIA) as benchmark for overnight money market rates.
    - DONIA: a volume-weighted average rate based on actual overnight transactions; will be published daily.
    - Computation of DONIA already started; role as benchmark will be phased in gradually.
  - CBUAE planning to introduce a new Cost of Fund Index, a composite money market rate; implementation activities ongoing.

- M-Bills issuance and market development:
  - M-Bills first issued on January 11, 2021.
  - As of end-September 2021:
    - cumulative amount of M-Bills issued reached 260 bn AED;
    - of which 150 bn AED have already matured;
    - leaving about 110bn AED of outstanding M-Bills.
  - M-Bills issued at 1, 3, 6 and 12-month tenors, with 6-month tenor having the largest issued amount.
  - Secondary market transactions remain infrequent but expected to become more frequent as the market develops.
  - M-Bills rates:
    - 1-month M-Bills issuance rate stayed close to Base Rate.
    - Risk premium (difference with 1-month US T-Bill) amounts to around 10 bps.
    - 1-month rate shifted by 5 bps as Base rate increased by 5 bps, evidencing tight connection between monetary stance and monetary conditions.
    - Slope of yield curve (12- minus 1-month rate) is contained, indicating no expectations of short-term change in monetary stance and ample liquidity.
    - Pass-through to 12-month rate has been strong.
    - On-the-run and off-the-run effects seem absent, possibly due to tap issuances and underdeveloped market.

- DMF and capital market development considerations:
  - M-Bills expected to promote development of a secondary market in UAE Dirham securities.
    - M-Bills auctioned and traded through Bloomberg and Euroclear, increasing transparency of liquidity conditions and monetary policy transmission.
    - M-Bills rates will provide the risk-free rate for short-term assets and facilitate price discovery and issuance of similarly denominated securities.
  - Planned issuance of local market federal debt (maturities longer than one year) will complete the yield curve but requires coordination with government.
    - CBUAE will be the issuing agent of federal debt; proceeds initially deposited in the government account at the CBUAE, impacting central bank balance sheet, estimation of autonomous factors, issuance of M-Bills and money market conditions.
    - Choice of remuneration rate of the government account is consequential: remuneration at a rate lower than ODF rate decreases efficacy of the Base rate as a floor to money market rates.
    - A clear framework defining rates on the government account and communication procedures for significant flows in and out of the account should be set up; this framework should apply also to emirates’ government accounts.

- Recommended ongoing actions and risks:
  - Continued attention to liquidity estimation and M-Bills secondary market development is needed.
    - Market surveillance, intraday control of money market activity, robust estimation of liquidity forecasts, and readiness to employ all available tools are required to maintain calm conditions in the face of shocks.
    - Authorities should follow liquidity and trading in the M-Bills market to ensure incentives are right for its development.
  - Online publication by authorities of the description of the new DMF, together with key data on standing facilities, open market operations, and rates, will enhance transparency, communication, and trust in the framework.

*UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND*

### 1. GDP Levels and Growth Rates Post-Pandemic ____________________________________________ 5

### 1. GDP Levels and Growth Rates Post-Pandemic

### A. Introduction — crisis impact and opportunities
- Non-oil GDP contracted by 6.2 percent in 2020.
- SMEs in high-contact and job-rich sectors (construction, tourism, hospitality, and trade) were particularly hard-hit.
- UAE authorities enacted health and economic measures in 2020-21 to mitigate the pandemic’s impact.
- The recovery is projected to be gradual and faces pre-crisis headwinds from slowing productivity and employment growth.
- The UAE’s 50-year reform agenda emphasizes investment in human capital and advanced technology (including green technology), opening to foreign capital and trade integration, and broader use of digital infrastructure and fintech.

### B. Potential growth and channels for long-lasting damage
- Long-lasting effects are defined as prolonged period of economic performance below pre-crisis projections.
- Possible lasting damage channels:
  - TFP losses and spillovers from severe declines in accommodation and food service, wholesale and retail trade, and construction (double-digit growth declines in 2020), with risks to “know-how,” resource allocation, competition, and firm investment in R&D and innovation.
  - Loss of human capital and labor force:
    - UAE population decreased by 2.3 percent in 2020 (the first decline in 20 years).
    - Employment declines have been significant among lower-skilled workers; uneven labor-market effects risk persistent income drops for women and youth.
    - The COVID-19 crisis accelerated automation and digitalization, adding labor market disruption and occupational/gender challenges.
  - Weak investment and resource misallocation: sector-specific stranded capital if high-contact sectors shrink persistently; increased corporate leverage could hamper future investments.
- Macroeconomic stimulus measures and a relatively high level of digitalization are mitigating some risks relative to many EMDEs.
- As discussed in Chapter 2 of the April 2021 WEO, world output in the medium-term is expected to be about 3 percent lower in 2024 than pre-pandemic projections.
- Countries reliant on tourism or high-contact sectors are expected to experience more persistent losses; the UAE’s high reliance on tourism and high-contact sectors underscores vulnerabilities to future global waves of the virus.

### C. Factors of production — empirical findings
- Non-oil potential growth has been on a downward trend over the past twenty years.
- Decomposition (Cobb-Douglas with constant labor share of 0.3; HP filter lambda = 300) attributes declines to:
  - Declining TFP contribution (particularly since the run-up to the Global Financial Crisis).
  - Increasingly lower contributions from labor.
  - A steady decline in capital stock over the entire period.

- TFP
  - Aggregate and firm-level analyses confirm a long-running decline in TFP growth among UAE companies.
  - UAE TFP growth declined by more relative to Germany, Singapore, or USA.
  - TFP growth decreased or remained unchanged for the last 10 years across firms.
  - Emirate heterogeneity: Dubai hosts more productive firms; Northern Emirates have higher density of lower-productive firms.
  - By sector: marketable services have more productive firms, followed by manufacturing and energy; non-marketable services are least productive.
  - Larger investments in intangible capital are correlated with higher TFP growth; higher leverage is associated with lower TFP.

- Labor and skills
  - Population and employment growth largely stagnated after the GFC, with slowdown in construction and oil activities.
  - Private sector reliance on low-skilled foreign labor: approximately 50 percent of males and 40 percent of females employed in elementary occupations, and as craft and related trades workers, plant and machine operators and assemblers.
  - UAE has the 7th highest net migration rate in the world at over 12 percent, and the highest gender imbalance in the world with a male/female ratio of 2.2 (or 2.75 for the 15-65 age group).
  - UAE ranks low on Economic Participation and Opportunity for women; female employment rate remains low.
  - UAE compares favorably regionally in human capital (TIMMS math and science) but lags Advance Economies; youth unemployment remains high.

- Capital, savings, and investment
  - Total capital stock per capita (PPP 2017 current $ per capita) decreased significantly since the 2000s, recovering only gradually after the GFC; UAE capital stock remains above OECD and Norway levels but is constrained by sustainability concerns.
  - National saving rate decreased after the GFC.
  - Investment rate has fluctuated at around 22 percent of GDP for the last 20 years.
  - Private sector investment dropped from around 16 percent of GDP in 2009 to just over 8 percent of GDP in 2019 and remains well below the OECD average of 20 percent.
  - Public investment has trended upward since 2000, hovering around 12 percent of GDP over the last five years; average public investment in OECD countries is around 3 percent of GDP.
  - Sectoral investment composition: majority of post-GFC investments directed to services and manufacturing; investment in these sectors remains lower than in AEs and has stagnated recently due to lower marketable services investment (transportation and storage, and trade).

### D. GREs’ role and financial indicators
- GREs represent a large share of the UAE economy (nonbank GREs assets amount to 112 percent of GDP in 2020 in the sample) and operate across many sectors (financial services, real estate, utilities, transportation, tourism, health, and education).
- GREs’ financial health relative to comparators:
  - GREs show higher return on assets and equity compared to other UAE and GCC corporates, and higher margins than EMs.
  - GRE debt has increased faster: median debt-to-EBITDA rose from 3 percent in 2015-2017 to 4.4 percent in 2020.
  - By comparison, median debt-to-EBITDA increased by 0.3 percent for other UAE corporates, 0.8 percent for GCC corporates, and 0.06 percent for EM corporates.
  - GREs have better liquidity than other UAE corporates but the highest leverage among the four comparator groups.
  - Overall: GREs have relatively low TFP growth, large contingent risks from high and increasing leverage, and comparatively low and declining liquidity and profitability.

### E. Implications for policy and structural reform priorities
- Sustained reform efforts are critical to achieve higher medium-term growth; reforms should aim to:
  - Reverse declining productivity trends (TFP) via support for intangible investment, R&D, and competition-enhancing measures.
  - Facilitate adjustment to a low-carbon future and promote green technology adoption.
  - Deliver a knowledge-based economy through investment in human capital, skills upgrading, and measures to attract high-skilled foreign labor.
  - Accelerate digitalization, fintech, and e-commerce to offset adverse productivity shocks and labor-market disruptions.
  - Address vulnerabilities from GRE concentration by improving corporate governance, monitoring contingent liabilities, and enhancing private sector investment incentives.
  - Prioritize reforms to boost private sector investment (targeting the persistent gap versus OECD private investment levels) and reduce resource misallocation.

*Source: 1uaeea2022002 - 1. GDP Levels and Growth Rates Post-Pandemic (UNITED ARAB EMIRATES, INTERNATIONAL MONETARY FUND, November 8, 2021).*

### 7.      To boost growth and productivity, government structural reform efforts should be

### 7.      To boost growth and productivity, government structural reform efforts should be

### Increasing Productivity
- Continue improving the business environment and competitiveness:
  - UAE has one of the most favorable business environments in the region and has undertaken substantial reforms to support SME development and their access to finance.
  - Recently announced reforms include 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 growth of start-ups — these should be fully implemented.
  - Further progress: reduce the costs to open a business, reduce further regressive government fees, and encourage business dynamism and start-ups.
  - Amendments to the UAE Bankruptcy Law should be fully deployed to address nonviable firms quickly and transparently.
- Ensure a level playing field for all companies:
  - Foster reallocation of resources to more productive sectors and firms (logistics, e-commerce, agri-tech, and clean-tech).
  - Consider commercializing nonstrategic GREs and bringing them within the 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 to ensure sustainability.
- Harness digital solutions and fintech:
  - Continue investments in broadening digital infrastructure to ensure access equally across Emirates and income levels.
  - Promote adoption of advanced technologies (cloud computing, Big Data and ML/AI, and 5G) and further SMEs digitalization.
  - Recent adoption of the UAE Data Law will support higher digitalization by protecting privacy and limiting entities’ use of personal data for profit.
  - Develop fintech sector and regulatory framework addressing risks arising from Fintech; regulation and supervision should balance risks and opportunities.
- Advance technology creation and adoption:
  - Consider welfare-improving government subsidies and funding of research and development in cutting edge technologies and encourage higher growth of ICT industries.
  - Government initiatives: Fourth Industrial Revolution Network project, Tech Drive program, and “Project 5Bn” to promote adoption of advanced technologies and entrepreneurship; implementation should be closely monitored to ensure efficiency.

### Modernizing the Labor Market
- Ensure more flexible and equitable labor markets:
  - More efficient and inclusive investments in education and training in emerging fields to enhance human capital and youth opportunities.
  - Modernization of visa and work permits to contribute to market flexibility 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 (upskilling, training/re-training programs), including for expatriate workers.
- Adopt gender-positive recovery policies and practices:
  - Female labor force participation declined by 5 ppts to 47 percent in 2020.
  - All legal restrictions on women’s work have been removed; gender wage equality for the public and private sectors is ensured under a 2019 cabinet resolution.
  - In 2020, the UAE became first Arab country to implement parental leave in both public and private sectors (with 3 paid months, and 5 paid days, respectively).
  - A gender quota was imposed on Federal National Council seats in 2020; women representation on publicly listed company boards has been required since 2021.
  - UAE ranked 18th under the UNDP Gender Inequality Index and 120th under the Global Gender Gap Index from the World Economic Forum.
  - Policies, including more progress through gender budgeting, are needed to address crisis impacts on female employment and gender balance.

### Investing in Green Energy and Future Infrastructure
- Sustainable and green infrastructure:
  - Progress under the 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 and build adaptive capacity across public and private sectors, especially utilities, construction, and transportation.
- Scaling up public and private capital for sustainable investments:
  - UAE 2050 Energy Strategy calls for additional investment of AED 600 billion by 2050 to meet growing energy demand and ensure sustainable growth.
  - The investment target of 25 percent of GDP set out in the UAE strategy seems appropriate given the UAE’s development level, structural characteristics, and external environment.
  - Public sector involvement should have an announced timeframe and a clear exit plan to avoid crowding-out private sector investors and foreign direct investments (FDI).

### Structural reforms: prioritization, sequencing, and coordination
- Reforms will need to be prioritized, sequenced, and better coordinated across emirates and different levels of government.
- IMF framework (IMF 2016) suggests prioritizing:
  - Product and labor market reforms,
  - Investments in R&D and infrastructure,
  - Fiscal structural reforms.
- Reforms to trade and FDI openness and improvement of government effectiveness have largest short-term benefits for multifactor productivity of 0.5 to 1 percent (see Annex II).
- Joint efforts on these reforms could potentially add up to 30 percent to long-term growth and up to 5 ppt to employment growth.
- Guiding framework elements:
  - Identify gaps: comparative economic strengths and existing structural reform gaps relative to UAE historical average and global best practices.
  - Estimate impacts: map announced and planned structural reforms (UAE 2050 Strategy, UAE Green Agenda 2030, UAE Energy Strategy 2050, SDGs) to desired improvements in TFP, labor, capital, and institutions; consider UAE cyclical position, complementarities and trade-offs.
  - Prioritize and sequence based on most lagging areas, cost-benefit analysis, timing of implementation and pay-off, and UAE-specific socio-economic, institutional, and political considerations.

### Estimating Potential Gains from Reforms — Illustrative Scenarios
- Two illustrative scenarios assess impacts of announced and planned structural reforms on medium-term non-oil growth.
- Baseline scenario:
  - Assumes TFP growth to average 0.5 percent in 2022-2026 (the authorities’ current target).
  - This would increase non-oil GDP growth to reach 3.6 percent in 2026 (from current level of 3.2 percent in 2021).
  - Higher capital accumulation of 0.3 ppts each year starting in 2022 could add another 0.6 ppts to growth of non-oil GDP by 2026, bringing it to above 4 percent in 2026.
  - The additional capital accumulation could be financed through expected FDI of $12 billion each year under the UAE’s 2050 strategy and increased government project financing.
  - This baseline scenario assumes average labor growth of 2.5 over 2022-2026, in line with October 2021 WEO projections.
- Upside scenario:
  - Assumes higher TFP growth (at the current level of advanced economies) and a higher labor growth rate (to the historical pre-GFC average) relative to the baseline.
  - Requires frontloading structural reforms to boost productivity and modernize the labor market.
  - In this upside scenario, non-oil GDP growth increases to above 5 percent of GDP by 2026.
- Scenarios are illustrative using Cobb-Douglas production function estimates and parameters for the 2000-2019 period.

### Conclusions and policy priorities
- Prioritizing and sequencing the ambitious structural reform agenda would help lift productivity and potential growth.
- Extend reform efforts to:
  - Further improve the business environment,
  - Ensure a level playing field for all companies,
  - Harness benefits of digital solutions and fintech,
  - Attract high skilled talent and investment.
- Continue opening the economy to trade and investment.
- Increased efforts to modernize labor markets are needed, including boosting female labor participation and delivering more efficient educational outcomes, particularly in science and technology.
- Policies should foster reallocation of resources to more productive sectors and firms.
- Achieving outcomes requires enhanced integration of strategies and policies at different levels of government and collaboration across the emirates.
- Ensure timely collection and dissemination of economic data to support reform efforts.

*UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND*

### Annex I. Key Structural Reforms Implemented and

### Annex I. Key Structural Reforms Implemented and Announced During 2020–2021

### Major structural reforms and announcement dates
- September 2020: The UAE loosens Islamic laws on personal behavior.
- December 2020: The UAE expands golden residency program.
- March 2020: The UAE adopts remote work visa and multiple-entry tourist visa.
- June 1, 2021: The UAE allows full foreign ownership of on-shore commercial companies.
- June, 2021: Abu Dhabi plans to invest $6bn in cultural and creative industries (after already committing $2.3bn).
- June, 2021: Dubai cut procedures for doing business by 30 percent.
- July, 2021: Abu Dhabi reduced business setup fees by 94 percent.

### “Projects of the 50” (First 13 Projects) — September 5, 2021
- Green Visa: expands self-residency options to investors, entrepreneurs, highly-skilled individuals, etc.
- Freelancers Visa: will allow self-employed workers to sponsor themselves.
- Economic partnerships: aims to increase trade volume with 8 key global markets by AED 40bn a year and double the size of the national economy from Dh1.4 trillion to Dh3 trillion over the next decade.
- UAE Data Law: aims to protect individuals’ privacy and limit the commercial use of personal data for profit.
- 100 Coders Every Day: aims to attract 3,000 coders every month, to facilitate the establishment of programming companies in the UAE through a set of incentives and benefits.
- PyCon Summit: in H2 2022, the UAE will host PyCon Summit to help develop digital talent and expertise, inspire innovative technology projects, and connect programmers with firms.
- 4th Industrial Revolution Network: 500 national technology companies will be set up and promoted.
- 10x10: aims to achieve a 10 percent annual increase in the country’s exports in 10 key markets: China, the UK, the Netherlands, Italy, Russia, Poland, Luxembourg, Australia, New Zealand and Indonesia.
- Invest.ae: a new electronic portal that will act as an umbrella for all investment-related local entities and 14 state economic entities.
- Emirates Investment Summit: the UAE will host the Emirates Investment Summit, with aim is to attract AED 550 bn in foreign direct investment over the next nine years.
- National In-Country Value Program: aims to redirecting more than 42 percent of procurement of the fed. gov. and major UAE firms to local products and services by 2025.
- Project 5bn: the allocation of AED 5 bn to support Emirati projects in priority sectors.
- Tech Drive: AED 5 bn program, jointly with the EDB, will support advanced technology adoption in the industrial sector.

### Reforms to support employment of nationals in the private sector — September 12, 2021
- an investment of AED 24bn had been allocated to create 75,000 new private sector jobs for nationals;
- an AED 1bn fund will grant loans to fresh graduates and university students to start their own businesses;
- UAE nationals employed in the private sector have the option to retire early in order to start their own businesses. Early retirees will be given financial incentive to pursue their entrepreneurial dreams;
- temporary financial aids for Emiratis who lose their jobs in the private sector due to circumstances beyond their control: they will be supported for six months as they search for a job;
- firms have been given Emiratization targets–2 percent per annum for 5 years–to reach 10 percent;
- announced a retirement fund for Emiratis in the private sector;
- monthly allowances will be given to Emirati parents in the private sector to raise their children: AED 800 per child per month, with a maximum of AED 3,200;
- Emiratis in specialized private sector fields will get paid an additional AED 5,000 per month for 5 years;
- Minister of Cabinet Affairs said the government will bear the cost of training Emiratis for the private sector. During this period, university graduates will be paid Dh8,000 per month. After the training, they will be given Dh5,000 per month in addition to their salaries;
- The scheme—called Nafis—designed to boost the employment of nationals in the private sector.

*Sources: Country authorities and news outlets.*

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### Annex II. Literature Survey: Structural Reforms and Their Short- and Long-Term Impacts

### Framework and measurement note
- GDP is measured as GDP per capita, real GDP in constant prices, or GDP growth. The impact ranges depending on the measure used in the research paper or on the time-horizon considered.
- For example, regulatory barriers to competition in network industries measured by OECD’s Energy, Transport and Communication Regulation (ETCR) indicator.
- Percent deviations from baseline reported in some studies.

### Examples of selected structural reforms and reported impacts (selected entries)
- Reduction in regulatory barriers to competition in network industries
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.53
  - Labor (L/N) (in ppt): -
  - Capital (K/Y) (in %): 6.5
  - Total effect on GDP (in %): 0.10 0.07 0.72 - 2.09 (reported across sources)
  - Sources: Sanchez (2016), Égert (2017, 2018), Cette (2013), OECD (2015), Bouis (2011, 2012)

- Reduction in regulatory barriers to entry in professional services and retail trade; reducing intermediate firms' entry barriers
  - Short-term effect on demand: Increase
  - Impact on supply side components: No effect or negative
  - Total effect on GDP (in %): 0.2 - 1.9 and 3.7 - 7.9 (reported ranges)
  - Sources: Sanchez (2016), Rono (2020), De Haan (2018), Varga (2013)

- Shift in tax composition from direct to indirect sources
  - Short-term effect on demand: Small increase
  - Multifactor Productivity (in %): 1.3 - 4.7 (reported)
  - Capital (K/Y) (in %): 1 - 4.5 (reported)
  - Sources: Sanchez (2016), Varga (2013)

- Reform of collective wage bargaining arrangement and minimum wages
  - Short-term effect on demand: Small increase
  - Multifactor Productivity (in %): 0.06
  - Labor (L/N) (in ppt): -0.32
  - Total effect on GDP (in %): 0.09 - 0.70
  - Sources: Sanchez (2016), Égert (2018)

- Easing of employment protection legislation on regular contract
  - Short-term effect on demand: No effect or small increase
  - Multifactor Productivity (in %): 0.07
  - Labor (L/N) (in ppt): 0.24
  - Capital (K/Y) (in %): 0.22
  - Total effect on GDP (in %): - 1.83
  - Sources: Sanchez (2016), Égert (2018), Bouis (2011, 2012)

- Reform of unemployment benefits
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.21
  - Labor (L/N) (in ppt): 0.31
  - Total effect on GDP (in %): -0.6
  - Sources: Sanchez (2016), Égert (2018), De Haan (2018), Bouis (2011, 2012)

- Strengthening of job search assistance, training and wage subsidy programs
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.09
  - Labor (L/N) (in ppt): 0.25
  - Capital (K/Y) (in %): 0.46
  - Total effect on GDP (in %): - 0.85
  - Sources: Sanchez (2016), Égert (2018), Bouis (2011, 2012)

- Reforms of pension systems: Increasing retirement ages; Reducing benefits or raising contributions
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.06
  - Labor (L/N) (in ppt): 0.10
  - Total effect on GDP (in %): -0.14
  - Sources: Sanchez (2016), Égert (2018), Bouis (2011, 2012)

- Raising infrastructure investment or incentives for investment in knowledge-based capital, including through infrastructure spending
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.36 - 1.2
  - Labor (L/N) (in ppt): 0.57 - 0.9
  - Capital (K/Y) (in %): 0.28 to ~1.7
  - Sources: Sanchez (2016), Égert (2018), Rono (2020)

- Openness, FDI, technology spillovers
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.47 - 0.79
  - Capital (K/Y) (in %): 0.2 - 2.40
  - Sources: Égert (2017, 2018), Rono (2020)

- R&D expenditures investment in ICT and intangible capital, R&D subsidy
  - Short-term effect on demand: No effect or small increase
  - Multifactor Productivity (in %): 0.09
  - Total effect on GDP (in %): -0.2 and 0.09 - 0.46 and 0-1.4 (reported ranges)
  - Sources: Égert (2017, 2018), De Serres (2014), Demmou (2021), Varga (2013), Cette (2013)

- Family benefits in kind
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.11
  - Labor (L/N) (in ppt): 0.17 - 0.24
  - Sources: Égert (2018)

- Maternity leave weeks
  - Multifactor Productivity (in %): 0.28
  - Labor (L/N) (in ppt): 0.42 - 0.61
  - Sources: Égert (2018)

- Government effectiveness, public administration and judicial system reform
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): ~1
  - Labor (L/N) (in ppt): 0.6 - 0.9
  - Total effect on GDP (in %): 1 to ~3.5 and 0.6 - 0.9 (reported ranges)
  - Sources: Rovo (2020), Rodriguez-Pose (2019), OECD (2015), Égert (2017)

- Investment in human capital, decreasing a share of low-skilled workers
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 1.2 -11.3
  - Labor (L/N) (in ppt): 1.3 to ~2.3
  - Total effect on GDP (in %): 3.9 - 28.4
  - Sources: Rovo (2020), Martins (2019), Lutz (2008), Varga (2013)

- Labor market reforms
  - Short-term effect on demand: Increase
  - Multifactor Productivity (in %): 0.1
  - Labor (L/N) (in ppt): 0.5 - 1.3
  - Capital (K/Y) (in %): 0.6 - 1.2
  - Sources: OECD (2015), De Haan (2018)

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### New Dirham Monetary Framework (DMF)

### Objectives and rationale
- DMF endorsed in 2020 to strengthen monetary policy transmission and support capital market development.
- Aims:
  - align the overnight money market rate with the policy rate, set at a level consistent with the currency peg;
  - enhance CBUAE’s liquidity provision and management, and allow banks to pro-actively manage their liquidity;
  - foster capital market development through creation of a local currency short-term yield curve.
- DMF implementation planned in steps until the first quarter of 2022.
- DMF design took into account IMF technical assistance in 2017, 2018, and 2021 (liquidity forecasting).

### Key operational features
- Floor-rate corridor system anchored by Overnight Deposit Facility (ODF) — the Base Rate.
  - ODF instituted to deposit banks’ overnight excess liquidity.
  - Base Rate anchored to the US Federal Reserve’s Interest on Reserve Balances (IORB), replacing the 1-week CD rate.
  - ODF provides the effective interest rate floor for overnight money market rates.
- Intraday Lending Facility (ILF) and Marginal Lending Facility (MLF) / Collateralized Mubarah Facility (CMF) provide intraday and overnight loans, respectively; loans are collateralized.
  - ILF access provided at a zero-interest rate (intraday only).
  - Rate on MLF/CMF provides the interest rate ceiling; initial corridor width was reduced from 100 to 50 bps on January 11, 2021 (MLF = Base rate plus 50 bps).
- Reserve Requirements (RR)
  - RR ratios: 1 percent for time deposits (maturity from 7 days onward), and 14 percent for demand and saving deposits (the latter reduced to 7 percent as part of the TESS program in April 2020).
  - Same RR applies to both local and foreign currency deposits; fulfillment done in Dirham in both cases.
  - Reserves held for RR are not remunerated.
  - Reserve Maintenance Period extended from 7 to 14 days under the new DMF; RR can be averaged over the maintenance period.
  - Penalty rate applied on any shortfall: Base rate plus 400 bps.
- Open market operations: structural and fine-tuning operations.
  - Structural liquidity absorbing operations via Monetary Bills (M-Bills), maximum maturity of one year.
  - M-Bills allotted with variable rate auction for primary dealers; CBUAE can set the maximum yield on M-Bills offered.
  - M-Bills can be traded on secondary markets; reverse transactions (lending against M-Bills as collateral) possible.
  - Fine-tuning operations via ad-hoc collateralized operations and FX transactions/swaps, conducted exclusively in USD.
- Liquidity insurance facilities
  - Contingent liquidity insurance facility (back-stop) being implemented to provide term liquidity during exceptional stress against broader eligible collateral; access and rate at CBUAE discretion.

### Targeted implementation timeline (Table 1: Key Milestones)
- Endorsement of the New Framework & Announcement of its Implementation Timetable to the Market: 2020Q2
- Introduce the Overnight Deposit Facility –ODF: 2020Q3
- Develop a Liquidity Forecasting Function: 2021Q4
- Inauguration of the M-Bills Program: 2020Q4
- Introduce the Intraday Lending Facility –ILF: 2021Q1
- Restructure the Standing Credit Facilities –MLF/CMF: 2021Q3
- Introduce the Contingent Liquidity Insurance Facility –CLIF: 2021Q3
- Introduce Fine-tuning Open Market Operations: 2021Q4
- Establish New Indices to Support the Dirham Monetary Framework: 2022Q1

### Implementation outcomes and market reception
- Transition to the new framework has been smooth and well received by market participants.
- Banks welcomed the framework and did not encounter major difficulties in initial transition to standing facilities and M-Bills issuance.
- Money market rates remained calm during implementation.
  - Before ODF introduction, CBUAE lowered the policy rate cumulatively by 125 bps and introduced the TESS support package in response to COVID-19.
  - Lowering of RR helped ensure smooth money market conditions.
  - Since ODF introduction, overnight rates have remained close to the Base rate.
  - CBUAE increased the Base rate by 5 bps on June 17, 2021 to align with the US IOER; overnight rates moved accordingly.
  - Volatility of the Emirates Interbank Offered Rate (EIBOR) overnight decreased since ODF introduction.
  - After corridor reduction from 100 to 50 bps on January 11, 2021, EIBOR overnight kept slightly closer to the MLF.

### New money market indices
- CBUAE planning to transition from EIBOR to Dirham Overnight Index Average (DONIA) as benchmark for overnight money market rates.
  - DONIA: a volume-weighted average rate based on actual overnight transactions; will be published daily.
  - Computation of DONIA already started; role as benchmark will be phased in gradually.
- CBUAE planning to introduce a new Cost of Fund Index, a composite money market rate; implementation activities ongoing.

### M-Bills issuance and market development
- M-Bills first issued on January 11, 2021.
- As of end-September 2021:
  - cumulative amount of M-Bills issued reached 260 bn AED;
  - of which 150 bn AED have already matured;
  - leaving about 110bn AED of outstanding M-Bills.
- M-Bills issued at 1, 3, 6 and 12-month tenors, with 6-month tenor having the largest issued amount.
- Secondary market transactions remain infrequent but expected to become more frequent as the market develops.
- M-Bills rates:
  - 1-month M-Bills issuance rate stayed close to Base Rate.
  - Risk premium (difference with 1-month US T-Bill) amounts to around 10 bps.
  - 1-month rate shifted by 5 bps as Base rate increased by 5 bps, evidencing tight connection between monetary stance and monetary conditions.
  - Slope of yield curve (12- minus 1-month rate) is contained, indicating no expectations of short-term change in monetary stance and ample liquidity.
  - Pass-through to 12-month rate has been strong.
  - On-the-run and off-the-run effects seem absent, possibly due to tap issuances and underdeveloped market.

### DMF and capital market development considerations
- M-Bills expected to promote development of a secondary market in UAE Dirham securities.
  - M-Bills auctioned and traded through Bloomberg and Euroclear, increasing transparency of liquidity conditions and monetary policy transmission.
  - M-Bills rates will provide the risk-free rate for short-term assets and facilitate price discovery and issuance of similarly denominated securities.
- Planned issuance of local market federal debt (maturities longer than one year) will complete the yield curve but requires coordination with government.
  - CBUAE will be the issuing agent of federal debt; proceeds initially deposited in the government account at the CBUAE, impacting central bank balance sheet, estimation of autonomous factors, issuance of M-Bills and money market conditions.
  - Choice of remuneration rate of the government account is consequential: remuneration at a rate lower than ODF rate decreases efficacy of the Base rate as a floor to money market rates.
  - A clear framework defining rates on the government account and communication procedures for significant flows in and out of the account should be set up; this framework should apply also to emirates’ government accounts.

### Recommended ongoing actions and risks
- Continued attention to liquidity estimation and M-Bills secondary market development is needed.
  - Market surveillance, intraday control of money market activity, robust estimation of liquidity forecasts, and readiness to employ all available tools are required to maintain calm conditions in the face of shocks.
  - Authorities should follow liquidity and trading in the M-Bills market to ensure incentives are right for its development.
- Online publication by authorities of the description of the new DMF, together with key data on standing facilities, open market operations, and rates, will enhance transparency, communication, and trust in the framework.

*Prepared by Hatim Bukhari and Marcello Miccoli.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1uaeea2022002.pdf_