## UAE Reforms for More Productive and Greener Growth — Executive Summary and Chapters 1–3 (Content unit: 1areea2023002)

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---

### Quantifying Gains from Trade Liberalization (Chapter 1)
- Context and recent policy developments
  - UAE signed or initiated CEPAs with 11 countries under “Projects of the 50’”.
  - Non-oil exports share in total exports doubled over the past 20 years.
  - Aggregate tariffs weighted by partner imports: 3.20 percent in 2019.
  - FDI inflows: about 0.6 percent of global inflows pre-COVID-19; about 1.5 percent of global inflows (about USD 21 billion, 5 percent of GDP) in 2021.
  - The 11 CEPA-related countries represented about 15 percent of UAE total imports in 2019.
  - Tariff reduction from CEPAs (if no tariffs after signing with 11 countries):
    - Aggregate tariffs reduced by 0.5 ppt for intermediate inputs, 0.6 ppt for consumption goods, and 0.1 ppt for capital goods.

- Key empirical findings (IMF FSGM)
  - TFP gains range: 0.25 to 2.0 percent (medium-term).
  - Real GDP level gains range: 0.3 to 2.1 percent (medium-term).
  - If all tariffs on intermediate inputs removed:
    - TFP increase range: 0.7 to 5.6 percent.
    - Real GDP rise range: 0.7 to 5.9 percent.
  - Given UAE’s assessed FDI restrictiveness, estimated gains are assessed to be closer to the lower end of ranges.

- FDI restrictiveness and reforms
  - Federal Decree Law No. 32 of 2021 (Commercial Companies Law) issued September 20, 2021; effective January 2, 2022.
  - Earlier reforms: Federal Decree Law No. 26 of 2020 and 2018 “FDI Law”.
  - Estimated FDI restrictiveness index: around 0.12 in 2021 versus around 0.7 in 2018 (OECD methodology).
  - Comparative benchmarks (2020): OECD average 0.07; global average about 0.1.
  - UAE remains closer to the 70th percentile of the index distribution.

- Mechanisms and literature evidence
  - Reduction of input tariffs raises productivity via learning, variety, and quality effects; input-tariff reductions often yield larger productivity gains than output-tariff reductions.
  - Empirical citations summarized: reductions in input tariffs drive larger firm-level productivity gains and complement FDI presence.

- Policy recommendations (from findings)
  - Prioritize reduction of tariffs on intermediate inputs to maximize productivity gains.
  - Continue FDI liberalization and consider additional incentives to attract FDI and move closer to best practices.
  - Leverage CEPAs to deepen integration into global value chains and capture technology transfer from higher-ECI partners.
  - Complement tariff liberalization with behind-the-border and labor/product market reforms, education improvements, and measures to support business dynamism.

### Assessing the Impact of ICT Investments on Growth (Chapter 2)
- UAE digital targets and context
  - UAE Digital Economy strategy aims to double digital economy contribution to non-oil GDP to 20 percent by 2031 (from 9.8 percent of non-oil GDP in 2022).
  - Digital economy contribution to overall GDP estimated at 4.3 percent in 2018.

- Empirical approach (FAVAR model) and data
  - FAVAR with endogenous vector Yt (digital investment, non-ICT investment, real GDP, common factors).
  - Common factors explain 87.2 percent of dataset variance.
  - Quarterly coverage 1990Q1-2021Q4; digital investment proxied using OECD ICT investment shares and DEI closeness.
  - Impulse responses based on 4-quarter local projections; multipliers derived by scaling IRFs.

- Model results and multipliers
  - Public spending multiplier on overall GDP: point estimate around 1.0 after the 4th quarter.
  - ICT spending multiplier on overall GDP: about 1.5.
  - ICT spending multiplier on non-oil GDP: around 1.8.
  - Non-ICT spending multiplier on non-oil GDP: about 0.9.
  - Multipliers in the oil sector: negligible.

- Digital infrastructure and skill indicators
  - Mobile broadband download speed: 118.42 Mbps in August 2022.
  - Coverage: 100 percent 4G coverage and 70 percent 5G coverage by 2020.
  - Observed internet-user ICT skills (2020): basic 85 percent; intermediate 69 percent; advanced 17 percent.
  - UAE Digital strategy training targets by 2025:
    - 100 percent of federal government workforce trained in basic and intermediate digital skills.
    - At least 10 percent of federal government workforce trained in advanced technologies by 2025.

- Policy recommendations (from findings)
  - Prioritize and scale up ICT investments to support non-oil growth and diversification.
  - Design ICT investments to maximize spillovers into factor market efficiency and public service delivery.
  - Invest in digital infrastructure, R&D, local skills, eCommerce, electronic payments, and government–private sector collaboration.

### Growing Green and Sustainable (Chapter 3)
- Climate exposure and commitments
  - Hydrocarbon revenues: around 60 percent of total fiscal revenues.
  - Oil exports: over 15.9 percent of total exports of goods and services.
  - UAE Net Zero emissions target: 2050.
  - Enhanced 2022 NDC target: 31 percent reduction in greenhouse gas emissions by 2030 (up from 23.5 percent).
  - UAE Energy Strategy envisages investment of AED 600 billion (USD 163 bn, or 52.1 percent of 2021 non-resource GDP) in clean energy and renewables.

- Sectoral expected contributions to CO2 reductions
  - Electricity generation: 66.4 percent
  - Industry: 16.6 percent
  - Transport: 9.7 percent
  - Carbon capture, utilization, and storage: 5.3 percent
  - Waste: 2.1 percent

- Modeling tools and scenario findings (DIGNAR and CPAT)
  - DIGNAR-19 partial equilibrium model calibrated for UAE; CPAT used for carbon-pricing illustration.
  - Full implementation of announced reforms and UAE 2050 targets could almost double potential non-hydrocarbon GDP growth.
  - Investments plus reforms have potential to almost double projected medium-term non-oil GDP growth of about 4 percent.
  - CPAT suggests larger than announced investments in renewables may be needed by 2030 to stay on track to Net Zero by 2050.
  - Estimated carbon tax (or ETS emissions price) consistent with UAE intermediate objectives: $75 per ton by 2030.

- Green investment scenarios (DIGNAR-19 calibrated scenarios)
  - Baseline: public investment steady at around 10.5 percent of GDP long-term; medium-term annual non-oil GDP growth about 4 percent.
  - Alternative Scenario 1: additional green public investment growing by an additional 2 percent of GDP per year until 2050 (reflecting AED 600 billion cumulative new investments by 2050, AED 600 billion = USD$ 163 billion), combined with partial reforms → non-oil GDP growth around 6 percent in the medium- to long-term.
  - Alternative Scenario 2: additional green investments plus full, well-coordinated reforms (20 percent increase in public expenditure efficiency relative to baseline; 2 percent increase in labor supply under partial reforms; larger labor supply increase under full reforms) → non-oil GDP growth around 8 percent by 2050.
  - Baseline medium-term non-oil GDP growth: about 4 percent.

- Labor market and productivity effects
  - Partial reforms assumption: 2 percent increase in labor supply relative to baseline.
  - Full implementation assumption: labor supply increases by around 10 percent by 2027; real wages increase by around 4 percent by 2027.
  - IMF 2022 finding referenced: 7 percent wage premium associated with green-intensive jobs versus pollution-intensive jobs.

- Fiscal implications and financing
  - UAE sovereign financial assets: around 350 percent of GDP in 2021.
  - Frontloading AED 600 billion in renewables by 2050 financed by exhausting public wealth and postponing NHPB adjustment leads to higher non-oil primary deficits and lower net public financial wealth in transition.
  - Alternative financing strategies (scale-up private green finance) can preserve net public financial wealth.

- Green and sustainable finance: current state and scaling channels
  - UAE Sustainable Finance Framework (SFF) 2021-2030 objectives include enhancing supply and demand of sustainable finance and developing UAE taxonomy.
  - Total green investments identified at 6.8 percent of GDP (AED 80 billion15) per 2016 State of Green Finance Report.
  - Since 2003, UAE attracted USD 13 billion in green bonds and loans.
  - Notable issuances: First Abu Dhabi Bank green bond USD 587 million (2017); Majid Al Futtaim green sukuk USD 600 million (2019).
  - Estimated financing need cited: USD 163 billion.
  - Potential scaling channels: SWFs integration of climate strategies, GREs (including ADNOC) low-carbon investments, carbon trading platforms, government guarantees, PPPs, joint investments with institutional investors and multilateral development banks.

- Bottlenecks to mainstreaming green finance and recommended measures
  - Identified bottlenecks: no universal ESG definition; absence of nation-wide taxonomy; lack of enforcement; scarce ESG disclosures; high sector risk; long payback periods; lack of profitability clarity; lack of MRV data and standard methodologies.
  - Measures to address barriers:
    - Develop and disseminate consistent climate dashboards and unified databases.
    - Education and training for finance providers on ESG risk assessment and pricing.
    - Build legal and accounting capacity for sustainable finance.
    - Adopt nation-wide ESG disclosure standards, ESG scoring methodology, and a national taxonomy.
    - Strengthen governance, legislative and regulatory frameworks and enforcement; consider incentives (preferential rates, credit allocation policies).

### DIGNAR-19 Model Calibration and Key Parameters (Annex)
- Model features: resource fund, fiscal tools, absorptive capacity constraint, public investment inefficiency, two household types, three production sectors.
- Public investment dynamics and production function preserved as:
  - yt = At (KGt-1)^{αg} (Lt)^{αN} (Kt-1)^{1−αN}
  - KGt = (1−δ) KGt-1 + ε IGt
- Calibrated parameters and initial steady-state values (In percent)
  - Potential real non-oil GDP growth rate: 4.0
  - Exports to GDP ratio: 71.9
  - Imports to GDP ratio: 68.7
  - Private investment to GDP ratio: 10.5
  - Public investment to GDP ratio: 10.5
  - Public consumption to GDP: 11.4
  - Total public revenues to GDP ratio: 31.0
  - Share of government natural resource revenues in total government revenues: 55.0
  - Public debt to GDP ratio: 29.2
  - Private foreign debt to GDP ratio: 76.9
  - Share of the natural resource sector to GDP: 30.0
  - Implied interest rate on domestic debt: 5.0
  - Public investment efficiency: 50.0/70.0
  - Depreciation rate of public capital: 7.0
  - Inverse of the Frisch elasticity of labor supply (skilled): 0.5
  - Inverse of the Frisch elasticity of labor supply (low skilled): 0.5

### Key statistics and summarized policy priorities
- Core numeric indicators
  - 60 percent — Hydrocarbon revenues as percent of total fiscal revenues
  - 15.9 percent — Oil exports as percent of total exports of goods and services
  - 31 percent — Target reduction in greenhouse gas emissions by 2030 (enhanced 2022 pledge)
  - 23.5 percent — Previous NDC reduction pledge
  - AED 600 billion (USD 163 bn, or 52.1 percent of 2021 non-resource GDP) — Investment envisaged in clean energy and renewables under UAE Energy Strategy
  - 2050 — Net Zero target year
  - 2030 — Near-term horizon for elevated renewable investment needs
  - $75 per ton — Estimated carbon tax (or ETS emissions price) by 2030 consistent with intermediate emissions objectives
  - About 4 percent — Current projected medium-term non-oil GDP growth (potential to almost double under full reforms)
  - 66.4 percent; 16.6 percent; 9.7 percent; 5.3 percent; 2.1 percent — Expected sectoral contributions to CO2 reductions (electricity generation; industry; transport; CCUS; waste)
  - 85 percent — Agriculture’s share of total water consumption
  - Mobile broadband download speed: 118.42 Mbps (August 2022)
  - 100 percent 4G coverage and 70 percent 5G coverage by 2020

- Overarching policy priorities distilled from analysis
  - Complement tariff liberalization with further FDI regulatory reforms and incentives.
  - Prioritize reductions in input (intermediate) tariffs to maximize TFP gains.
  - Scale up ICT investments to leverage a 1.8 multiplier on non-oil GDP and support diversification.
  - Fully implement planned green investments and UAE 2050 structural reforms to more than double non-hydrocarbon growth potential in the medium- to long-term.
  - Mainstream and scale private green and sustainable finance to reduce direct fiscal burdens and preserve public financial wealth.
  - Implement carbon pricing (illustrative consistent level: $75 per ton by 2030) alongside subsidy reform, green PFM, budget tagging, and targeted fiscal instruments to achieve emissions objectives cost-efficiently.
  - Address green finance bottlenecks via a nation-wide taxonomy, mandatory disclosures, MRV improvements, capacity building, and incentive mechanisms to mobilize private capital.

*Prepared by IMF staff.*

### Executive Summary ____________________________________________________________________ 3

### Executive Summary

### Overview
- Since the GFC, the marginal productivity of investment in the UAE has declined along with total factor productivity (TFP) and employment growth; the COVID-19 crisis has reinforced these trends.
- The UAE government’s reform strategy under the UAE 2050 Strategy and Climate Neutrality Goal by 2050 seeks to boost trade and FDI, modernize labor markets, increase digitalization, and expand green and sustainable investments to facilitate growth and non-oil diversification.
- The analysis uses IMF’s Flexible System of Global Models (FSGM), Factor Augmented Vector Autoregressive (FAVAR), DIGNAR-19 model, and scenario analysis.
- Main conclusion: ongoing reform efforts documented in IMF Article IV Reports in 2021-22 could boost long-term non-hydrocarbon growth by around 4 percent above the projected baseline, conditional on: fully harnessing productivity and growth gains from evolving economic partnerships; achieving planned ICT investment outcomes; and fully implementing planned green investments.
- Facilitating green and sustainable private finance would reduce direct fiscal burdens, help smooth the transition to a lower carbon future, and preserve public financial wealth.

*Prepared by IMF staff.*

---

### Chapter 1 — Quantifying Gains from Trade Liberalization

### Context and recent policy developments
- The UAE has recently signed or started negotiations for Comprehensive Economic Partnership Agreements (CEPAs) with 11 countries as part of the “Projects of the 50’” reform agenda.
- The UAE’s share of non-oil exports in total exports has doubled over the past 20 years.
- In 2019, the aggregate tariffs weighted by partner imports was 3.20 percent.
- FDI inflows were around 0.6 percent of global inflows before COVID-19 and picked up to about 1.5 percent of global inflows (about USD 21 billion, 5 percent of GDP) in 2021.
- The first CEPA was signed with India in February 2022; the UAE also signed CEPAs with Indonesia and Israel, and has initiated negotiations with Australia, Georgia, Kenya, Philippines, South Korea, Turkey, Ukraine, Uzbekistan.
- The 11 CEPA-related countries represented about 15 percent of UAE total imports in 2019.
- If there are no tariffs after signing CEPA with those 11 countries, aggregate tariffs will be reduced by 0.5 ppt for intermediate inputs, 0.6 ppt for consumption goods and 0.1 ppt for capital goods.

### Key empirical findings
- Model results (IMF FSGM) indicate medium-term gains from CEPA-related liberalization:
  - Total factor productivity (TFP) gains: range from 0.25 to 2.0 percent.
  - Level of real GDP gains: range from 0.3 to 2.1 percent.
- These ranges depend on the attractiveness of the UAE’s FDI environment and empirical literature on trade–FDI complementarities.
- Given the FDI restrictiveness index estimated for the UAE, gains are assessed to be closer to the lower end of the reported ranges.

### FDI restrictiveness and reforms
- The UAE substantially relaxed FDI restrictions in recent reforms including:
  - Federal Decree Law No. 32 of 2021 (Commercial Companies Law) issued on September 20, 2021 and effective January 2, 2022.
  - Earlier reforms: Federal Decree Law No. 26 of 2020 and the 2018 “FDI Law”.
- Estimated FDI restrictiveness index improved from around 0.7 in 2018 to around 0.12 in 2021 (OECD methodology).
- Despite improvement, the UAE remains closer to the 70th percentile of the index distribution relative to OECD countries and other emerging market economies; continued efforts and additional incentives may be needed to attract FDI.

### Mechanisms and literature evidence
- Reduction of output tariffs increases competition; reduction of input tariffs (intermediate goods) raises productivity via learning, variety, and quality effects.
- Evidence cited: Amiti and Koning (2007) — productivity gains from reducing tariffs on intermediate goods at least twice as high as from reducing output tariffs; Topalova and Khandelwal (2011) — larger effect of input tariffs on firm-level productivity and complementarities with industrial policy reforms.
- The UAE’s Economic Complexity Index (ECI) is relatively weak compared to CEPA partners; intensifying trade with higher-ECI partners could encourage technology transfer and raise aggregate productivity.

### Policy implications (implied by findings)
- Prioritize reduction of tariffs on intermediate inputs to maximize productivity gains.
- Continue FDI liberalization and consider additional incentives to move the UAE closer to best practices and improve attractiveness for FDI.
- Leverage CEPAs to deepen integration into global value chains and capture technology transfer from higher-ECI partners.

---

### Chapter 2 — Assessing the Impact of ICT Investments on Growth

### Objectives and UAE digital targets
- The UAE Digital Economy strategy aims to double the contribution of the digital economy to non-oil GDP to 20 percent by 2031 through adoption of digitalization across public and private sectors.
- Digitalization is expected to increase efficiency in factor markets and improve public sector service delivery.

### Model results and multipliers
- Model results show a large multiplier of 1.8 for ICT investments on non-oil GDP (about double the impact of non-ICT spending).
- Investment multipliers are negligible in the oil sector.
- Implication: ICT investments can have a significant positive effect on economic diversification and non-oil growth.

### Policy implications (implied by findings)
- Prioritize and scale up ICT investments to support non-oil economic growth and diversification.
- Design ICT investments to maximize spillovers into factor market efficiency and public service delivery.

---

### Chapter 3 — Growing Green and Sustainable

### Challenges and policy intent
- The UAE faces twin challenges: reducing reliance on hydrocarbon activity and adapting to climate risks while aligning with global decarbonization.
- The UAE announced structural reforms and green investments to reduce emissions and energy intensity and diversify away from fossil fuels.

### Scenario analysis and model findings
- Using IMF’s DIGNAR model:
  - The combination of green investments and full implementation of reforms under the 2050 Strategies could almost double potential long-term non-oil GDP growth.
- However, the costs of energy transition are large and implementation is urgent.

### Fiscal and finance implications
- Developing and scaling up private green and sustainable finance would:
  - Reduce direct fiscal costs of green investment needs.
  - Increase efficiency of green investments.
  - Preserve public financial wealth while delivering on growth and Net Zero ambitions.
- An enabling environment for smooth energy transition is necessary to attract private green finance.

### Policy recommendations (implied by findings)
- Fully implement planned green investments and structural reforms under UAE 2050 Strategy.
- Scale up private green and sustainable finance instruments and create enabling conditions for private participation.
- Prioritize sequencing that harnesses complementarities between green investments, digitalization, and trade openness to maximize productivity and growth gains.

---

*Source: IMF — “UAE Reforms for More Productive and Greener Growth,” Executive Summary and Chapters 1–3 (January 10, 2023).*

### 8. However, productivity gains from trade liberalization can vary substantially depending

### 1areea2023002 - 8. However, productivity gains from trade liberalization can vary substantially depending

### Key findings on trade liberalization, FDI, and productivity
- Based on a study of 60 advanced and emerging countries over the period 1997-2016, Mistura and Roulet (2019) estimates an average increase of 2.1 percent in bilateral FDI inward stocks to every 10 percent reduction in FDI restrictiveness.
- Ahn et al. (2016) finds a dominant role of tariff reduction on intermediate goods in fostering productivity gains and a strong complementarity between trade and FDI liberalization.
- Halpern et al. (2015) using firm-level data for Hungary showed productivity gains from lower input tariffs doubling with a higher foreign firms’ presence.
- Empirical evidence from Amiti and Koening (2007), Topalova and Khandelwal (2011) and Ahn et al. (2016) implies:
  - A reduction of aggregate tariffs by 0.5 ppt following CEPAs would increase TFP by a range of 0.25 to 2.0 percent (range depends on FDI environment).
  - If all tariffs on intermediate inputs are removed, TFP is estimated to increase by a range of 0.7 to 5.6 percent.

### Methodology
- Macroeconomic gains from trade liberalization are evaluated using the Flexible System of Global Models (FSGM) (Andrle et al., 2015), specifically the MCDMOD module:
  - MCDMOD is an annual, multi-region, forward-looking model combining micro-founded and reduced-form formulations.
  - Private consumption and investment have microeconomic foundations (OLG and LIQ households; a Tobin’s Q model for firms’ investment).
  - Trade is modeled by reduced-form equations as a function of a competitiveness indicator (relative prices) and domestic or foreign demand.
  - Supply is determined by an aggregate Cobb Douglas production function.
  - Consumer price and wage inflation are modeled by forward-looking Phillips’ curves.
  - Monetary policy is governed by an interest rate reaction function.
- The UAE’s FDI environment is assessed using an in-house proxy indicator of FDI restrictiveness based on the OECD methodology (Golub, 2003; Kalinova et al., 2010).
  - The index evaluates four areas: (i) foreign equity restrictions, (ii) screening and prior approval requirements, (iii) restrictions on employment of foreigners as key personnel, and (iv) operational restrictions (branching, capital repatriation, land ownership).
  - The index ranges between 0 and 1 where higher score = more restrictive.
  - Official national publications and laws were used to identify restrictions, consistent with OECD methodology for non-member, non-adhering countries.

### FDI restrictiveness scoring and UAE assessment
- The authors estimate the current UAE FDI restrictiveness index to be around 0.12 compared to 0.7 in 2018 (Table 2).
- Comparative benchmarks in 2020:
  - OECD average was 0.07.
  - Global average (based on 85 countries) was about 0.1.
- Despite improvement, the UAE remains closer to the 70th percentile in terms of regulatory restrictions.
- Scoring methodology components (selected items and scores as presented):
  - Measure I: Foreign Equity Restrictions — examples include scores of 1.0, 0.50, 0.25, 0.125 for differing foreign equity allowances.
  - Measure II: Screening and Prior Approval Requirements — example scores: 0.2, 0.1, 0.025 depending on approval thresholds.
  - Measure III: Rules for Key Personnel — example scores: 0.1, 0.05, 0.025, 0.075, 0.02 for various nationality/employment rules.
  - Measure IV: Other Restrictions on Operation — example scores: 0.05, 0.1, 0.05, 0.1, 0.05, 0.01 scaled by conditions.
  - TOTAL shown up to 1.0 with entries such as 0.135 and 0.010 in table rows.

### Results: tariff reductions, TFP, and real GDP gains
- UAE net imports: intermediate inputs represented 48 percent of net imports in 2019 (after excluding imports for re-exports); 15 percent of which were from India and other CEPA-related countries.
- Aggregate tariffs were at 3.2 percent in 2019.
- Tariff reduction scenarios:
  - The 11 ongoing CEPAs could lead to a 0.5 ppt reduction in aggregate tariffs (if assuming no tariffs on intermediate goods after signing CEPA with 11 countries).
  - If tariffs on all imported intermediate goods are set to zero (not just CEPA-related), aggregate tariffs would be reduced by about 1.4 ppt.
- GDP and TFP impact estimates (medium-term, over 7 years using FSGM and empirical ranges):
  - With a 0.5 ppt reduction in aggregate tariffs:
    - TFP increase range: 0.25 to 2.0 percent (dependent on FDI environment).
    - Real GDP rise range: 0.3 to 2.1 percent.
  - With zero tariffs on all intermediate inputs:
    - TFP increase range: 0.7 to 5.6 percent.
    - Real GDP rise range: 0.7 to 5.9 percent.
- Given the UAE’s assessed FDI restrictiveness, the authors assess estimated gains to be closer to the lower end of these ranges.
- Definition used: FDI friendly environment is defined as FDI restrictiveness at the 25th percentile of its cross-country distribution based on the OECD FDI restrictiveness index of 2020.
- For simplification, gains are assumed to vary linearly with the FDI environment.

### Policy implications and recommendations
- To maximize gains from trade liberalization and CEPAs:
  - Complement tariff liberalization with FDI regulatory reforms to reduce restrictiveness and attract higher FDI inflows.
  - Evaluate behind-the-border barriers to FDI to narrow uncertainty in gains estimates; the FDI index measures regulatory restrictiveness but not overall business environment.
  - Consider market size, regional integration, implementation of FDI regulations, and state ownership in key sectors as determinants of actual FDI outcomes.
- Broader reforms needed to fully materialize gains:
  - Labor and product market reforms.
  - Full implementation of recent reforms: expanding residency permits, supporting private sector employment of nationals, increasing scope for personal choices, encouraging start-ups (Korniyenko, 2021).
  - Enhance education system reforms to raise human capital and innovation.
  - Legislative initiatives to encourage business dynamism, well-targeted assistance to vulnerable groups, reforms of unemployment benefits and pension schemes, and sufficient social safety nets (including for expatriates) to attract and retain skilled professionals.

### Caveats, excluded channels, and uncertainty
- The FDI restrictiveness index evaluates regulatory restrictiveness but excludes the broader business environment and non-regulatory entry barriers.
- Gains might be underestimated because the analysis excludes other CEPA provisions and trade in services:
  - CEPA provisions not modeled include technical barriers to trade cooperation, promotion of trade opportunities for SMEs, regulation of cross-border trade in services, and transparency and impartiality in government procurement.
  - Those additional provisions could further lift trade and real GDP, especially from services.

### UAE digital economy objectives and context (introductory findings)
- The UAE’s Digital Economy Strategy aims to double the contribution of the digital economy to non-oil GDP to 20 percent by 2031 (from 9.8 percent of non-oil GDP in 2022).
- The digital economy contribution estimates:
  - UAE digital economy contribution to overall GDP was estimated at 4.3 percent in 2018 (Ministry of Economy, 2018).
  - Comparative benchmarks: United States of America 8 percent, Europe 6.2 percent; UAE lower than Bahrain, Kuwait, and Egypt among GCC countries.
- The strategy focuses on six areas: (i) digital infrastructure, (ii) unified digital platform and common digital enablers, (iii) integrated, easy, and fast digital services, (iv) digital capabilities and skills, (v) legislation, and (vi) raising efficiency of government work.
- Evidence indicates a higher multiplier of ICT investments on non-oil GDP compared to non-ICT investments, supporting diversification and propagation effects in the non-oil sector.

*International Monetary Fund — Extracted content from the UAE country note (assessing trade liberalization, FDI, and digital economy).*

### 5.   The UAE has invested strongly in the digital economy and remains at the forefront of

### 5.   The UAE has invested strongly in the digital economy and remains at the forefront of

### Digital infrastructure: coverage, speeds, and benchmarks
- By 2020, the UAE matched or exceeded the OECD and the GCC on several digital infrastructure indicators, including the percentage of the population using the internet, ultra-broadband home speed, international bandwidth, and fixed and mobile broadband.
- Mobile broadband download speed: 118.42 Mbps in August 2022.
- Coverage: 100 percent 4G coverage and 70 percent 5G coverage by 2020.
- Figure-based comparisons in the source show the UAE ranking ahead of GCC averages on international bandwidth, fixed broadband download (Mbps), mobile broadband download (Mbps), ultrabroadband homes passed (%), and 4G/5G population coverage.

### Digital capacity development and skills targets
- UAE Digital strategy targets:
  - 100 percent of the federal government workforce trained in basic and intermediate digital skills by 2025.
  - At least 10 percent of the federal government workforce trained in advanced technologies (blockchain, artificial intelligence, bot processing, among others) by 2025.
- Observed internet-user ICT skills (2020):
  - ICT skills with basic skills: 85 percent.
  - ICT skills with intermediate skills: 69 percent.
  - ICT skills with advanced skills: 17 percent.
- SDG (Sustainable Development Goals) comparisons:
  - SDG targets cited: 70 percent (basic) and 50 percent (intermediate).
  - Strategy’s target for advanced skills: 10 percent (the 17 percent observed exceeds this).

### Digital regulation and cybersecurity
- Key regulatory steps taken:
  - 2021 new data law to protect privacy of people and institutions and limit entities from using personal data for profit.
  - Information Assurance Regulation as part of the National Cybersecurity Strategy (NCSS), covering business continuity, disaster recovery, compliance, certification, and accreditation.
  - Additional regulations targeted at digital trade and blockchain.

### Digital innovation, local production, and R&D
- UAE R&D and local production indicators (2020):
  - Local Production Pillar Index for UAE: 14.8.
  - GCC regional Local Production Pillar Index: 12.5.
- Between 2010 and 2018, the UAE was among the top 10 countries with the fastest growth in published Apps (though global share remains low).
- Policy implication noted: expanding local skills and talent can boost total factor productivity and diversify the economy via enhanced hi-tech exports.

### Empirical approach: estimating digital investment impact
- Objective: estimate impact of UAE digital investment on economic growth using a Factor Augmented Vector Autoregressive (FAVAR) model.
- Model details:
  - Endogenous vector Yt (includes digital investment, non-ICT investment, real GDP, and a 1×5 vector of common factors).
  - Cholesky identification scheme: assumes investment spending impacts GDP with a lag and is more exogenous than GDP.
  - Common factors extracted from a large dataset of macroeconomic variables using principal component analysis (Bai and Ng (2007) ICp2 criterion).
  - The common factors explain 87.2 percent of the informational dataset variance.
  - Transition equation estimated with an optimal lag length of 4, with a constant and no time trends.
  - To address shock foresight, included forecast of total investments one year before as an exogenous variable (due to absence of forecasts for digital investments).
- Data and proxies:
  - Quarterly data covering 1990Q1-2021Q4; annual data interpolated to generate quarterly series where needed.
  - Digital investment data unavailable directly; proxy built as a share of OECD average ICT investments based on UAE’s closeness to OECD averages on DEI indicators.
  - Analysis conducted for overall GDP, non-oil GDP, and oil GDP.
  - Impulse responses: 4-quarter average impulse responses based on local projections (Jordà, 2005).
  - Impact multipliers obtained by multiplying IRF values by the mean of the ratio of real GDP to the government spending indicator.

### Empirical results: multipliers and sectoral effects
- Public spending multiplier on overall GDP:
  - Point estimate around 1.0 after the 4th quarter.
- ICT spending multiplier on overall GDP:
  - About 1.5 (higher than non-ICT spending at 1.0).
- Sectoral multipliers:
  - ICT spending multiplier on non-Oil GDP: around 1.8.
  - Non-ICT spending multiplier on non-Oil GDP: about 0.9.
  - Multipliers in the oil sector: negligible (reflecting oil production as an enclave sector with limited direct linkages).
- Comparative literature benchmarks:
  - Literature surveyed finds general government spending multipliers range from 0.7 to 1.0 for high multipliers.
  - ITU (2019) suggests digitalization economic impacts of 1.4 and 1.0 percent on overall GDP per capita for OECD and non-OECD, respectively.
- Interpretation:
  - A dollar spent on ICT investments almost doubles economic activity in the non-oil sector relative to non-ICT spending.
  - ICT investments have propagation effects through the economy, contributing cumulatively to non-oil GDP and digitalization.

### Policy implications and conclusions
- UAE Digital Economy Strategy target: double the contribution of the digital economy to around 20 percent of GDP by 2031.
- Recommended emphasis:
  - Continued investment in ICT infrastructure and R&D to boost the digital sector’s contribution to economic growth.
  - Development of local skills and attraction of talent to increase total factor productivity and diversify through hi-tech exports.
  - Further investment in eCommerce, local production, expansion of electronic payment systems, and strengthened government–private sector collaboration to advance digital transformation.

*Source: IMF staff estimates.*

### Annex I. List of Variables in the Information Set

### Annex I. List of Variables in the Information Set

### Variables in the Information Set
- Public Consumption — IMF WEO Database
- Total debt — IMF WEO Database
- Exports of goods and services — IMF WEO Database
- Imports of goods and services — IMF WEO Database
- Oil production — Statista
- Oil price — FRED Database
- Total government revenues — IMF WEO Database
- Real Broad Effective Exchange Rate — FRED Database
- Inflation — IMF WEO Database
- Broad Money — IMF WEO Database
- Gross international reserves — IMF WEO Database
- Employment — IMF WEO Database

### Climate exposure and vulnerabilities
- The UAE remains heavily reliant on hydrocarbon activity as a source of income and economic growth:
  - Hydrocarbon revenues amount to around 60 percent of total fiscal revenues.
  - Oil exports are over 15.9 percent of total exports of goods and services.
- Physical climate risks and natural-resource pressures:
  - Growing heat stress and rising temperatures threaten non-oil economy, infrastructure, human health, and habitat.
  - Agriculture represents about 85 percent of total water consumption, increasing pressure on non-renewable water sources.
  - Critical infrastructures (desalination, power stations) and coastal habitats are at risk from rising sea levels; desertification has increased sandstorm severity.

### Climate commitments, targets, and planned investments
- National targets and strategies:
  - The UAE announced Net Zero emissions by 2050.
  - In September 2022, the UAE enhanced its voluntary climate commitment to target a 31 percent reduction in greenhouse gas emissions by 2030 (up from 23.5 percent announced previously).
  - The UAE Energy Strategy envisages an investment of AED 600 billion (USD 163 bn, or 52.1 percent of 2021 non-resource GDP) in clean energy and renewables, modernization of infrastructure, and increased energy efficiency.
- Sectoral contributions to CO2 reductions (expected):
  - Electricity generation: 66.4 percent
  - Industry: 16.6 percent
  - Transport: 9.7 percent
  - Carbon capture, utilization, and storage: 5.3 percent
  - Waste: 2.1 percent

### Costs, modeling, and scenario findings
- Modeling tools and approach:
  - Analysis uses the IMF’s DIGNAR model and the Carbon Pricing Assessment Tool (CPAT).
  - The analysis is a partial equilibrium based on DIGNAR-19 and CPAT.
- Key scenario findings:
  - Full implementation of announced reforms and targets under the UAE 2050 Strategies could almost double potential non-hydrocarbon GDP growth.
  - Investments in green and sustainable policies reinforced by successful supporting reforms have the potential to almost double the current projected medium-term non-oil GDP growth of about 4 percent and raise potential non-oil GDP growth and economic diversification in the medium-to-long-term.
  - The CPAT tool indicates the UAE may need larger than announced investments in renewables by 2030 to stay on track to achieve Net Zero emissions by 2050.
  - An estimated carbon tax (or ETS emissions price) of $75 per ton by 2030 would be consistent with UAE’s intermediate emissions objectives, without other mitigation measures.
- CPAT illustrative results shown:
  - GHG Emissions excl. LULUCF — 17% Reduction ($75 ETS) (chart)
  - GHG Emissions excl. LULUCF — 18% Reduction ($75 CarbonTax) (chart)

### Policy recommendations and fiscal measures
- Mix of policies to contain fiscal pressure while achieving Net Zero:
  - Continue investments in green and renewable energy.
  - Gradual removal of energy subsidies and electricity/gas price reforms to bring prices in line with market prices, help target subsidies to the most vulnerable, reduce fiscal burdens, and lower energy demand.
  - Introduce climate PIMA, green PFM, and a budget tagging system to integrate climate costs and benefits into fiscal frameworks and public investment management.
  - Consider climate taxation (carbon tax or ETS) as a cost-efficient instrument to reduce emissions alongside investments.
  - Deploy measures to attract private capital for green projects, including innovative financing solutions (e.g., green bonds) and policies to boost returns on green investments.
  - Strengthen public investment management and sequencing to raise public investment efficiency and absorptive capacity.
- Rationale and expected benefits:
  - Developing and scaling up private green and sustainable finance and creating an enabling environment for a smooth energy transition would reduce direct fiscal costs, increase efficiency of green investments, and preserve public financial wealth while delivering on growth and Net Zero ambitions.
  - Alternative and supportive fiscal policies (tax policies, subsidy reform, green PFM) could further support macroeconomic sustainability and ease public finance pressures from front-loaded green investments.

### Key statistics and indicators (extracted)
- 60 percent — Hydrocarbon revenues as percent of total fiscal revenues
- 15.9 percent — Oil exports as percent of total exports of goods and services
- 31 percent — Target reduction in greenhouse gas emissions by 2030 (enhanced 2022 pledge)
- 23.5 percent — Previous NDC reduction pledge
- AED 600 billion (USD 163 bn, or 52.1 percent of 2021 non-resource GDP) — Investment envisaged in clean energy and renewables under UAE Energy Strategy
- 2050 — Net Zero target year
- 2030 — Near-term horizon for elevated renewable investment needs
- $75 per ton — Estimated carbon tax (or ETS emissions price) by 2030 consistent with intermediate emissions objectives
- About 4 percent — Current projected medium-term non-oil GDP growth (potential to almost double under full reforms)
- 66.4 percent; 16.6 percent; 9.7 percent; 5.3 percent; 2.1 percent — Expected sectoral contributions to CO2 reductions (electricity generation; industry; transport; CCUS; waste)
- 85 percent — Agriculture’s share of total water consumption

*Source: Annex I. List of Variables in the Information Set and selected extracted sections of the UAE chapter (Growing Green and Sustainable) from the provided IMF content unit.*

### conclusion that investments in green energy are more labor intensive than investing in brown

### 1areea2023002 - conclusion that investments in green energy are more labor intensive than investing in brown

### Model and scenarios
- Model: IMF’s DIGNAR-19 partial equilibrium model calibrated for the UAE (Aligishiev, Melina and Zanna, 2021) with three production sectors (nontraded goods, non-resource traded goods, traded natural resources), financially and non-financially constrained households, and a natural resource fund fiscal buffer.  
- Assumptions summary provided in Annex A.1 of the source.  
- Scenarios considered:
  - Baseline scenario: aligned with the macro-framework underpinning the UAE 2022 Article IV consultations; public investment steady at around 10.5 percent of GDP in the long-term; continued implementation of government reform agenda supporting medium-term annual non-oil GDP growth of about 4 percent.
  - Alternative Scenario 1: additional green public investment growing by an additional 2 percent of GDP per year until 2050 (reflecting AED 600 billion cumulative new investments by 2050, AED 600 billion = USD$ 163 billion), combined with partial implementation of reforms; assumed to include investments in renewables and greening fossil fuel extraction processes.
  - Alternative Scenario 2: additional green investments plus full, well-coordinated implementation of the reform agenda (including trade liberalization, digitalization); assumes a 20 percent increase in public expenditure efficiency relative to baseline and a 2 percent increase in labor supply under partial reforms (see labor reforms below) with larger gains under full reforms.

### Growth impacts and key quantitative findings
- Alternative Scenario 1 results: delivers non-oil GDP growth of around 6 percent in the medium- to long-term.
- Alternative Scenario 2 results: delivers non-oil GDP growth of around 8 percent by 2050.
- These growth outcomes are consistent with:
  - The relatively small share of the non-oil sector in total GDP.
  - Recent IMF analysis showing green investment output multipliers "well within the 1.1 - 1.5 range (Batini et al, 2021)".
- Baseline medium-term non-oil GDP growth assumed at about 4 percent.
- Public investment baseline level: around 10.5 percent of GDP in the long-term.
- Additional public investment under UAE Energy Strategy: AED 600 billion cumulative (USD$ 163 billion) by 2050.

### Labor market, productivity, and wages
- Labor market reforms considered include visa policy enhancement, pension schemes and safety nets (including for expatriates), support for private sector employment, continued support to female labor force participation, and better education/training in emerging fields.
- Partial reforms assumption: a 2 percent increase in labor supply relative to the baseline.
- Full implementation assumption (as in Alternative Scenario 2):
  - Labor supply increases by around 10 percent by 2027.
  - Real wages increase by around 4 percent by 2027, reflecting productivity gains.
- Literature consistency:
  - Labor productivity payoff from low carbon investments (Garrett-Peltier, 2017; Hepburn et al., 2020).
  - IMF 2022 finding of a 7 percent wage premium associated with green-intensive jobs versus pollution-intensive jobs.

### Fiscal implications and transition financing
- UAE sovereign financial assets estimated at around 350 percent of GDP in 2021.
- Accelerating the energy transition and frontloading adaptation and mitigation investments would put additional pressure on public finances:
  - Frontloading AED 600 billion in renewables by 2050 and financing by exhausting existing public financial wealth (with postponed NHPB adjustment to 2050) leads to higher non-oil primary deficits during the transition and lower net public financial wealth (as illustrated in scenario charts).
  - Alternative financing strategies, including increased green and sustainable private finance, can preserve net public financial wealth.
- No-growth-benefit frontloading scenario in charts: assumes additional AED 600 bn investments in renewables by 2050 financed by exhausting public wealth and NHPB adjustment postponed; "No growth benefits beyond the fiscal multiplier effects are assumed."

### Green and sustainable finance: current state and avenues to strengthen
- UAE Sustainable Finance Framework (SFF) 2021-2030 objectives: enhance supply and demand of sustainable finance; strengthen enabling environment for diversified sustainable finance products.
- Three priority actions identified by the UAE Sustainable Finance Working Group (SFWG): (i) strengthen consistent sustainability disclosures across UAE, (ii) foster sustainability-focused corporate governance, (iii) develop UAE taxonomy of sustainable activities.
- Central bank and financial authorities actions:
  - CBUAE added climate change to strategic priorities; promoting risk management, stress testing, data collection, and development of UAE taxonomy.
  - ADGM and DFS participate in the Network for Greening the Financial System (NGFS).
- Current green finance volumes and gaps:
  - Total amount of green investments identified at 6.8 percent of GDP (AED 80 billion15) per the 2016 State of Green Finance Report.
  - Since 2003, the UAE has attracted USD 13 billion in green bonds and loans.
  - Prominent issuances: First Abu Dhabi Bank green bond USD 587 million (2017); Majid Al Futtaim green sukuk USD 600 million (2019).
  - Estimated financing need cited as USD 163 billion; current issuance volumes remain low relative to this need and concentrated in energy and financial sectors, with many pioneering projects government led.
- Potential channels to scale green finance:
  - Sovereign Wealth Funds (SWFs) can catalyze green investments by integrating national climate strategies into long-term investment strategies; examples include Dubai Green Fund (deploying about USD 27 billion) and Mubadala/Masdar investments.
  - GREs (including ADNOC) can drive sustainable finance through diversification, low-carbon investments, CO2 utilization, CCUS infrastructure, and partnerships (e.g., Abu Dhabi Hydrogen Alliance).
  - Market mechanisms: carbon trading platforms, carbon credit markets, regional carbon market opportunities (building on Qatar’s Global Carbon Council or proposed Riyadh Voluntary Exchange Platform).
  - Targeted tools: government guarantees, risk insurance, PPPs, joint investments with institutional investors and multilateral development banks.
- Policy design emphasis: Mainstream private sector green finance, design supportive climate policies (including carbon pricing), and ensure targeted guarantees and risk-sharing mechanisms to mobilize private capital while mitigating fiscal impacts.

*Source: IMF staff calculations and analysis as presented in the provided content.*

### 27. The UAE’s participation in internationally coordinated platforms could further

### 27. The UAE’s participation in internationally coordinated platforms could further

### International cooperation and green finance platforms
- IRENA and the UAE announced the Energy Transition Accelerator Financing (ETAF) Platform, described as a new global climate finance facility to accelerate the transition to renewable energy in developing countries.
- To grow green finance portfolio in the context of international cooperation, the UAE might also consider enhanced participation in Debt-for-Nature and Debt-for-Climate Swaps.

### Conclusions: climate change, energy transition, and growth
- Managing climate change challenges and energy transition policies will be key to ensuring sustainable long-term growth.
- The UAE is committed to climate adaptation and mitigation policies to ensure necessary transition of its economy away from fossil fuels.
- Analysis findings:
  - Scaling up investments in clean energy and renewables while continuing to invest in the development of diversified and greener traditional energy products and markets under the UAE 2050 Energy Strategy would increase potential non-oil GDP in the medium- to long-term to 6 percent.
  - The growth benefits could increase to about 8 percent in the medium- to long-term with full and successful implementation of the UAE ambitious reform agenda.

### Fiscal implications and financing strategies
- Accelerating energy transition reforms could put pressure on public finances.
- Frontloading investments in adaptation and mitigation would require alternative financing strategies, including relying more on green and sustainable private finance to help preserve net public financial wealth.
- Mainstreaming private sector green finance, creating an energy transition enabling environment, and adopting alternative and supporting fiscal policy options for meeting emissions goals, as well as appropriate design of these policies, could mitigate impacts on public finances.

### Identified bottlenecks to mainstreaming green finance in the UAE
- The UAE authorities are working on addressing financing challenges and identified bottlenecks include:
  - (i) no universal definition of ESG finance;
  - (ii) absence of nation-wide taxonomy;
  - (iii) the lack of adequate enforcement of policies and regulations;
  - (iv) scarce ESG financial disclosures at the company level;
  - (v) high risk of green sectors;
  - (vi) long payback period and lack of long-term finance;
  - (vii) lack of profitability and clarity in benefits.
- Additional barrier: lack of data and standard methodology for measurement, reporting and verification (MRV), which affects decision-making such as due diligence and risk assessment.
- Measures to address these barriers:
  - Developing and disseminating consistent climate related dashboards and unified databases to promote growth of green private finance.
  - Education and training programs to enable finance providers to better identify, assess, price, and mitigate ESG risks.
  - Building a sufficient base of well-qualified lawyers and accountants to support the growing sustainable finance sector.
- Footnote point: Only few organizations headquartered in the UAE currently support Taskforce for Climate-related Financial Disclosures (TCFD).

### Governance, legislative, and regulatory recommendations
- Continue strengthening governance, legislative and regulatory frameworks and their enforcement to create an enabling environment for private green finance markets.
- Focus on setting a coherent UAE wide set of standards for ESG products to guide investors and avoid “greenwashing.”
- Implement a nation-wide taxonomy for ESG finance, along with a pipeline of well-defined green projects, to inform investors and set a path for economic transition.
- Regulators could reinforce initiatives by:
  - enhancing legislations;
  - removing financial and non-financial barriers;
  - enforcing green finance rules and guidelines;
  - boosting the capacity of the financial sector;
  - considering offering incentives such as preferential rates and credit allocation policies.
- Adopt nation-wide company level ESG disclosure standards and develop ESG scoring methodology to assess ESG performance, industry practices, and corporate performance.

### Annex I — The DIGNAR-19 model: role and calibration for UAE
- Model overview:
  - The DIGNAR-19 (Debt Investment Growth Natural Resources and COVID-19) model is an extension of the DIGNAR model that accommodates the effects of the COVID-19 pandemic.
  - The model includes a resource fund and fiscal tools (consumption tax, income tax, government spending divided into consumption, investment, and transfers).
  - Features absorptive capacity constraint and public investment inefficiency; suitable for resource rich countries such as the UAE.
- Key model structure elements:
  - Two types of households: intertemporal optimizing households and “hand to mouth” households.
  - Three production sectors: nontraded good sector, (non-resource) traded good sector, and a natural resource sector (assumed exogenous and entirely exported).
  - Government finances public consumption, public investment, transfers, debt service, and resource fund savings using taxes, resource revenues, bond sales, and resource fund returns.
  - Resource fund serves as fiscal buffer drawn down for revenue shortfalls or accumulates excess savings; can be used alongside fiscal tools and fiscal rules to control fiscal adjustment speed.
- Public investment mechanisms in the model include:
  - (i) a growth-investment nexus,
  - (ii) a fiscal response required to maintain debt sustainability,
  - (iii) potential for both crowding-in and crowding-out of private investment,
  - (iv) potential to increase labor supply.
- Production function and public capital dynamics (variables and parameters preserved as in source):
  - yt = At (KGt-1)^{αg} (Lt)^{αN} (Kt-1)^{1−αN}
  - Public capital accumulation: KGt = (1−δ) KGt-1 + ε IGt  (with ε ∈ (0,1] public investment efficiency and δ ∈ (0,1) depreciation rate)
  - Private investment adjustment cost specification involves κ ∈ [0,1).
  - Higher αg and ε increase the size of the investment multiplier; higher κ decreases it.
- Calibration for UAE:
  - Calibrated at an annual frequency using recent UAE data.
  - Initial efficiency of public investment set at 50 percent in line with the IMF’s average score for the Middle East and Central Asis countries in 2017.
  - Additional parameters as in Aligishiev, Melina and Zanna (2021).
- Table 1. United Arab Emirates: Calibrated Parameters and Initial Values for the Steady State (In percent)
  - Potential real non-oil GDP growth rate 4.0
  - Exports to GDP ratio 71.9
  - Imports to GDP ratio 68.7
  - Private investment to GDP ratio 10.5
  - Public investment to GDP ratio 10.5
  - Public consumption to GDP 11.4
  - Total public revenues to GDP ratio 31.0
  - Share of government natural resource revenues in total government revenues 55.0
  - Public debt to GDP ratio 29.2
  - Private foreign debt to GDP ratio 76.9
  - Share of the natural resource sector to GDP 30.0
  - Implied interest rate on domestic debt 5.0
  - Public investment efficiency 50.0/70.0
  - Depreciation rate of public capital 7.0
  - Inverse of the Frisch elasticity of labor supply (skilled) 0.5
  - Inverse of the Frisch elasticity of labor supply (low skilled) 0.5

*Source: IMF staff calculations as presented in the chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1areea2023002.pdf_