## 1. Spotlight on India CEPA

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### Introduction and uncertainty measures
- UAE economic activity has become more synchronized with the global business cycle over the past decade (Text Figure 1).
- Increased synchronization: higher concordance indices and GDP growth correlations with main systemic countries; synchronization with the Kingdom of Saudi Arabia has declined.
- Deepening integration via financial, investment, and trade linkages increases exposure to external demand, global financial conditions, and oil price fluctuations.
- Four measures of uncertainty/volatility used: TPU (Trade Policy Uncertainty), GPR (Geopolitical Risk Index), VIX (30-day option-implied volatility of the S&P 500 index), and OVX (Oil Price Volatility index).

### Financial resilience to global shocks
- Methods and data:
  - Local-projection method (Jordà (2005)) used.
  - Financial-variable estimates based on daily data from January 2021 to July 2025; cumulative impacts reported over five days.
- Key empirical findings:
  - The VIX has dominant effects on UAE financial markets relative to other shocks.
  - UAE financial markets generally outperform EM benchmarks across most shocks and instruments.
  - Sensitivities observed:
    - Sovereign yield spreads: most sensitive to U.S. interest rates, VIX, and OVX; UAE shows greater resilience compared to EM and Middle East composite indices.
    - CDS spreads: rise in response to VIX, OVX, and USD movements, with stronger reactions compared to the EM composite.
    - Stock market returns: statistically significant responses to oil prices, USD movements, VIX, and OVX; impacts are smaller than for the EM composite.
  - TPU and GPR shocks: generally not statistically significant for the UAE; TPU shows selective significance for some other GCC countries.
- Portfolio and asset flows:
  - Portfolio flows significantly affected by VIX and USD movements.
  - Bond flows also respond to shifts in US Treasury yields.
  - Equity flows are more sensitive to oil price volatility (OVX).
- Visual/figure notes:
  - Text Figure 2: Measuring Uncertainty (Z-Scores) shows co-movements and divergence among VIX, OVX, GPR, TPU.
  - Text Figures 4a–4c, 5a–5b detail responses of bond yield spreads, CDS spreads, stock performance, bond flows, and equity flows to shocks (filled boxes indicate statistical significance; whiskers indicate 95% confidence intervals).

### The US interest-rate transmission to the UAE economy
- Policy rate movements:
  - Fed raised rates from March 2022 to August 2023.
  - UAE policy rate increased from 0.15 percent to 5.40 percent in the same period.
  - Policy rates stabilized until August 2024, then declined to 4.33 in January 2025.
- Observed macro dynamics:
  - Non-hydrocarbon growth remained robust during rate increases.
  - Private credit showed consistent growth, accelerating after the Federal Reserve began reducing interest rates in 2024 (Text Figure 6).
- CBUAE analysis:
  - Limited monetary transmission: lending relatively insensitive to policy rate changes; deposit base sensitivity limited.
  - Pass-through effective for market rates, interbank rates, and time deposit rates; limited for current accounts, savings accounts, and longer-term M-Bill yields.
- IV-SVAR supplementary analysis:
  - Instrumental variable structural VAR (IV-SVAR) with Bayesian methods at monthly frequency, 6 lags, 7 variables: real private credit, real non-hydrocarbon GDP, inflation, oil price, US industrial production, US inflation, and 1-year EIBOR.
  - 1-year EIBOR instrumented with exogenous US monetary policy shocks from high-frequency data.
  - Three samples/estimations:
    - Baseline: January 2015 to September 2024 (March, April, and May 2020 excluded).
    - FED Hiking Cycle sample: December 2015 to February 2019, and April 2022 to August 2024.
    - Pre 2019 sample: excludes COVID recovery and recent excess liquidity period.
- IV-SVAR empirical results (responses to a 100 basis points 1-year EIBOR shock):
  - Private credit:
    - Declines by 2.2 percent three months after a 100 basis points shock in the baseline sample.
    - Response somewhat greater in the Pre 2019 sample.
    - Response during FED Hiking periods remains near zero.
    - All private credit responses are not statistically significant.
  - Non-hydrocarbon GDP:
    - Declines by 2.1 percent in the baseline sample after three months.
    - Declines by 6 percent in the Pre 2019 sample after three months.
    - Declines by 1.4 percent in the FED Hiking sample after three months.
    - Responses after six months are not significant.
  - Interpretation: Weak private-credit sensitivity suggests interest rates are not a primary driver of credit in the UAE; non-hydrocarbon output shows a more pronounced and sometimes significant response, with lower sensitivity during recent tightening periods implying increased insulation from external shocks.

### External trade, tourism, and Comprehensive Economic Partnership Agreements (CEPAs)
- Methodology and coverage:
  - Tourism estimates: daily data from January 2021 to July 2025; reported as immediate cumulative impacts over five days.
  - Trade estimates: monthly data from January 2018 to December 2024; reported as three-month cumulative effects.
  - Estimates may understate recent volatility due to data lags; complementary high-frequency Portwatch data used for trade volumes.
- Key empirical findings on trade and tourism:
  - General: Impact of global and regional shocks on trade and tourism has been limited; tourism shows resilience to all shock types.
  - Non-oil goods exports:
    - Sensitive to Trade Policy Uncertainty (TPU) and oil price volatility (OVX).
    - Impact from oil price is statistically significant but small.
  - Imports:
    - Negatively affected by USD appreciation, oil price volatility (OVX) and financial volatility (OVX and VIX).
    - Positively affected by higher oil prices.
  - Tourism (Daily Tourist Arrivals):
    - Daily Tourist Arrivals indexed to "Index 100 = 2024 Average" indicate resilience across shock types.
- Portwatch and trade-volume dynamics:
  - Slight decline in volume of non-oil exports from the UAE relative to some other trade hubs, consistent with a global slowdown weighing on non-oil exports.
  - In June 2025 Strait of Hormuz trade disruptions, uptick in trade in ports outside the Strait compared to those inside, indicating trade agility.
  - Trade-volume indices referenced: Trade Tensions: Impact on Non-Oil Export Volumes (Index 100 = 2024 Average); UAE Non-Oil Exports by Port (Index Jan 2025 = 100).

### Comprehensive Economic Partnership Agreements (CEPAs) and Spotlight on India CEPA
- CEPAs expansion expected to support resilience to external shocks; coverage includes trade in goods and services, investment, and broader economic and financial cooperation.
- UAE ratified 13 CEPAs in the last three years.
- First CEPA with India:
  - Signed in February 2022 and ratified in April 2023.
  - Earliest CEPA to come into force was with India in May 2022.
- Effects and channels:
  - Diversify markets for goods and services and financial flows.
  - Reduce dependency on a limited number of partners.
  - Strengthen supply chains through preferential access to raw materials and intermediate goods.
  - Preliminary indications of CEPAs boosting trade and FDI; India highlighted in a focused analysis (Box 1).
- Spotlight on India CEPA — preliminary indicators:
  - Came into force: May 2022; Ratified: April 2023.
  - Preliminary analysis indicates an increase in both trade and FDI between the UAE and India following the CEPA.
  - Caution: gold is a major traded commodity between the two countries; gold price movements likely partially impact increases in total trade values.
  - Provisions: simpler customs procedures and removal/reduction of tariffs on a significant portion of traded products; facilitates trade in 11 service sectors.
  - UAE estimates the CEPA could unlock $100 billion in non-oil bilateral trade within five years of its ratification.
  - Agreement references the UAE-India Bilateral Investment Treaty (signed in 2024) and encourages mutual investments via the UAE-India Technical Council on Investment.
  - Investment indicators:
    - UAE investments in India appear to have increased coinciding with CEPA signing and ratification.
    - UAE reported that in 2023 India was its second largest investor and that in 2024 India was the largest investor in Dubai, with the highest announced greenfield investments into the UAE (13.7 percent of total announced greenfield investments).

### Fiscal federalism and fiscal structure — key facts and recommendations
- Fiscal decentralization:
  - Federal government accounts for only around 15 percent of total public spending.
  - Each of the seven emirates has full fiscal autonomy over natural resource management, fiscal operations, and debt issuance.
- VAT revenue sharing:
  - Each Emirate transfers all its collected VAT proceeds to the federal government; the federal government retains 30 percent of each Emirate’s collection and transfers back the remaining 70 percent to the respective Emirate.
- Public sector balance-sheet estimates (2023):
  - Total estimated assets exceeded 1200 percent of GDP in 2023 (including hydrocarbon wealth), of which over 45 percent were financial assets.
  - Liabilities are estimated at about 100 percent GDP in 2023.
  - 2024 Article IV Staff report estimated liabilities to be 100.9 percent of GDP in 2023, which include 32.4 percent liabilities on general government, 35 percent liabilities on GREs, and 33.5 percent liabilities on the Central Bank of UAE.
- Sovereign wealth funds (SWFs) and asset figures:
  - ADIA manages assets of about $1 trillion and invests exclusively abroad, allocating nearly half of its portfolio to the U.S.
  - Mubadala Investment Company holds assets of around $300 billion, with approximately 40 percent invested in the U.S. and 20 percent domestically.
  - Abu Dhabi Development Holding Company (ADQ) manages about $200 billion in assets.
  - Investment Corporation of Dubai (ICD) and Dubai Investment Fund (DIF) oversee about $400 and $100 billion in assets, respectively.
  - ADIA, Mubadala, and ICD adhere to the voluntary Santiago Principles.
- GREs and SOEs:
  - Prominent GREs/GRE-type entities include ADNOC, Emirates Airlines, Etisalat, Dubai Holding, and Emaar.
  - ADNOC committed to localizing production of over 100 additional products and to procuring $30 billion of goods from domestic manufacturers by 2030.
  - Emirates Investment Authority (EIA) is the only SWF owned by the federal government and holds strategic ownership in some GREs such as Etisalat.
- Fiscal coordination recommendations:
  - Institutionalize coordinated Medium-Term Fiscal Frameworks (MTFFs) across federal and emirate levels.
  - Greater coordination in fiscal risk analysis and management to identify and mitigate vulnerabilities and spillovers.
  - Enhanced information sharing on fiscal operations, debt, and contingent liabilities.
  - Strengthen the Fiscal Policy Coordination Council’s role in aligning fiscal policy and medium-term fiscal planning.

### Short-term fiscal policy challenges and buffers
- Hydrocarbon revenue volatility:
  - Hydrocarbon revenues account for a sizable share of consolidated government income, making fiscal outcomes sensitive to oil price volatility.
  - Fiscal policy has exhibited some procyclicality.
- Fixed exchange rate implications:
  - Dirham pegged to the U.S. dollar; domestic interest rates closely follow U.S. monetary policy, constraining monetary policy tools for countercyclical stabilization.
  - Emphasizes maintaining fiscal space and building resilience to oil price volatility.
- Conservative budgeting and fiscal buffers:
  - Oil price assumptions used for budgeting are set below market forecasts; non-hydrocarbon tax revenues projected conservatively.
  - Revenues tend to overperform under normal circumstances, generating fiscal surpluses; reserves and debt issuance can be used for temporary shocks.
  - Under severe shocks, governments can rely on SWFs, adjust dividend policies, and rationalize subsidies.
  - Consideration for a framework enabling timely and targeted cross-government interventions given heterogeneity in debt levels and fiscal space across emirates.
- Medium and long-term objectives:
  - Diversification of revenue sources is key for fiscal sustainability and intergenerational equity amid exhaustibility of hydrocarbon resources and energy transition risks.
  - Assessment: UAE general government debt is sustainable over the foreseeable future, underpinned by continued accumulation of fiscal surpluses.
  - Recommendation: Compile comprehensive public sector debt statistics, including GREs debt and contingent liabilities, to strengthen fiscal risk monitoring and medium-term planning.

### Strengthening fiscal policy framework under fiscal federalism
- MTFFs and coordination:
  - MTFFs should span three-to-five years, include fiscal strategy, medium-term macro-fiscal projections, fiscal risks, and an aggregate expenditure ceiling.
  - Recent developments:
    - Federal MoF adopted a five-year budget cycle (2022–2026), plans to transition to a three-year cycle (2027–2029).
    - Abu Dhabi uses a five-year internal MTFF with conservative oil price path.
    - Dubai applies a rolling three-year internal budget framework with a surplus stance and fiscal rules.
    - No consolidated medium-term macro-fiscal forecasts for the general government sector.
  - Recommended features:
    - Shared analysis of global and domestic risks to inform common macro assumptions where appropriate.
    - MTFFs by each emirate and federal government consistent with macro outlook.
    - Consolidated multi-annual fiscal framework for the general government incorporating projections from all jurisdictions.
- Fiscal risk analysis and management:
  - Sources of fiscal risks: macro volatility, government borrowing, contingent liabilities (government guarantees, PPPs, GREs), financial sector liabilities, climate adaptation, developmental priorities.
  - Current practices: Federal Fiscal Risk Management Guidelines being formalized; MoF preparing climate fiscal risk guidelines; Dubai maintains a centralized registry of public debt and guarantees; GRE reporting requirements exist.
  - Recommendations:
    - Develop alternative macro-fiscal scenarios and routine debt sustainability analysis.
    - Share regular information on GREs financial positions and aggregate borrowing and contingent liabilities.
    - Periodic stress testing of public finances.
- FPCC and information sharing:
  - FPCC established in 2008; mandates include oversight of public finance reports, fiscal strategy preparation, consultation on budgets, coordination on revenue mobilization and financing, and sovereign rating coordination.
  - FPCC chaired by MoF; meets three times a year; scope for a more prominent role in fiscal policy coordination beyond reporting.
- Fiscal statistics and data improvements:
  - Fiscal statistics compiled under GFSM 2014; standardized disaggregated data on revenues and expenditures across government entities and GREs.
  - Needs:
    - Comprehensive public sector balance sheet encompassing general government, financial and non-financial corporations.
    - Full accrual accounting adoption across emirates.
    - Increased granularity on revenues, expenditures, financing, GREs, SWFs, and quasi-fiscal activities.
    - Consistent sectorization of public sector entities across emirates.

### IMF STA CD recommendations and fiscal framework guidance
- STA CD recommendations:
  - Ensure all emirates follow GFSM 2014 framework and guidelines.
  - Improve classification of revenues to hydrocarbon and non-hydrocarbon.
  - Provide data on transactions in financial assets and liabilities and compile and disseminate a consolidated financial balance sheet at the GG level.
  - Compile public sector debt statistics (PSDS) including outstanding debt, maturities, instruments, currency, residency and borrowing rates.
  - As public debt management capacity strengthens, disseminate PSDS quarterly with a clear publication schedule.
- Fiscal framework guidance:
  - Greater transparency, comprehensive harmonized reporting, and enhanced coordination across emirates and federal government.
  - More active FPCC role to support consistent policy implementation and fiscal sustainability.
  - Expand coverage to include GREs and SWFs and improve data on intra-public sector flows and contingent liabilities.
  - Regular monitoring and systematic assessment of contingent liabilities, including government guarantees, PPPs, and potential financial exposures.

### Non-hydrocarbon productivity and AI in the UAE
- Context and headline statistics:
  - Share of non-hydrocarbon output to total GDP increased from 71 percent in 2010 to 75.5 percent in 2024.
  - Non-hydrocarbon sector supported by tourism, financial services, manufacturing, construction, real estate, and wholesale trade.
  - UAE increased investment in digital infrastructure and AI development across government agencies and many sectors.
- Methodology for non-hydrocarbon TFP:
  - Solow growth accounting framework extended to sector-specific TFP components with a Cobb-Douglas production function.
  - Capital stock estimated from 1975 to 2023 via the perpetual inventory method.
  - Labor share used to calibrate capital share α_n.
  - Local projection (LP) models used with dependent variable log of non-hydrocarbon TFP; regressors include FDIs, business environment indices, technology adoption measures, and controls.
- Empirical results — contributions and drivers:
  - TFP and labor accounted for a significant portion of non-hydrocarbon GDP growth.
  - TFP accounts for around one third of overall GDP growth; in 2021-2023 sample, TFP was the largest contributor to non-hydrocarbon GDP growth.
  - Main drivers: FDI inflows, technology adoption, and improvements in regulation.
  - FDI effect: a one percentage point increase in FDI (as a share of GDP) raises non-hydrocarbon TFP by about 1.6 percent in the UAE, with effects peaking after two years.
  - Positive and significant TFP responses to increases in the share of medium and high-tech value added in manufacturing.
- Role of AI:
  - AI can boost labor and TFP through greater technology adoption, improved government efficiency, and attracting increased FDI.
  - IMF estimates AI could boost global GDP growth between 0.1 and 0.5 percentage points per year in the medium term.
  - Literature estimates:
    - Acemoglu (2025): cumulative TFP gains of around 0.7 percent over the next 10 years, based on 4.6 percent of tasks being profitably replaced by AI and a 27 percent productivity increase due to labor cost savings.
    - Aghion and Bunel (2024): cumulative median 6.8 percent TFP growth over 10 years based on (i) 60 percent of tasks exposed to AI in developed countries; (ii) 50 percent of exposed tasks profitably using AI; (iii) labor saving costs induced by AI of 40 percent.
  - Implication: With appropriate infrastructure and regulatory frameworks, AI can stimulate FDI, technology adoption, and regulatory quality—primary drivers of non-hydrocarbon TFP.
- Sectoral AI potential (share of 2024 nominal GDP, in percent):
  - Manufacturing (9.4%): automation, predictive maintenance, supply chain optimization.
  - Healthcare (1.8%): faster diagnosis, clinical decision support, operations optimization.
  - Wholesale and Retail Trade (12.5%): demand forecasting, inventory optimization, personalized marketing.
  - Construction (8.3%): project planning, predictive maintenance, autonomous equipment.
  - Financial Services (10.2%): fraud detection, predictive analytics, compliance.
  - Logistics and Transportation (6.5%): predictive maintenance, warehouse automation, route optimization, smart port/airport operations.
  - Public Services (6.1%): predictive policy planning, smart cities, citizen-centric services.

### Box 1 — AI in the UAE (national strategy, investments, capacity, risks, and policy responses)
- National vision and governance:
  - UAE National Strategy for Artificial Intelligence 2031 with eight strategic objectives to position the UAE among leading AI nations by 2031.
  - Ministry for AI and UAE Council for AI established; AI Ethics Guide (2022) and AI Charter (2024) support regulated expansion.
  - Regulatory Sandboxes and Innovation Labs created to test AI solutions.
  - Abu Dhabi Government Digital Strategy 2025-2027 aims to become the world's first fully AI‑native government by 2027, investing AED 13 billion into digital infrastructure and sovereign cloud and launching over 200 AI solutions for public services.
  - Authorities began incorporating AI‑based analytics into fiscal management at the federal level.
- Investments and infrastructure:
  - MGX, established in 2024 as a joint venture between Mubadala and G42, aims to manage up to $100 billion in global AI assets.
  - MGX co‑founded the $30 billion Global AI Infrastructure Investment Fund with BlackRock, Microsoft, and others.
  - Partnerships with OpenAI and Oracle; MGX investing in initiatives like the Stargate supercomputing project.
- Education, research, and talent initiatives:
  - Mohamed bin Zayed University of Artificial Intelligence (MBZUAI) founded in 2019; launched first undergraduate AI program in 2025.
  - Technology Innovation Institute (TII) created in 2020; responsible for Falcon open‑source language models (LLMs), including Arabic LLMs.
  - Upskilling programs: “One Million AI Learners” (launched April 2025) to train one million government employees by 2027; “One Million Prompters” to equip one million individuals with AI tool skills.
  - Tech hubs like Hub71 support startups in AI, fintech, cybersecurity, and healthtech.
- AI readiness and rankings:
  - UAE ranked 13th out of 188 countries on the Government AI Readiness index (2024).
  - UAE ranked 35th out of 174 countries in the IMF AI Preparedness Index (Text Figure 4).
  - UAE average penetration of AI skills is 0.725 times the global average across the same occupations (LinkedIn self‑reported AI skills, 2016–2024).
- Challenges and mitigation:
  - Labor market disruption: need for robust re‑skilling and up‑skilling programs.
  - Cybersecurity vulnerabilities: require multilayered AI‑specific defenses; National Cybersecurity Strategy updated in 2025 focuses on governance, protection, innovation, capacity building, and partnerships.
  - Resource intensity: AI infrastructure is energy and water intensive; mitigation via alternative power sources, efficient desalination, smart grids, low‑water cooling for data centers, and investments in solar and nuclear power.
- Policy responses:
  - Talent and workforce expansion through government upskilling programs and AI‑focused curricula.
  - Cybersecurity measures include Cybercrimes Law, Personal Data Protection Law, Cybersecurity Council (2020), UAE Information Assurance Standards, and National Information Assurance Platform (NIAP).
  - Energy and water efficiency measures: investments in solar and nuclear power, efficient desalination, smart grids, AI‑driven tools, and Water Security Strategy 2036 initiatives.

*Source: 1. Spotlight on India CEPA — 1areea2025002-source-pdf*

### 1. Spotlight on India CEPA _________________________________________________________________ 15

### 1. Spotlight on India CEPA

### Introduction
- The UAE’s economic activity has become more synchronized with the global business cycle over the past decade (Text Figure 1).
- Increased synchronization is reflected in higher concordance indices and GDP growth correlations with main systemic countries, while synchronization with the Kingdom of Saudi Arabia has declined.
- The UAE’s deepening integration into the global economy occurs via financial, investment, and trade linkages, increasing exposure to external demand, global financial conditions, and oil price fluctuations.
- Four measures of uncertainty/volatility are the focus: TPU (Trade Policy Uncertainty), GPR (Geopolitical Risk Index), VIX (30-day option-implied volatility of the S&P 500 index), and OVX (Oil Price Volatility index).

### Financial Resilience to Global Shocks
- Methods and data:
  - Empirical analyses use the local-projection method (Jordà (2005)).
  - Estimates for financial variables are based on daily data from January 2021 to July 2025, reflecting cumulative impacts over five days.
- Key empirical findings:
  - The VIX has dominant effects on UAE financial markets compared to other shocks.
  - UAE financial markets generally outperform EM benchmarks across most shocks and instruments.
  - Sensitivities observed:
    - Sovereign yield spreads: most sensitive to U.S. interest rates, VIX, and OVX; UAE shows greater resilience compared to EM and Middle East composite indices.
    - CDS spreads: rise in response to VIX, OVX, and USD movements, with stronger reactions compared to the EM composite.
    - Stock market returns: statistically significant responses to oil prices, USD movements, VIX, and OVX; impact less than EM composite.
  - TPU and GPR shocks: generally not statistically significant for the UAE, with TPU showing selective significance for some other GCC countries.
- Portfolio and asset flows:
  - Portfolio flows are significantly affected by VIX and USD movements.
  - Bond flows additionally respond to shifts in US Treasury yields.
  - Equity flows are more sensitive to oil price volatility (OVX).
- Visual/figure notes (Text Figures referenced):
  - Text Figure 2: Measuring Uncertainty (Z-Scores) shows co-movements and periods of divergence among VIX, OVX, GPR, TPU.
  - Text Figures 4a–4c, 5a–5b detail responses of bond yield spreads, CDS spreads, stock market performance, bond flows, and equity flows to shocks. (Filled boxes indicate statistical significance; whiskers indicate 95% confidence intervals.)

### The US Interest Rate Transmission to the UAE Economy
- Policy rate movements:
  - From March 2022 to August 2023, the Fed raised rates. In the same period the UAE policy rate increased from 0.15 percent to 5.40 percent.
  - Policy rates stabilized until August 2024, then declined to 4.33 in January 2025.
- Observed macro dynamics:
  - Non-hydrocarbon growth remained robust during the period of rate increases.
  - Private credit showed consistent growth, accelerating after the Federal Reserve began reducing interest rates in 2024 (Text Figure 6).
- CBUAE analysis:
  - Found limited monetary transmission: lending appears relatively insensitive to changes in policy rates; deposit base sensitivity to policy rate changes is limited.
  - Pass-through is effective for market rates, interbank rates, and time deposit rates; limited for current accounts, savings accounts, and longer-term M-Bill yields.
- Supplementary IV-SVAR analysis (methodology and samples):
  - An instrumental variable structural VAR (IV-SVAR) with Bayesian methods is estimated at monthly frequency with 6 lags and 7 variables: real private credit, real non-hydrocarbon GDP, inflation, oil price, US industrial production, US inflation, and 1-year EIBOR.
  - The 1-year EIBOR is instrumented with exogenous US monetary policy shocks obtained from high-frequency data.
  - Three samples/estimations:
    - Baseline: January 2015 to September 2024 (March, April, and May 2020 excluded to control for COVID outliers).
    - FED Hiking Cycle sample: periods when the US Fed was increasing interest rates (December 2015 to February 2019, and April 2022 to August 2024).
    - Pre 2019 sample: excludes the COVID recovery and recent excess liquidity period.
- IV-SVAR empirical results (responses to a 100 basis points 1-year EIBOR shock):
  - Private credit:
    - Declines by 2.2 percent three months after a 100 basis points shock in the baseline sample.
    - The response is somewhat greater in the Pre 2019 sample.
    - The response during FED Hiking periods remains near zero.
    - All private credit responses are not statistically significant.
  - Non-hydrocarbon GDP:
    - Declines by 2.1 percent in the baseline sample after three months.
    - Declines by 6 percent in the Pre 2019 sample after three months.
    - Declines by 1.4 percent in the FED Hiking sample after three months.
    - Responses after six months are not significant.
  - Interpretation: Private credit’s weak sensitivity suggests interest rates are not a primary driver of credit in the UAE; non-hydrocarbon output shows a more pronounced and sometimes significant response, with lower sensitivity during recent interest rate hike periods implying increased insulation from external shocks.

### External Trade and Comprehensive Economic Partnership Agreements
- The paper indicates that global and regional uncertainty has had a limited impact on tourism and trade, with resilience further supported by expanding international agreements (section opening and D. heading).
- Four uncertainty measures (TPU, GPR, VIX, OVX) are used to study transmission channels to the UAE, including trade in goods and services, non-oil exports, and tourism, but specific numerical impacts on trade and CEPA outcomes are not detailed in the supplied excerpt.

*Source: 1. Spotlight on India CEPA — 1areea2025002-source-pdf*

### 13.      The impact of global and regional shocks on tourism and trade has been limited. We

### The impact of global and regional shocks on tourism and trade has been limited.

### Methodology and data coverage
- Tourism estimates: daily data from January 2021 to July 2025; reported as immediate cumulative impacts over five days.
- Trade estimates: monthly data from January 2018 to December 2024; reported as three-month cumulative effects.
- Estimates may underestimate recent global uncertainty and volatility surges due to data lags.
- Complementary high-frequency Portwatch data used to track trade volumes.

### Key empirical findings on trade and tourism
- General: The impact of global and regional shocks on trade and tourism has been limited; tourism shows resilience to all types of shocks.
- Non-oil goods exports:
  - Sensitive to Trade Policy Uncertainty (TPU) and oil price volatility (OVX).
  - Impact from oil price is statistically significant but small.
- Imports:
  - Negatively affected by USD appreciation, oil price volatility (OVX) and financial volatility (OVX and VIX).
  - Positively affected by higher oil prices.
- Tourism (Daily Tourist Arrivals):
  - Daily Tourist Arrivals indexed to "Index 100 = 2024 Average" indicate resilience across shock types.

### Portwatch and trade-volume dynamics
- Portwatch data indicates:
  - A slight decline in the volume of non-oil exports from the UAE relative to some other trade hubs, consistent with a global slowdown weighing on non-oil exports.
  - In June 2025 Strait of Hormuz trade disruptions, an uptick in trade in ports outside the Strait compared to those inside, indicating trade agility.
- Trade-volume indices referenced:
  - Trade Tensions: Impact on Non-Oil Export Volumes (Index 100 = 2024 Average).
  - UAE Non-Oil Exports by Port (Index Jan 2025 = 100).

### Comprehensive Economic Partnership Agreements (CEPAs)
- Ongoing expansion of CEPAs expected to further support resilience to external shocks.
- CEPAs cover trade in goods and services, investment, and broader economic and financial cooperation.
- UAE ratified 13 CEPAs in the last three years.
- First CEPA with India: signed in February 2022 and ratified in April 2023; earliest CEPA to come into force was with India in May 2022.
- Effects and channels:
  - Diversify markets for goods and services and financial flows.
  - Reduce dependency on a limited number of partners.
  - Strengthen supply chains through preferential access to raw materials and intermediate goods.
  - Preliminary indications of CEPAs boosting trade and FDI, with India highlighted in a focused analysis (Box 1).

### Spotlight on India CEPA (Box 1) — preliminary indicators
- Timing:
  - Came into force: May 2022.
  - Ratified: April 2023.
- Trade and FDI indications:
  - Preliminary analysis indicates an increase in both trade and FDI between the UAE and India following the CEPA.
  - Caution: gold is a major traded commodity between the two countries; gold price movements likely partially impact increases in total trade values.
- Provisions and potential:
  - CEPA grants simpler customs procedures and removal/reduction of tariffs on a significant portion of traded products.
  - Facilitates trade in 11 service sectors.
  - UAE estimates the CEPA could unlock $100 billion in non-oil bilateral trade within five years of its ratification.
  - Agreement references the UAE-India Bilateral Investment Treaty (signed in 2024) and encourages mutual investments via the UAE-India Technical Council on Investment.
- Investment indicators:
  - UAE investments in India appear to have increased coinciding with CEPA signing and ratification.
  - UAE reported that in 2023 India was its second largest investor and that in 2024 India was the largest investor in Dubai, with the highest announced greenfield investments into the UAE (13.7 percent of total announced greenfield investments).

### Conclusion on external resilience
- Despite closer global integration, the UAE demonstrates strong financial and economic resilience:
  - Broad resilience to external shocks including movements in the U.S. dollar, interest rates, and global volatility, with limited pass-through to domestic activity.
  - Financial markets and capital flows less affected by global shocks than regional peers and other emerging markets.
  - Transmission of U.S. monetary policy to domestic credit and growth has been limited in recent years, particularly during tightening cycles coinciding with periods of ample liquidity in the UAE.
  - Impact of global and regional uncertainty on trade and tourism appears contained, with resilience further supported by expanding CEPAs and diversification efforts.

### Fiscal federalism and fiscal structure (selected facts)
- Fiscal decentralization:
  - The federal government accounts for only around 15 percent of total public spending.
  - Each of the seven emirates has full fiscal autonomy over natural resource management, fiscal operations, and debt issuance.
- VAT revenue sharing arrangement:
  - Each Emirate transfers all its collected VAT proceeds to the federal government; the federal government retains 30 percent of each Emirate’s collection and transfers back the remaining 70 percent to the respective Emirate.
- Public sector balance-sheet estimates (2023):
  - Total estimated assets exceeded 1200 percent of GDP in 2023 (including hydrocarbon wealth), of which over 45 percent were financial assets.
  - Liabilities are estimated at about 100 percent GDP in 2023.
  - 2024 Article IV Staff report estimated liabilities to be 100.9 percent of GDP in 2023, which include 32.4 percent liabilities on general government, 35 percent liabilities on GREs, and 33.5 percent liabilities on the Central Bank of UAE.
- Sovereign wealth funds (SWFs) and major asset figures:
  - ADIA manages assets of about $1 trillion and invests exclusively abroad, allocating nearly half of its portfolio to the U.S.
  - Mubadala Investment Company holds assets of around $300 billion, with approximately 40 percent invested in the U.S. and 20 percent domestically.
  - Abu Dhabi Development Holding Company (ADQ) manages about $200 billion in assets.
  - Investment Corporation of Dubai (ICD) and Dubai Investment Fund (DIF) oversee about $400 and $100 billion in assets, respectively.
  - ADIA, Mubadala, and ICD adhere to the voluntary Santiago Principles on transparency and accountability for SWFs.
- Government-related entities (GREs) and SOEs:
  - Prominent GREs/GRE-type entities include ADNOC, Emirates Airlines, Etisalat, Dubai Holding, and Emaar.
  - ADNOC committed to localizing production of over 100 additional products and to procuring $30 billion of goods from domestic manufacturers by 2030.
  - Emirates Investment Authority (EIA) is the only SWF owned by the federal government and holds strategic ownership in some GREs such as Etisalat.
- Fiscal coordination recommendations (institutional context):
  - Importance of coordinated Medium-Term Fiscal Frameworks (MTFFs) across federal and emirate levels.
  - Greater coordination in fiscal risk analysis and management to identify and mitigate vulnerabilities and spillovers.
  - Enhanced information sharing on fiscal operations, debt, and contingent liabilities.
  - The Fiscal Policy Coordination Council could play a more active role in aligning fiscal policy and medium-term fiscal planning.

### Short-term fiscal policy challenges
- Hydrocarbon revenue volatility:
  - Hydrocarbon revenues account for a sizable share of the UAE’s consolidated government income, making fiscal outcomes sensitive to oil price volatility.
  - Fiscal policy has exhibited some procyclicality, with spending rising during booms and facing pressures in downturns.
- Fixed exchange rate implications:
  - With the dirham pegged to the U.S. dollar, domestic interest rates closely follow U.S. monetary policy, constraining monetary policy tools for countercyclical stabilization.
  - This magnifies the importance of maintaining fiscal space, building resilience to oil price volatility, and ensuring fiscal policy can respond to short-term shocks while supporting diversification and development objectives.

*Source: IMF staff.*

### 8.      Conservative annual budgets by federal and larger emirates help to protect against

### 8.      Conservative annual budgets by federal and larger emirates help to protect against small and temporary shocks

### Conservative budgeting and fiscal buffers
- Oil price assumptions used for forecasting revenues to inform budget decisions are set below market forecasts, and non-hydrocarbon tax revenues are projected conservatively.
- Under normal circumstances, revenues tend to overperform, generating fiscal surpluses; during downturns, budget targets can be met without abrupt fiscal adjustment.
- This prudent approach can help smooth expenditure over the cycle and limit procyclicality.
- In the event of temporary shocks, fiscal policy can draw on reserves and debt issuance, supported by postponement of selected projects and expenditure efficiency measures.
- Under more severe or prolonged shocks, governments can rely on SWFs, adjust dividend policies, and gradually rationalize subsidies while reallocating spending toward priority areas.
- Consideration should be given to establishing a framework for timely and targeted interventions including potential financial support across different governments in response to crises and severe shocks, to facilitate coordinated cross-government transfers and interventions given heterogeneity in debt levels and fiscal space across emirates.
- Text and figures referenced: Text Figure 3. Fiscal Balances and Oil Price Dynamics (USD, Year on Year Difference); Text Figure 4. Fiscal Balances and GDP Growth (USD, Year on Year Difference). (Sources: IMF Staff Calculations Based on Data Received from Authorities.)

### Medium and long-term fiscal policy objectives
- Diversification of revenue sources is key to addressing long-term fiscal sustainability and intergenerational equity challenges due to exhaustibility of hydrocarbon resources and the global energy transition.
- Risks highlighted: eventual decline in production, potential reduction in global demand for oil and gas, uncertainty around future oil prices, extraction costs, reserve estimates, and climate policy developments.
- Assessment: UAE general government debt is sustainable over the foreseeable future, underpinned by continued accumulation of fiscal surpluses.
- UAE has accumulated large financial assets that provide ample buffers against potential shocks.
- Analysis based on various definitions of the Permanent Income Hypothesis (including Bird-in-Hand approach) indicates that general government fiscal balances do not face additional constraints from intergenerational equity considerations. (Footnotes: 7, 8)
- Recommendation: Compile comprehensive public sector debt statistics, including GREs debt and associated contingent liabilities, to strengthen fiscal risk monitoring and medium-term fiscal planning.
- Text Figure 5 referenced: Non-resource Primary Balance (Percent of non-resource GDP) showing scenarios including Baseline projection; Constant share of non-resource GDP; Real annuity per capita; Real annuity; Bird-in-hand; Average. (Source: IMF Staff Calculations.)

### Strengthening fiscal policy framework under fiscal federalism
- Challenge: Individual emirates set and implement fiscal policies independently while economic cycles are highly correlated due to interlinkages, common shocks, and cross-emirate spillovers.
- Progress: High-level information sharing and coordination on strategic policy planning exists; transition toward accrual-based accounting and IPSAS-aligned reforms is underway, supported by cooperation between the Ministry of Finance and emirate-level entities such as Sharjah.
- Recommendation: Institutionalize and enhance operational-level coordination; assess fiscal position from a comprehensive public sector perspective (including GREs and SWFs) to strengthen consistency, accountability, and annual fiscal stance calibration.
- Further action: Strengthen MTFFs of each emirate and the federal government, enhance routine sharing of medium-term fiscal projections, budgets, balance sheets, and fiscal risks.

### More coordinated medium-term fiscal frameworks (MTFFs)
- Role of MTFFs: Promote fiscal sustainability and better-informed fiscal decisions; typically span a three-to-five-year period and include fiscal strategy, medium-term macro-fiscal projections, fiscal risks, and an aggregate expenditure ceiling.
- Recent developments:
  - Federal MoF adopted a five-year budget cycle (2022–2026) for the central government, anchored in balanced budget objectives; plans to transition to a three-year cycle (for 2027-2029).
  - Abu Dhabi’s internal MTFF uses a five-year cycle with a conservative oil price path, gradually expanding non-oil revenues, and indicative expenditure ceilings.
  - Dubai applies a rolling three-year internal budget framework with a surplus stance and a set of fiscal rules.
  - No consolidated medium-term macro-fiscal forecasts prepared for the general government sector.
- Key features recommended for a well-coordinated fiscal framework:
  - Shared analysis of global and domestic economic and financial developments and risks to inform common macroeconomic assumptions where appropriate.
  - Preparation of MTFFs by each emirate and the federal government consistent with the macroeconomic outlook to form the basis for annual budgets.
  - Medium-term fiscal objectives defined by each government, considering short-term macro objectives, medium-term development goals, and long-term sustainability/intergenerational equity.
  - Compilation of a consolidated multi-annual fiscal framework for the general government incorporating projections from all jurisdictions via timely and standardized exchange of fiscal forecasts and spending plans.
  - MTFFs supplemented with information on fiscal operations of GREs and eventual expansion to broader public sector coverage.

### Preconditions and technical capacity building for MTFFs
- Preconditions for achieving coordinated MTFFs:
  - Strengthening macro-fiscal forecasting capacity, upgrading tools and analytical capabilities, and understanding inter-jurisdictional spillovers.
  - Robust medium-term expenditure planning mechanisms.
  - Clear and coordinated timeline for information sharing of fiscal forecasts, budgets, and borrowing plans.
  - Address outstanding data limitations (see Section on Fiscal Statistics).

### Fiscal risk analysis and management
- Sources of fiscal risks: macroeconomic volatility, government borrowing, contingent liabilities (government guarantees, PPPs, GREs), financial sector liabilities, climate adaptation, and developmental priorities.
- Current practice:
  - Federal Fiscal Risk Management Guidelines issued to identify, assess, and mitigate fiscal risks; being formalized through regulation at the federal level.
  - MoF preparing guidelines to integrate fiscal risks from climate change.
  - Dubai maintains a centralized registry of public debt and government guarantees and oversees GRE borrowing and debt governance; GREs required to submit annual financial statements, projections, and borrowing plans for review by the PDMO.
  - Abu Dhabi’s Executive Committee has similar controls on loan guarantees.
  - Several jurisdictions have adopted regulatory frameworks for PPP approval and management.
- Recommendations to enhance fiscal risk management:
  - Develop alternative macro-fiscal scenarios, conduct routine debt sustainability analysis, assess fiscal sustainability implications of long-term trends, and perform periodic stress testing of public finances.
  - Share regular information on GREs financial positions and financial indicators.
  - Share aggregate information on government borrowing and debt portfolio risks, government guarantees, and other material contingent liabilities.
  - Conduct alternative macro-fiscal scenarios of general government fiscal forecasts to better understand aggregate risk and spillovers.

### Fiscal Policy Coordination Council (FPCC) and enhanced information sharing
- FPCC established in 2008; mandates (per Cabinet Decree No. 24 for 2015) include oversight over public finance reports, preparation of fiscal strategies, consultation on budgets and expenditures, coordination on revenue mobilization, coordination on financing for projects, coordination on sovereign rating issues, coordination on competitiveness and government efficiency measures, and coordination on new fiscal issues relevant to economic development.
- FPCC is chaired by MoF with representatives from local governments and the Central Bank of the UAE; supported by a Fiscal Coordination Department within MoF; meets regularly (three times a year).
- Emirate governments report fiscal outturn data quarterly to MoF to support compilation and reporting of general government fiscal statistics (covering the statement of Government Operations).
- Scope for FPCC to play a more prominent role in fiscal policy coordination beyond fiscal reporting and project discussions; requires enhanced technical capacity of MoF’s Fiscal Coordination Unit and a clear roadmap for strengthening macro-fiscal frameworks, information sharing, and fiscal risk analysis and management.
- Note: Coverage of GREs and SWFs currently falls outside the FPCC mandate.

### Fiscal statistics and data improvements
- Significant progress in data compilation and reporting; fiscal statistics are compiled under GFSM 2014 despite differing fiscal reporting practices and accounting standards across emirates.
- Standardized compilation of disaggregated data on revenues (including oil), expenditures, and net transactions in fixed assets across government entities including emirates and GREs; a list of GREs at the general government has been established to compile public debt.
- Need for timely and comprehensive fiscal information to support policymaking:
  - Compile a comprehensive and updated public sector balance sheet incorporating fiscal accounts for general government, financial and non-financial corporations.
  - Adoption of full accrual accounting systems across emirates will support balance sheet compilation.
  - Increase granularity in breakdown of revenues (including hydrocarbon revenues), expenditures, financing and investment activities, GREs, SWFs, and quasi-fiscal activities.
  - Establish comprehensive and consistent sectorization of public sector entities across all emirates to enhance GFS and public sector debt statistics.

*Source: UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND.*

### 25.      The recommendations from IMF STA CD include further:

### The recommendations from IMF STA CD include further:

### IMF STA CD recommendations
- Strengthening fiscal statistics by:
  - ensuring all emirates are following GFSM 2014 framework and guidelines;
  - improving the classification of revenues to hydrocarbon and non-hydrocarbon revenues;
  - providing data on transaction in financial assets and liabilities and compiling and disseminating a consolidated financial balance sheet at the GG level.
- Enhancing fiscal sustainability and management of risk through the compilation of public sector debt statistics (PSDS). PSDS should include information on outstanding debt, maturities, instruments, currency, residency and borrowing rates.
- As the capacity of the newly established public debt management office is strengthened, the frequency of disseminating PSDS should be on a quarterly basis and with clear schedule for publication.

### Fiscal framework — conclusions and policy guidance
- Strengthening the UAE’s fiscal framework could benefit from:
  - greater transparency;
  - more comprehensive and harmonized reporting;
  - enhanced coordination across emirates and with the federal government.
- These efforts, supported by more coordinated Medium-Term Fiscal Frameworks (MTFFs) across government levels, would help ensure a consistent overall fiscal stance and more effective fiscal policy.
- A more active role for the Fiscal Policy Coordination Council could help advance these reforms, supporting consistent policy implementation and reinforcing the sustainability and resilience of public finances.
- Expanding coverage to include GREs and SWFs, and improving data on intra-public sector flows and contingent liabilities would provide a more comprehensive view of the public sector’s fiscal position.
- Regular monitoring and systematic assessment of contingent liabilities, including government guarantees, PPPs, and potential financial exposures, would allow for more effective monitoring of fiscal risks and more efficient fiscal risk management.

*UNITED ARAB EMIRATES — INTERNATIONAL MONETARY FUND*

### Annex I. Country case studies on fiscal coordination — key lessons

- Spain: Financial decentralization and fiscal coordination
  - Spain’s 1978 Constitution guarantees financial autonomy of Autonomous Communities (ACs) while mandating coordination and fiscal solidarity; Article 135 (2011) binds all levels to the principle of budgetary stability.
  - The central government consolidates and reports fiscal positions and ensures compliance with EU fiscal rules, including those under the Stability and Growth Pact.
  - Regional revenues: shared taxes (personal income tax, VAT, excise duties) and fiscal transfers determined by the Regional Financing System Organic Law (2009). Basque Country and Navarra operate under a foral regime with full fiscal autonomy outside the common system.
  - Organic Law of Budget Stability and Financial Sustainability (2012): central government can establish annual deficit, debt, and expenditure targets for all levels; targets must be endorsed by the Fiscal and Financial Policy Council.
  - Deviation procedures: Economic-Financial Plans/adjustment plans required for breaches; central government can impose sanctions, including withholding transfers or activating Article 155 in extreme cases.
  - Institutional mechanisms:
    - Fiscal and Financial Policy Council: chaired by the Minister of Finance, composed of AC finance ministers; consultative/coordinating role; decisions not binding; final approval by Council of Ministers and Parliament. Basque Country and Navarra not members of CPFF.
    - National Commission of Local Administration: similar role for municipalities.
  - Independent Authority for Fiscal Responsibility (created 2013): monitors compliance, produces independent forecasts, issues non-binding recommendations and early warnings.
  - Remaining challenges: periodic tensions over regional financing arrangements and need for reform of the financial system (last updated in 2009).

- Australia: Fiscal federalism, intergovernmental financial arrangements and fiscal coordination
  - Government structure: Commonwealth (federal), eight States and Territories, and local governments. Federal government has high revenue-raising power; expenditure responsibilities split, creating vertical fiscal imbalances.
  - Federal Financial Relations system: Federal funding to States/Territories for jointly funded services; GST revenue sharing arrangements. These arrangements account for around 25 per cent of total Federal Government expenditure and about 40 per cent of state and territory government expenditure.
  - GST: levied and collected by Federal government, distributed entirely to states/territories; distribution share calculated by the Commonwealth Grants Commission via a transparent, rules-based formula.
  - States/Territories: autonomy over spending; most have Fiscal Responsibility Legislation requiring medium-term strategies and reporting.
  - Consolidated fiscal projections: not compiled by governments; Federal Parliamentary Budget Office prepares a National Fiscal Outlook Report with medium-term projections for consolidated general government; Australian Bureau of Statistics compiles ex-post consolidated outturns quarterly and annually.
  - Borrowing: State and Territory Governments have authority to borrow, issue own debt securities; market provides fiscal discipline; Federal government does not place direct borrowing restrictions.
  - Coordination mechanisms:
    - Council on Federal Financial Relations (CFFR): chaired by Federal Treasurer; includes state and territory treasurers; oversees intergovernmental financial matters.
    - Heads of Treasuries: supports Council.
    - National Cabinet: Prime Minister, State Premiers, Territory Chief Ministers collaborate on economic and fiscal policy.
  - Uniform Presentation Framework (1991): ensures common core of financial information presentation across jurisdictions.

### Non-hydrocarbon productivity and Artificial Intelligence in the UAE — overview

- Context and objective
  - The non-hydrocarbon economy in the United Arab Emirates has grown considerably in the last two decades due to diversification efforts.
  - The paper examines the role of total factor productivity (TFP) in non-hydrocarbon growth and analyzes drivers of non-hydrocarbon TFP, assessing how Artificial Intelligence (AI) can boost productivity and growth.

- Key statistics and trends
  - The share of non-hydrocarbon output to total GDP in the UAE increased from 71 percent in 2010 to 75.5 percent in 2024.
  - The non-hydrocarbon sector growth is supported by tourism, financial services, manufacturing, construction, real estate, and wholesale trade.
  - UAE increased investment in digital infrastructure and focused on expanding AI development and use across government agencies and many sectors.

### Methodology for estimating non-hydrocarbon TFP
- Framework and data
  - Solow growth accounting framework extended to sector-specific TFP components; aggregate Cobb-Douglas production function specified with Y_t^n, K_t^n, L_t^n, A_t^n, and capital share α_n.
  - Capital stock estimated from 1975 to 2023 using the perpetual inventory method with initial level set by the steady state relation of the Solow Growth model: K_t^n = (1−δ)K_{t−1}^n + I_t^n, where δ is the depreciation rate and I_t^n is real investment.
  - Labor share used to calibrate α_n, computed using total labor compensation (split between hydrocarbon and non-hydrocarbon using respective employment shares) and sectoral GDP.
- Assessing structural drivers
  - Local projection (LP) models used where dependent variable is the log of non-hydrocarbon TFP; regressors include FDIs, business environment indexes, measures capturing technology adoption, and controls (lags of dependent and explanatory variables and non-oil GDP).

### Empirical results — contributions and drivers
- Contributions to growth
  - TFP and labor accounted for a significant portion of non-hydrocarbon GDP growth.
  - Text Figure 2 reports average contributions of TFP, capital, and labor to GDP growth for three subsamples: 2002-08, 2010-19, and 2021-23.
  - TFP accounts for around one third of overall GDP growth, with labor making a slightly bigger contribution in the 2002-2008 sample.
  - In the 2021-2023 sample, TFP has been the largest contributor to non-hydrocarbon GDP growth.
  - Note: 2009 and 2020 are excluded as outliers driven by exogenous shocks (GFC, COVID).
- Main structural drivers
  - FDIs, technology adoption, and improvements in regulation are the main structural drivers of non-hydrocarbon TFP growth.
  - FDI inflows are a robust and significant driver: a one percentage point increase in FDI (as a share of GDP) raises non-hydrocarbon TFP by about 1.6 percent in the UAE, with effects peaking after two years.
  - Positive and significant non-hydrocarbon TFP responses are found to increases in the share of medium and high-tech value added in manufacturing.
  - Text Figure 3 shows cumulative percentage change in non-hydrocarbon TFP 2 years after a one standard deviation shock of explanatory variables. Variables and measurements noted:
    - FDIs measured as a share of GDP;
    - new businesses measured as new registrations per 1000 people;
    - medium and high-tech manufacturing value added measured as the share of total value added;
    - controls of movements of capital and people measured as ratings from Economic Freedom of the World Report.

### The role of AI in boosting productivity and growth
- Potential channels and opportunities
  - UAE’s strategic focus on AI expansion and investments in digital infrastructure present an opportunity to increase non-hydrocarbon TFP and accelerate non-hydrocarbon growth.
  - AI can boost both labor and total factor productivity through different channels, including greater technology adoption, improved government efficiency, and attracting increased foreign direct investment (FDI).
  - AI sector expansion offers opportunities for further diversification.
- Literature estimates and uncertainty
  - The IMF estimates that AI, depending on how it is adopted, could boost global GDP growth between 0.1 and 0.5 percentage points per year in the medium term.
  - Acemoglu (2025) projects cumulative TFP gains of only around 0.7 percent over the next 10 years, hinging on 4.6 percent of tasks being replaced profitably by AI, and a 27 percent increase in productivity due to labor cost savings.
  - Aghion and Bunel (2024) estimate cumulative median 6.8 percent TFP growth over 10 years based on: (i) the share of tasks exposed to AI in developed countries estimated at 60 percent; (ii) the share of exposed tasks for which it will be profitable to use AI estimated at 50 percent; and (iii) labor saving costs induced by AI of 40 percent.
- Implications
  - With the right infrastructure and regulatory frameworks, AI can stimulate primary drivers of non-hydrocarbon TFP identified in this study (FDI, technology adoption, regulatory quality), raising labor productivity and TFP across sectors.
  - Table 1 (referenced in the source) outlines channels through which AI can enhance productivity across sectors in the UAE.

*United Arab Emirates — International Monetary Fund*

### Box 1. AI in the UAE

### Box 1. AI in the UAE

### National vision, governance framework, and AI in government
- The UAE National Strategy for Artificial Intelligence 2031 outlines eight strategic objectives to position the UAE as one of the leading nations in AI by 2031, develop a fertile ecosystem for AI, attract talent, enhance research capabilities and ensure strong governance and effective regulation—covering sectors like energy, logistics, tourism, hospitality, government services, and healthcare.
- The UAE created the Ministry for AI and formed the UAE Council for AI to guide AI‑friendly policy, research and investment.
- The AI Ethics Guide (2022) and the AI Charter (2024) support a regulated expansion of the sector.
- Regulatory Sandboxes and Innovation Labs have been created to test and deploy AI solutions and encourage public‑private collaboration.
- Abu Dhabi Government Digital Strategy 2025-2027 aims to become the world's first fully AI‑native government by 2027, investing AED 13 billion into digital infrastructure and sovereign cloud, and launching over 200 AI solutions for public services.
- Authorities began incorporating AI‑based analytics into fiscal management at the federal level.

### Investments and infrastructure
- MGX, established in 2024 as a joint venture between Mubadala and G42, aims to manage up to $100 billion in global AI assets.
- MGX co‑founded the $30 billion Global AI Infrastructure Investment Fund with BlackRock, Microsoft, and others to fund data centers and energy infrastructure.
- Through partnerships with OpenAI and Oracle, MGX is investing in projects like the Stargate supercomputing initiative.

### Education, research institutions, and innovation hubs
- Mohamed bin Zayed University of Artificial Intelligence (MBZUAI) was founded in 2019 as the world’s first graduate‑level AI University; in 2025 it launched its first undergraduate AI program.
- The Technology Innovation Institute (TII), established in 2020 under Abu Dhabi’s Advanced Technology Research Council (ATRC), focuses on AI, robotics, cryptography, quantum computing, and is responsible for the creation and launch of the Falcon open‑source language models (LLMs), including Arabic LLMs.
- Upskilling programs include the “One Million AI Learners” initiative launched April 2025 to train one million government employees by 2027, and the “One Million Prompters” program aimed at equipping one million individuals with the skills to use AI tools.
- The UAE fosters a startup ecosystem through tech hubs such as Hub71 hosted under ADGM to support innovation in AI, fintech, cybersecurity and healthtech.

### AI readiness, rankings, and talent
- The UAE ranked 13th out of 188 countries on the Government AI Readiness index (2024), ranking highly on the government and data and infrastructure components.
- The UAE ranked 35th out of 174 countries in the IMF AI Preparedness Index (Text Figure 4).
- The UAE has increased its AI talent concentration since 2016. The UAE's average penetration of AI skills is 0.725 times the global average across the same set of occupations (LinkedIn self‑reported AI skills, 2016–2024).

### Opportunities and sectoral potential
- The UAE is well placed to capitalize on AI adoption in priority non‑hydrocarbon sectors—health, tourism, education, financial services, logistics and manufacturing—due to advanced digital infrastructure, proactive policy frameworks, and investments in AI education and talent.
- Continued attraction of private capital and international partnerships is essential to sustain sector expansion, support diversification efforts, and generate AI‑driven productivity gains.
- Fostering an AI startup ecosystem can expand the sector’s footprint and attract global AI talent.

### Challenges and mitigation priorities
- Labor market disruption: AI‑driven automation could lead to job displacement while creating new jobs with new skills requirements; robust re‑skilling and up‑skilling programs are needed.
- Cybersecurity vulnerabilities: Rapid digitalization heightens cybersecurity risks; mitigation requires multilayered approaches combining traditional security practices with AI‑specific defenses.
- Resource intensity: AI infrastructure—especially data centers and high‑performance computing—is energy and water intensive; addressing this requires investments in alternative power sources and efficiency.

### Policy responses and ongoing measures
- Talent and workforce: Since launching its national AI strategy in 2017, the UAE has expanded its domestic talent pool through government upskilling programs, AI‑focused university curricula, and MBZUAI.
- Cybersecurity: National Cybersecurity Strategy (updated in 2025) focuses on five pillars—governance, protection, innovation, capacity building, and partnerships. Key actions include the Cybercrimes Law, Personal Data Protection Law, and the establishment of the Cybersecurity Council in 2020. The government enforces standards like the UAE Information Assurance Standards and uses the National Information Assurance Platform (NIAP) to monitor compliance of government entities with cybersecurity standards. Regular cyber drills, public awareness campaigns, and workforce development initiatives strengthen cyber resilience.
- Energy and water efficiency: Investments in solar and nuclear power, efficient desalination, smart grids, and AI‑driven tools aim to optimize energy and water use. Data centers are being designed with advanced, low‑water cooling systems and powered in part through alternative power sources. Utilities like Dubai Electric and Water Authority (DEWA) are adopting digital twin platforms and real‑time monitoring. Water security is being enhanced under the Water Security Strategy 2036 through cloud seeding, efficient desalination, and smart water management.

### How AI can enhance productivity across sectors (share of 2024 nominal GDP, in percent)
- Manufacturing (9.4%): Automation of repetitive tasks, predictive maintenance, supply chain and inventory optimization, waste reduction, timely delivery.
- Healthcare (1.8%): Faster and more accurate diagnosis, clinical decision support, hospital operations optimization, better capacity planning, reduced wait times.
- Wholesale and Retail Trade (12.5%): Demand forecasting and inventory optimization, personalized marketing and customer experience.
- Construction (8.3%): Project planning and scheduling optimization, predictive maintenance, site monitoring and safety compliance, adoption of autonomous equipment and robotics.
- Financial Services (10.2%): Fraud detection and risk management, predictive analytics, regulatory compliance and reporting.
- Logistics and Transportation (6.5%): Predictive maintenance, warehouse automation, inventory management, route optimization, real‑time fleet management, smart port and airport operations.
- Public Services (6.1%): Predictive policy and resource planning, smart cities and infrastructure (traffic management, energy optimization, public transport), citizen‑centric services.

*Source: IMF staff compilation from Box 1. AI in the UAE (1areea2025002‑source‑pdf).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1areea2025002-source-pdf.pdf_