## _cr07347

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### Executive Summary — Background and Recent Developments
- Rapid economic expansion continued for the fourth consecutive year, with non-hydrocarbon GDP growth averaging in excess of 10 percent.
- Drivers: outward-oriented development strategy, favorable business climate, and sustained high oil prices.
- Fiscal and external surpluses remain large, allowing for further accumulation of official foreign assets.
- Capacity constraints intensified: strong demand growth and housing shortages led to sharp increases in rents; consumer price inflation exceeded 9 percent in 2006.
- Medium-term outlook: real GDP growth projected to remain strong in 2007 and decelerate to about 7 percent on average during 2008–12.
- Fiscal and external positions projected to remain in large surplus under current WEO oil price projections.

- Real GDP grew by 9.4 percent in 2006; oil production rose by 8 percent.
- Population growth about 6 percent per year on average; large infrastructure investment projects in Abu Dhabi and Dubai.
- Inflation: 6.2 percent in 2005 to 9.3 percent in 2006; expected to decelerate somewhat in 2007.
- Overall fiscal surplus increased by 8.5 percentage points to about 29 percent of GDP in 2006 (federal and emirate governments, including investment income).
- External current account surplus increased to close to $36 billion, or 22 percent of GDP.
- Gross official reserves at the central bank increased in 2006 to $27.9 billion, or the equivalent of about 2.8 months of next year’s imports of goods and services (or 4.7 months excluding imports for re-exports).
- Money and private sector credit continued to grow rapidly in 2006, somewhat slower than in 2005; credit growth particularly high for services, personal business and real estate.
- Banks increasingly relied on foreign borrowing at longer maturities and lower rates; nominal domestic interest rates tracked corresponding U.S. rates closely under the U.S. dollar peg, but real interest rates have become increasingly negative.
- Banking sector: bank assets and profits increased by about 35 percent and 11 percent, respectively, in 2006; significant reduction in the ratio of nonperforming loans to total loans; five new banks and a number of new branches authorized in 2006; planned merger of National Bank of Dubai and Emirates Bank to create largest U.A.E. bank.
- Capital markets experienced a sharp correction beginning in late 2005: Abu Dhabi Securities Market and Dubai Financial Market declined by 42 percent and 44 percent in 2006, respectively; overall economic impact limited and stock prices started to recover during Q2 2007.

### Policy Discussions — Near- and Medium-Term Outlook, Inflation, and Fiscal Policy
- Growth projections:
  - Growth projected to remain high at about 8 percent in 2007.
  - Crude oil production projected to increase by about 3.5 percent to 2.66 million barrels per day (mbd) in 2007.
  - Non-oil sector growth projected at 9 percent in 2007.
  - Inflation projected to ease to 8 percent in 2007.
- Fiscal outlook:
  - Overall fiscal surplus expected to remain at about 28 percent of GDP in 2007.
  - Non-oil fiscal deficit (excluding investment income) projected to narrow by one percentage point to about 23 percent of non-oil GDP in 2007, mostly reflecting lower budgeted spending by Abu Dhabi on behalf of the federal government.
- External outlook:
  - Assuming oil export prices average $63 per barrel, the current account surplus projected to remain about $38 billion in 2007.
- Medium-term (2008–12):
  - Growth projected to decelerate gradually to about 7 percent on average.
  - Hydrocarbon sector projected to grow by 3.5 percent annually.
  - Fiscal and external positions projected to remain in large surplus even if oil prices decline significantly from current levels.
- Sensitivity:
  - Fiscal and current account positions would be in balance at oil prices of $20 and $32 per barrel, respectively, on average during 2008–12 (staff medium-term scenario).

- Inflation policy focus:
  - Inflation identified as a major issue driven by capacity constraints and housing shortages, especially in Dubai and Abu Dhabi.
  - Authorities introduced temporary caps on rent increases on existing contracts in Dubai and Abu Dhabi; expected easing of rent pressures in late 2007 as new housing units come to market.
  - Policy recommendation: if inflation fails to decline in 2007 as expected, further fiscal expenditure restraint, including by public and quasi-public entities, would be needed to slow aggregate demand growth.
  - Importance of enhancing fiscal coordination between federal and emirate governments and improving phasing and monitoring of large investment projects carried out by government and quasi-public entities outside the budget.

### Financial Sector, Monetary and Exchange Rate Policies
- FSAP Update: financial system sound but needs development—strengthen prudential and regulatory oversight of banking system and capital markets; open the banking sector to greater competition; strengthen legal framework for financial sector.
- Authorities reiterated commitment to the U.S. dollar peg in the period leading up to the GCC monetary union and commitment to achieving the monetary union by 2010.
- Staff calculations: real effective exchange rate (REER) of the dirham appreciated by 6 percent over the past two years and is consistent with fundamentals.
- Financial sector observations and recommendations:
  - Strengthen prudential regulations and supervision; enhance central bank surveillance of bank and finance company risk management in view of rapid credit growth, including real estate lending.
  - Caution against allowing banks to increase exposure to the real estate sector through subsidiary companies.
  - Coordinate and improve supervision of financial services groups comprising banks, insurance companies, and securities firms.
  - Establishment of a federal credit bureau is welcomed to improve reporting and monitoring of credit data.
  - Enact laws to strengthen regulations governing equity markets and their supervision.
  - Improve monitoring of external borrowing by financial institutions and large corporations.
  - Staff welcomes planned establishment of a debt management unit by the Dubai government.

### Exchange Rate Regime — Official Choice and Assessment
- Authorities chose to maintain the peg to the U.S. dollar during run up to the GCC monetary union; staff judges this choice appropriate during the transition.
- Rationale:
  - Peg provides a credible nominal anchor.
  - Peg appropriate given U.A.E.’s trade pattern and large share of dollar-denominated financial assets.
- Staff support and emphasis:
  - Support for close cooperation with other GCC members on preparing for monetary union.
  - Need to reach consensus on the appropriate common exchange rate regime for the monetary union.
- Official parity:
  - Mid-point exchange rate: AED 3.6725 = $1 (in effect since November 1997).
  - Historical parity: Dirham officially pegged to the SDR at AED 4.76190 = SDR 1 from November 1980 to February 2002, albeit in practice pegged to the dollar.
- Real exchange rate and competitiveness:
  - REER assessment: REER is in line with its equilibrium level over the medium term; appreciation driven by higher inflation.
  - Normal indicators of competitiveness do not give reasons for concern at this stage.
  - Policy recommendation: step up structural reforms to improve efficiency and competitiveness.

### Box 1 — Developments in the Real Estate Markets
- Market drivers and demand:
  - Rapid population growth of about 6 percent per year on average drove strong housing demand.
  - Estimated need: Some 43,000 additional residential units will be needed annually in 2006–10.
- Supply and pipeline:
  - Around 120,000 residential units are expected to be completed over the next three years.
  - Capacity constraints delayed some large projects, especially in Dubai; many projects expected to be completed shortly.
  - In Abu Dhabi, less than 8,000 residential units are expected to be completed over 2007.
- Rent and price dynamics:
  - Rent increases officially estimated at 9 percent in 2005 and 15 percent in 2006.
  - Authorities introduced temporary caps of 7 percent on rent increases in Abu Dhabi and Dubai in late 2006 and early 2007.
  - Rent increases expected to ease in late 2007 as new housing units come to market.
  - Given continued strong medium-term demand, a sharp price correction in the real estate market is not expected.
- Policy implications:
  - Temporary rent caps tied to supply improvements as new units come online.
  - Pipeline (120,000 units over three years) expected to relieve rental pressure by late 2007.
  - Persistent pressures on rents and prices in Abu Dhabi expected through 2007 due to limited completions (less than 8,000 units in 2007), implying differentiated dynamics across emirates.

### Statistics, Data Issues, and Institutional Reforms
- Overall data provision to the Fund adequate for surveillance but shortcomings affect staff analysis: inadequate compilation techniques; infrequent reporting; shortage of trained staff; insufficient resources; poor information flow between federal and emirate governments and public sector entities.
- Most official statistics produced only on an annual basis; data provision between missions remains poor except for monetary and some trade statistics.
- CPI and national accounts weaknesses:
  - Only an annual CPI is compiled; MOE compiles annual CPI with a three month lag.
  - CPI shortcomings: outdated weights, inadequate geographic representation, no replacement items or imputations for missing prices, no quality adjustment procedures.
  - National accounts deficiencies: lack of a comprehensive data collection program; unsound statistical techniques for GDP by production and expenditure approaches; inadequate basic data for manufacturing, construction, wholesale and retail trade, and most services; oil and gas sector data received with a lag from ADNOC; computation of petrochemicals value-added not based on 1993 SNA methodology.
- Fiscal data weaknesses:
  - Lack of coordination among emirates and federal government; MOFI compiles federal government data only.
  - Annual “consolidated” fiscal statement published in central bank’s Statistical Bulletin differs from Fund staff presentation due to omission of items such as investment income.
  - No financing information provided by federal authorities or emirates; no sub-annual data reported for IMF IFS; last data reported to STA for Government Finance Statistics Yearbook were for 1999 and covered only the federal government.
- External sector weaknesses:
  - BOP statistics suffer from lack of primary data sources; staffing insufficient; many entries are estimates; some important transactions (e.g., FDI) not covered and estimated by Fund staff.
  - U.A.E. does not report BOP data for publication in IMF IFS (except irregular trade statistics) or BOPSY.
  - Authorities do not compile or publish the International Investment Position (IIP) statement.
- Institutional steps:
  - Proposal for National Bureau of Statistics (NBS) approved in April 2007 as part of U.A.E. Government Strategy for next three years; NBS to have general oversight and assume MOE statistical functions, including price statistics.
  - New 2007/08 Household Expenditures Survey launched in April 2007 to facilitate adoption of a high-frequency CPI.
  - Work underway to establish a monthly CPI compiled in accordance with international standards; authorities expected to subscribe to GDDS.

### Selected Corroborating Macroeconomic and Financial Figures (selected series as reported)
- Exchange rate and effectiveness:
  - Average exchange rate (AED per dollar) 2003–07: 3.67253, 3.67253, 3.67253, 3.67253, 3.67253
  - Nominal effective exchange rate (1990=100) 2003–06: 120.5, 115.4, 115.1, 114.6,...
  - Real effective exchange rate (1990=100) 2003–06: 122.4, 118.1, 120.5, 125.4,...
- Inflation and output:
  - CPI inflation (average) 2003–07: 3.2, 5.0, 6.2, 9.3, 8.0
  - Real GDP (at factor cost) 2003–07: 11.9, 9.7, 8.2, 9.4, 7.7
  - Real non-oil GDP 2003–07: 11.2, 12.6, 10.8, 10.4, 9.1
- External and fiscal balances:
  - Current account balance (in percent of GDP) 2003–07: 8.6, 10.0, 18.3, 22.0, 20.5
  - Gross official reserves (in billions of U.S. dollars) 2003–07: 15.1, 18.7, 21.3, 27.9, 33.6
  - Overall balance (consolidated) 2003–07 (in percent of GDP): 2.6, 10.5, 20.3, 28.8, 27.6
  - Nonhydrocarbon balance (in percent of non-hydrocarbon GDP) 2003–07: -29.3, -22.6, -17.1, -15.3, -12.6
- Banking sector indicators (2003–06 unless noted):
  - Commercial banks' capital to risk-weighted assets ratio 2003–06: 18.6, 16.9, 17.4, 16.6
  - Gross non-performing loans to total loans 2003–06: 14.3, 12.5, 8.3, 6.3
  - Return on assets 2003–06: 2.3, 2.1, 2.7, 2.3
  - Foreign currency deposits/total deposits (percent) 2003–06: 26.3, 27.6, 24.1, 25.5
- Medium-term baseline scenario highlights (2006–12 projections):
  - Nominal GDP (in billions of U.S. dollars) 2006–12: 163.3, 184.9, 208.7, 227.8, 246.5, 268.6, 293.7
  - Real GDP (at factor cost) 2006–12: 9.4, 7.7, 6.6, 6.7, 6.9, 7.3, 7.7
  - Consumer prices 2006–12: 9.3, 8.0, 6.4, 5.4, 4.9, 4.2, 3.4
  - Current account balance (in percent of GDP) 2006–12: 22.0, 20.5, 21.6, 19.8, 17.9, 16.4, 15.0
  - Central bank reserves (in billions of U.S. dollars) 2006–12: 27.9, 33.6, 40.4, 47.1, 53.8, 60.4, 67.0

### Key Risks, Scenarios, and Next Steps
- Upside risks:
  - Attractive business climate, ambitious development strategy, accelerated structural reforms, completion of mega projects leading to rapid expansion of services and tourism, resolution of current bottlenecks in infrastructure and housing.
- Downside risks:
  - Acceleration of inflation, a sharp decline in oil prices, and heightened geopolitical tensions in the Gulf region.
- Next consultations:
  - Proposed next Article IV consultation on the standard 12-month cycle; last Article IV consultations held during March 22—April 6, 2006.

*Source: Staff Report for the 2007 Article IV Consultation (United Arab Emirates), August 27, 2007; Statement by the IMF Staff Representative, September 21, 2007.*

### Executive Summary ......................................................................................................

### _cr07347 - Executive Summary

### Background
- The rapid economic expansion in the U.A.E. has continued uninterrupted for the fourth consecutive year, with non-hydrocarbon GDP growth averaging in excess of 10 percent.
- Drivers: outward-oriented development strategy, favorable business climate, and sustained high oil prices.
- Fiscal and external surpluses remain large, allowing for further accumulation of official foreign assets.
- Capacity constraints have intensified: strong demand growth and housing shortages have led to sharp increases in rents and contributed to upward pressure on other prices; consumer price inflation exceeded 9 percent in 2006.
- Medium-term outlook described as very positive: real GDP growth projected to remain strong in 2007 and decelerate to about 7 percent on average during 2008–12.
- Fiscal and external positions projected to remain in large surplus under current WEO oil price projections.

### Recent Developments
- Real GDP grew by 9.4 percent in 2006; oil production rose by 8 percent. Construction, financial services, and trade services grew at double-digit rates.
- Population growth about 6 percent per year on average; large infrastructure investment projects in Abu Dhabi and Dubai.
- Inflation picked up from 6.2 percent in 2005 to 9.3 percent in 2006; expected to decelerate somewhat in 2007.
- Overall fiscal surplus increased by 8.5 percentage points to about 29 percent of GDP in 2006 (federal and emirate governments, including investment income).
- External current account surplus increased to close to $36 billion, or 22 percent of GDP.
- Gross official reserves at the central bank increased in 2006 to $27.9 billion, or the equivalent of about 2.8 months of next year’s imports of goods and services (or 4.7 months excluding imports for re-exports).
- Money and private sector credit continued to grow rapidly in 2006, somewhat slower than in 2005; credit growth particularly high for services, personal business and real estate.
- Banks increasingly relied on foreign borrowing at longer maturities and lower rates than available domestically; with the U.S. dollar peg and complete capital mobility, nominal domestic interest rates tracked corresponding U.S. rates closely, but real interest rates have become increasingly negative.
- Banking sector: comfortable levels of capitalization and profits; bank assets and profits increased by about 35 percent and 11 percent, respectively, in 2006; significant reduction in the ratio of nonperforming loans to total loans; five new banks and a number of new branches authorized in 2006; planned merger of National Bank of Dubai and Emirates Bank would create the largest bank in the U.A.E.
- Capital markets experienced a sharp correction beginning in late 2005: Abu Dhabi Securities Market and Dubai Financial Market declined by 42 percent and 44 percent in 2006, respectively; overall economic impact limited and stock prices started to recover during Q2 2007.

### Policy Discussions — Overview
- Focus areas: need to reduce inflation; role of fiscal policy in demand management given constraints on monetary policy; financial sector issues; monetary and exchange rate policies ahead of GCC monetary union; structural reforms; regional cooperation; progress on strengthening the statistical system.

### Policy Discussions — A. Near- and Medium-Term Outlook
- Growth projected to remain high at about 8 percent in 2007, somewhat lower than in 2006.
- Real domestic demand growth expected to remain robust due to rapid population growth, sustained private consumption following wage increases in the public sector, and strong investment momentum.
- Crude oil production projected to increase by about 3.5 percent to 2.66 million barrels per day (mbd) in 2007.
- Non-oil sector growth projected to remain relatively high at 9 percent in 2007 despite deceleration from supply bottlenecks.
- Inflation projected to ease to 8 percent in 2007, on expectation upward pressure on rents will diminish gradually as new housing units come to market.
- Fiscal outlook: overall fiscal surplus expected to remain at about 28 percent of GDP in 2007; non-oil fiscal deficit (excluding investment income) projected to narrow by one percentage point to about 23 percent of non-oil GDP, mostly reflecting lower budgeted spending by Abu Dhabi on behalf of the federal government.
- External outlook: under the assumption that oil export prices would average $63 per barrel, the current account surplus projected to remain very large (about $38 billion) in 2007.
- Medium-term (2008–12): growth projected to decelerate gradually to about 7 percent on average; hydrocarbon sector projected to grow by 3.5 percent annually; fiscal and external positions projected to remain in large surplus even if oil prices decline significantly from current levels.
- Sensitivity: fiscal and current account positions would be in balance at oil prices of $20 and $32 per barrel, respectively, on average during 2008–12 (staff medium-term scenario).

### Policy Discussions — B. Inflation
- Inflation identified as a major issue: capacity constraints have intensified, putting upward pressure on asset and consumer prices.
- Housing shortages—more severe in Dubai and Abu Dhabi—have led to sharp rises in rents reflected in the CPI.
- Officials agreed inflation is a major source of concern; persistent inflation could become entrenched and risk undermining competitiveness and long-term growth.
- Staff noted upward pressures on wages and significant rises in production costs in some sectors, such as construction.
- Authorities indicated temporary caps on rent increases on existing contracts in Dubai and Abu Dhabi; they were confident upward pressure on rents would start to ease in late 2007 as new housing units come to market.
- Policy recommendation in Executive Summary: if inflation fails to decline in 2007 as expected, further fiscal expenditure restraint, including by public and quasi-public entities, would be needed to slow aggregate demand growth.
- Staff underscored importance of enhancing fiscal coordination between the federal and emirate governments and improving the phasing and monitoring of large investment projects carried out by government and quasi-public entities outside the budget.

### Policy Discussions — Financial Sector and Monetary/Exchange Rate Policies
- FSAP Update: financial system found to be sound but areas for development identified, including strengthening prudential and regulatory oversight of the banking system and capital markets; opening the banking sector to greater competition; and strengthening the legal framework for the financial sector.
- Authorities reiterated commitment to the U.S. dollar peg in the period leading up to the establishment of the monetary union among GCC members and commitment to achieving the monetary union by 2010.
- Staff calculations suggest the real effective exchange rate of the U.A.E. dirham, which has appreciated by 6 percent over the past two years, is consistent with fundamentals.

### Policy Discussions — Structural Reforms, Regional Cooperation, and Statistics
- Structural reforms and regional cooperation emphasized as part of sustained favorable prospects and potential upside to growth if accelerated.
- Efforts to upgrade the statistical system welcomed and should continue: a National Bureau of Statistics to be established by end-2007; a number of surveys are being carried out; work is proceeding to establish a new national consumer price index (CPI).

### Key Risks and Scenarios
- Upside risks: attractive business climate, ambitious development strategy, accelerated structural reforms, completion of mega projects leading to rapid expansion of services and tourism, resolution of current bottlenecks in infrastructure and housing.
- Downside risks: acceleration of inflation, a sharp decline in oil prices, and heightened geopolitical tensions in the Gulf region.

*Source: _cr07347 - Executive Summary*

### Box 1. Developments in the Real Estate Markets

### Box 1. Developments in the Real Estate Markets

### Market drivers and demand
- Rapid population growth of about 6 percent per year on average has been a major factor behind strong demand for housing.
- Some 43,000 additional residential units will be needed annually to accommodate the growing demand in 2006–10.

### Supply, construction pipeline, and capacity constraints
- Around 120,000 residential units are expected to be completed over the next three years.
- Capacity constraints have delayed some large real estate projects, especially in Dubai, though there are indications many of these projects will be completed shortly.
- In Abu Dhabi, less than 8,000 residential units are expected to be completed over the course of 2007.

### Rent and price dynamics
- Rent increases have been officially estimated at 9 percent in 2005 and 15 percent in 2006, although market estimates have been higher.
- The authorities introduced temporary caps of 7 percent on rent increases in Abu Dhabi and Dubai in late 2006 and early 2007, respectively.
- Rent increases are expected to ease in late 2007 as new housing units come to the market.
- Given continued strong demand in the medium term, a sharp price correction in the real estate market is not expected.

### Policy implications and outlook
- Temporary rent caps were implemented to moderate rapid rent increases; these measures are tied to supply improvements as new units come online.
- While project delays have affected timing of supply increases, the sizeable pipeline (120,000 units over three years) is expected to relieve some rental pressure by late 2007.
- Persistent pressures on rents and prices in Abu Dhabi are expected through 2007 due to limited completions (less than 8,000 units in 2007), implying differentiated market dynamics across emirates.
- Overall, the outlook points to easing rent pressures once pipeline supply is delivered, but sustained medium-term demand makes large price corrections unlikely.

*Sources: Dubai Chamber of Commerce and Industry; Colliers International; CB Richard Ellis; and Shuáa Capital.*

### 33. The authorities’ policy choice of maintaining the current exchange rate regime

### 33. The authorities’ policy choice of maintaining the current exchange rate regime

### Exchange rate regime and policy stance
- The authorities chose to maintain the peg to the U.S. dollar during the run up to the GCC monetary union; staff judges this choice appropriate during the transition.
- Rationale cited:
  - The peg has provided the U.A.E. economy a credible nominal anchor.
  - The peg remains appropriate given the U.A.E.’s trade pattern and the large share of dollar-denominated financial assets.
- Staff support:
  - Staff supports the authorities’ commitment to work closely with other GCC member countries on preparing the monetary union.
  - Staff emphasizes the need to reach consensus among all parties on the appropriate common exchange rate regime to be adopted in the monetary union context.
- Official/in-practice parity information:
  - Mid-point exchange rate: AED 3.6725 = $1 (in effect since November 1997).
  - Historical note: Dirham was officially pegged to the SDR at AED 4.76190 = SDR 1 from November 1980 to February 2002, albeit in practice pegged to the dollar.

### Real exchange rate and competitiveness
- Assessment:
  - Real exchange rate developments do not suggest the dirham is out of line with fundamentals.
  - Based on current policies, the real effective exchange rate (REER) is in line with its equilibrium level over the medium term.
  - The REER has appreciated, driven by higher inflation.
- Competitiveness indicators:
  - Normal indicators of competitiveness do not give reasons for concern at this stage.
  - Improvements in the business climate and access to expatriate labor at competitive wage rates are relevant mitigating factors.
- Policy recommendation:
  - Priority should be to step up structural reforms to improve efficiency and competitiveness.

### Financial sector soundness and regulatory recommendations
- Overall judgment:
  - The banking system is sound, but there are areas in need of development.
- Recommended actions and cautions:
  - Implement the recommendations of the FSAP Update to further strengthen prudential regulations and supervision.
  - Enhance central bank surveillance of bank and finance company risk management practices in view of rapid credit growth, including in real estate lending.
  - Staff cautions against allowing banks to increase exposure to the real estate sector through subsidiary companies.
  - Coordinate and improve supervision of financial services groups comprising banks, insurance companies, and securities firms.
  - Establishment of a federal credit bureau is welcomed to improve reporting and monitoring of credit data.
  - Authorities are encouraged to enact laws to strengthen the regulations governing the equity markets and their supervision.
  - Improve monitoring of external borrowing by financial institutions and large corporations.
  - Staff welcomes the planned establishment of a debt management unit by the Dubai government.

### Statistical system and data improvements
- Current status:
  - Data provision to the Fund is adequate for surveillance purposes.
- Recommended improvements:
  - Improve the quality, availability, and timeliness of economic statistics to aid policy analysis and formulation.
  - Follow through with envisaged steps to improve consumer price and other economic statistics, including national accounts, balance of payments, and fiscal data.
  - Expedite the process of subscribing to the GDDS.
  - Consolidate data on public sector spending, including by government and quasi-public entities outside the budget, to better assess their contribution to demand pressures.

### Next consultations
- It is proposed that the next Article IV consultation take place on the standard 12-month cycle.
- The U.A.E. is on the standard 12-month consultation cycle; the last Article IV consultations were held during March 22—April 6, 2006.

### Selected corroborating macroeconomic and financial figures (as reported)
- Exchange rate and effectiveness:
  - Average exchange rate (AED per dollar) 2003–07: 3.67253, 3.67253, 3.67253, 3.67253, 3.67253
  - Nominal effective exchange rate (1990=100) 2003–06: 120.5, 115.4, 115.1, 114.6,...
  - Real effective exchange rate (1990=100) 2003–06: 122.4, 118.1, 120.5, 125.4,...
- Inflation and output:
  - CPI inflation (average) 2003–07: 3.2, 5.0, 6.2, 9.3, 8.0
  - Real GDP (at factor cost) 2003–07: 11.9, 9.7, 8.2, 9.4, 7.7
  - Real non-oil GDP 2003–07: 11.2, 12.6, 10.8, 10.4, 9.1
- External and fiscal balances:
  - Current account balance (in percent of GDP) 2003–07: 8.6, 10.0, 18.3, 22.0, 20.5
  - Gross official reserves (in billions of U.S. dollars) 2003–07: 15.1, 18.7, 21.3, 27.9, 33.6
  - Overall balance (consolidated) 2003–07 (in percent of GDP): 2.6, 10.5, 20.3, 28.8, 27.6
  - Nonhydrocarbon balance (in percent of non-hydrocarbon GDP) 2003–07: -29.3, -22.6, -17.1, -15.3, -12.6
- Banking sector indicators (2003–06 unless noted):
  - Commercial banks' capital to risk-weighted assets ratio 2003–06: 18.6, 16.9, 17.4, 16.6
  - Gross non-performing loans to total loans 2003–06: 14.3, 12.5, 8.3, 6.3
  - Return on assets 2003–06: 2.3, 2.1, 2.7, 2.3
  - Foreign currency deposits/total deposits (percent) 2003–06: 26.3, 27.6, 24.1, 25.5
- Medium-term baseline scenario highlights (2006–12 projections):
  - Nominal GDP (in billions of U.S. dollars) 2006–12: 163.3, 184.9, 208.7, 227.8, 246.5, 268.6, 293.7
  - Real GDP (at factor cost) 2006–12: 9.4, 7.7, 6.6, 6.7, 6.9, 7.3, 7.7
  - Consumer prices 2006–12: 9.3, 8.0, 6.4, 5.4, 4.9, 4.2, 3.4
  - Current account balance (in percent of GDP) 2006–12: 22.0, 20.5, 21.6, 19.8, 17.9, 16.4, 15.0
  - Central bank reserves (in billions of U.S. dollars) 2006–12: 27.9, 33.6, 40.4, 47.1, 53.8, 60.4, 67.0

*Source: Staff Report for the 2007 Article IV Consultation (United Arab Emirates), August 27, 2007.*

### 2004. Following discussion in RAK, the Bank team prepared TORs for the first of a

### ANNEX III: UNITED ARAB EMIRATES—STATISTICAL ISSUES

### Overview
- Data provision to the Fund is adequate for overall surveillance purposes, but data shortcomings affect staff’s analysis.
- Shortcomings reflect: inadequate compilation techniques; infrequent data reporting; shortage of trained staff; insufficient resources assigned to data gathering; poor information flow between federal and emirate governments and public sector entities.
- Provision of data to the Fund between missions remains poor, except for monetary and some trade statistics.
- Most official statistics are produced only on an annual basis.
- The U.A.E. received several STA technical assistance missions over the past decade. The 2003 STA multi-sector statistics mission concluded that methodologies are generally appropriate but serious deficiencies exist in most sectors.
- The 2003 mission worked with U.A.E. officials to prepare draft GDDS metadata. The U.A.E. hosted a GDDS workshop in Abu Dhabi during February 27–March 9, 2005.
- The STA Country Coordinator visited Abu Dhabi during March 11–22, 2007 as part of a consumer price index (CPI) mission.
- Authorities expected follow-up discussions involving the Ministry of Economy (MOE), the U.A.E. Central Bank, and the Ministry of Finance and Industry to result in the appointment of a GDDS coordinator.

### Real sector — key findings and implications
- Only an annual CPI is compiled.
- Staff resources at the Ministry of Economy (MOE)—which compiles and disseminates the annual CPI with a three month lag—and coordination among various federal and emirate data producing agencies need considerable strengthening.
- A proposal for the creation of an independent National Bureau of Statistics (NBS), submitted to the Council of Ministers in early 2007, was approved in April 2007 as part of the U.A.E. Government Strategy for the next three years.
  - The NBS will have general oversight of the national statistical system and will undertake the current statistical functions and responsibilities of the MOE, including the compilation of price statistics.
  - The conduct of the new 2007/08 Household Expenditures Survey, launched in April 2007, will greatly facilitate the adoption of a high-frequency CPI.
- Shortcomings of the annual CPI:
  - Outdated weights that do not adequately represent all regions.
  - Items, outlets and rental units surveyed for prices are not sufficiently representative.
  - No replacement items or imputations for missing prices.
  - No quality adjustment procedures.
- National accounts compilation system deficiencies:
  - Lack of a comprehensive data collection program.
  - Statistical techniques used in compiling GDP by production and expenditure approaches are not sound.
  - Basic data inadequate for manufacturing, construction, wholesale and retail trade, and most other service sectors.
  - Oil and gas sector data are received with a lag from the Abu Dhabi National Oil Company (ADNOC).
  - Computation of the real value-added for petrochemicals is not based on the 1993 SNA methodology.
- Labor statistics:
  - Census-based labor statistics are broadly in line with ILO recommendations but diverge from ILO definitions in some concepts.
  - Irregular and incomplete updating of census data.
  - Lack of regular household surveys prevents compilation of annual data on wages, unemployment, labor force and employment.

### Fiscal sector — key findings and implications
- Principal deficiencies attributable to lack of coordination among the emirates and federal government, and low frequency in reporting of government financial operations.
- The Ministry of Finance and Industry (MOFI) compiles data for the federal government only.
- Separate fiscal data on the federal government and three emirates (Abu Dhabi, Dubai, and Sharjah) are provided to annual Article IV consultation missions and are used by Fund staff to provide a consolidated fiscal position for the U.A.E.
- An annual, “consolidated” fiscal statement is published in the central bank’s Statistical Bulletin, which differs from Fund staff presentation due to omission of certain budget items, such as investment income.
- International standards of economic classification of expenditure and revenue are not fully followed.
- The last data reported to STA for publication in the Government Finance Statistics Yearbook were for 1999 and covered only the federal government.
- No financing information is provided by either the federal authorities or any of the emirates.
- No sub-annual data are reported for publication to the IMF’s International Financial Statistics (IFS).
- Information on pension fund activities administered through the federal-level General Pension and Social Security Authority (GPSSA) has been available since the 2002 consultation mission.
  - GPSSA was established in January 1999 to provide pension and social security insurance benefits to all nationals working in the government and the private sectors (except Abu Dhabi government employees which have their own separate pension fund).

### Monetary sector — key findings and implications
- Monetary and financial sector statistics are reported with a considerable lag and do not include information on the activities of non-bank finance companies.
- The 2006 STA workshop on harmonization of monetary and financial statistics found that the U.A.E.’s Standardized Report Forms (SRFs) suffer from a number of weaknesses.

### External sector — key findings and implications
- Balance of payments (BOP) statistics suffer from a lack of primary data sources for most transactions.
- Staffing for BOP compilation is insufficient, and cooperation from other government agencies remains inadequate.
- Many entries are estimates based on incomplete information; some important transactions, such as foreign direct investment (FDI), are not covered at all and are estimated by Fund staff.
- Major gaps exist in: official and private transfers; oil companies’ service payments; private and official investment income; and financial transactions for all sectors except banks.
- The U.A.E. does not report BOP data for publication in the IMF’s IFS (with the exception of trade statistics, which have been irregular), or the Balance of Payments Statistics Yearbook (BOPSY).
- The authorities do not compile or publish the International Investment Position (IIP) statement, despite ready availability of certain potential sources, such as banking and government statistics.

### Socio-demographic statistics — key findings and implications
- The MOE leads population census and large surveys; line ministries collect data through administrative reporting systems.
- A population census was completed in 2005.
- At present, no data exist on measures of income distribution, poverty, and access to basic services.
- The Statistics Center of Dubai has made substantial progress regarding provision of socio-demographic statistics for the emirate of Dubai.

### United Arab Emirates: Table of Common Indicators Required for Surveillance (As of June 15, 2007) — selected items and reporting frequencies
- Exchange Rates: Date of Latest Observation 05/07; Date Received 06/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 06/8/2007; Date Received 6/11/2007; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W.
- Reserve/Base Money: Date of Latest Observation 12/06; Date Received 04/07; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.
- Broad Money: Date of Latest Observation 12/06; Date Received 04/07; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.
- Central Bank Balance Sheet: Date of Latest Observation 12/06; Date Received 04/07; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation 12/06; Date Received 04/07; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.
- Interest Rates: Date of Latest Observation 02/06; Date Received 03/06; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.
- Consumer Price Index: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- External Current Account Balance: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Exports and Imports of Goods and Services: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data M; Frequency of Reporting A; Frequency of Publication A.
- GDP/GNP: Date of Latest Observation 2005; Date Received 3/06; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Gross External Debt: Date of Latest Observation ...; Date Received ...; Frequency of Data ...; Frequency of Reporting ...; Frequency of Publication ...

(Notes as in table)
- Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- Both market-based and officially-determined interest rates are included, such as discount rates, money market rates, rates on treasury bills, notes and bonds.
- Financing comprises foreign, domestic bank, and domestic nonbank financing.
- The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- Stocks include currency and maturity composition.
- Frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Statement by the IMF Staff Representative (September 21, 2007) — updates and market developments
- Information covers developments available since the staff report was circulated to the Executive Board on August 21, 2007 and does not change the staff appraisal.
- In August, the WEO oil price projections for 2007 were revised upward by 3 percent on average compared to their June 2007 baseline.
  - The impact of this revision on the projected current account and fiscal balances for 2007 is modest (about 0.6 percentage point of GDP each) and does not materially change the staff’s medium-term scenario.
- In July 2007, Moody’s upgraded the government of Abu Dhabi’s long-term foreign and local currency bond rating to Aa2.
  - This was followed by a rating upgrade for several U.A.E.-based banks.
  - The Emirate of Abu Dhabi announced plans to issue its first bond in the international capital markets, which would serve as a benchmark for the pricing of corporate debt instruments.
- The merger of Emirates Bank International and the National Bank of Dubai is underway following shareholder approval in September.
  - The new consolidated bank, to be named Emirates NBD, will have an asset base of about $45 billion, the largest in the U.A.E.
  - The merger is expected to lead to further consolidation in the U.A.E. banking sector.
- U.A.E. capital markets seem to be slowly recovering from the sharp correction that started in 2005.
  - As of September 13, 2007, the Abu Dhabi Securities Market (ADSM) and the Dubai Financial Market (DFM) had posted year-to-date gains of about 14 percent and 2 percent, respectively.
  - A new exchange, the Dubai Mercantile Exchange, started operations on June 1, with the introduction of the first Oman crude oil futures contract.
  - The recent turmoil in international financial markets has had a relatively minor effect on U.A.E. capital markets.

*Statement by the IMF Staff Representative, September 21, 2007.*

### 6.  Collaboration between the authorities and the IMF Statistics Department for the

### 6.  Collaboration between the authorities and the IMF Statistics Department for the development of a new consumer price index

### Collaboration on statistics and CPI development
- Collaboration between the authorities and the IMF Statistics Department for the development of a new consumer price index has continued.
- A multi-sector statistics mission is expected to take place in the next few months with the aim of helping the authorities upgrade their statistical system and subscribe to the GDDS.
- Work is underway to improve consumer price data, including with Fund technical assistance, and to establish a National Bureau of Statistics by end-2007.
- Directors encouraged the authorities to follow up on the Fund’s technical assistance recommendations to improve the quality and timeliness of consumer price data, and fiscal data at the federal and emirates levels.
- Directors welcomed the authorities’ intention to expedite the U.A.E.’s participation in the Fund’s General Data Dissemination Standard.

### Background — macroeconomic performance and pressures
- Real GDP growth was in excess of 9 percent in 2006.
- Oil production rose by 8 percent in 2006.
- Non-oil sectors grew at double-digit growth rates in 2006.
- CPI inflation exceeded 9 percent in 2006.
- Rapid expansion supported by an outward-oriented development strategy, favorable business climate, and sustained high oil prices.
- Strong domestic demand and housing shortages led to sharp increases in rents and upward pressure on other prices.
- Overall fiscal and external current account surpluses remained large in 2006, allowing further accumulation of official foreign assets.
- Medium-term outlook: real GDP growth projected to remain strong in 2007, and slightly decelerating thereafter due to temporary capacity constraints. Fiscal and external accounts projected to remain in large surplus.

### Fiscal stance, reforms, and risks
- Prudent government spending at the federal and emirate levels has led to a decline in the non-oil fiscal deficit (excluding investment income).
- A number of large investment projects are being undertaken by public and quasi-public entities outside the budget, including in the hydrocarbon sector, infrastructure, real estate, and tourism.
- External borrowing to finance these investment projects has picked up significantly.
- Directors called for greater fiscal coordination between the emirates and the federal government and welcomed the authorities’ intention to establish a macro-fiscal unit at the federal government level.
- Directors recommended intensifying phasing and monitoring of large investment projects carried out by government and quasi-public entities outside the budget.
- Preparations to introduce a Value Added Tax system at the federal level were welcomed.

### Exchange rate and monetary context
- Authorities committed to the U.S. dollar peg in the period leading up to the establishment of the monetary union among GCC members.
- Authorities remain committed to achieving the monetary union by 2010.
- On the back of higher inflation in the U.A.E. than in partner countries, the exchange rate of the dirham has appreciated in real effective terms by about 6 percent since 2004.
- Directors agreed the current peg of the dirham to the U.S. dollar has served the U.A.E. well and considered the exchange rate of the dirham is in line with fundamentals; a few Directors saw value in some flexibility.

### Financial sector resilience and regulatory recommendations
- The financial system is sound and was not affected by the correction of the U.A.E. stock markets in 2005-06.
- Growth of private sector credit remains high and banks’ exposure to the real estate sector has increased recently.
- Reforms underway to strengthen prudential and regulatory oversight of the banking system and the capital markets; open the banking sector to greater competition; and strengthen the legal framework for the financial sector.
- Directors encouraged further strengthening of prudential regulations and bank supervision given rapid credit growth and a buoyant real estate market.
- Directors welcomed the authorities’ intention to establish a federal credit bureau to help improve reporting and monitoring of credit data.
- Directors called for strengthening supervision of financial services groups comprising banks, insurance companies, and securities firms.
- Directors welcomed steps to enhance supervision of capital markets, update the banking law and the company law, enact the draft securities law, encourage listing of large quasi-public enterprises, and promote an increased role for institutional investors.

### Executive Board Assessment — key judgments
- Directors commended the U.A.E.’s impressive growth performance and prudent macroeconomic policies.
- Medium-term prospects viewed as bright, supported by favorable outlook for energy prices, strong investment momentum, and improved domestic business climate.
- Key challenges: ensure sustained noninflationary growth and further diversification of the economy.
- Directors observed inflation is too high, driven mainly by strong demand for housing, but anticipated reduction of capacity constraints—especially in housing—likely to reduce inflation pressures over the medium term.
- Fiscal policy could play a greater role in regulating domestic demand; expenditure increases—including by public and quasi-public entities—should be consistent with the country’s absorptive capacity.

### Selected economic indicators (U.A.E.: 2003–06)
- Real GDP (at factor cost): 2003: 11.9; 2004: 9.7; 2005: 8.2; 2006: 9.4 (Annual percent change)
- Real oil and gas GDP: 2003: 13.6; 2004: 2.9; 2005: 1.6; 2006: 6.5 (Annual percent change)
- Real non-oil GDP: 2003: 11.2; 2004: 12.6; 2005: 10.8; 2006: 10.4 (Annual percent change)
- CPI inflation (average): 2003: 3.2; 2004: 5.0; 2005: 6.2; 2006: 9.3 (Annual percent change)

Public finances (In percent of GDP)
- Revenue: 2003: 30.7; 2004: 35.4; 2005: 41.7; 2006: 50.5
- Oil revenue: 2003: 23.2; 2004: 26.1; 2005: 31.3; 2006: 38.4
- Non-oil revenue: 2003: 7.5; 2004: 9.3; 2005: 10.4; 2006: 12.1
- Expenditure and net lending: 2003: 28.2; 2004: 24.9; 2005: 21.4; 2006: 21.7
- Budget balance: 2003: 2.6; 2004: 10.5; 2005: 20.3; 2006: 28.8
- Non-hydrocarbon balance (excluding investment income)1/: 2003: -32.4; 2004: -27.9; 2005: -25.0; 2006: -24.3

Monetary sector (Annual percent change)
- Broad money: 2003: 16.1; 2004: 23.2; 2005: 33.8; 2006: 23.2
- Credit to private sector: 2003: 13.5; 2004: 24.7; 2005: 44.5; 2006: 36.9

External sector (In billions of U.S. dollars, unless otherwise indicated)
- Exports of goods: 2003: 67.2; 2004: 90.2; 2005: 117.2; 2006: 142.6
- Oil and gas exports: 2003: 29.6; 2004: 38.0; 2005: 55.0; 2006: 70.2
- Imports of goods: 2003: -45.8; 2004: -63.4; 2005: -74.5; 2006: -86.1
- Current account balance: 2003: 7.6; 2004: 10.3; 2005: 24.3; 2006: 35.9
- Current account balance (in percent of GDP): 2003: 8.6; 2004: 10.0; 2005: 18.3; 2006: 22.0
- Gross official reserves: 2003: 15.1; 2004: 18.7; 2005: 21.3; 2006: 27.9
- Reserves in months of next year imports of goods and services: 2003: 2.3; 2004: 2.4; 2005: 2.3; 2006: 2.8
- Total external debt (in percent of GDP)2/: 2003: 18.7; 2004: 24.0; 2005: 30.8; 2006: 47.0
- REER (CPI-based, percent change, annual average)3/: 2003: -6.8; 2004: -3.5; 2005: 2.0; 2006: 4.1

Notes attached to indicators
- 1/ In percent of non-hydrocarbon GDP.
- 2/ Mostly foreign liabilities of U.A.E. commercial banks and private institutions that are more than offset by the U.A.E.'s foreign assets. During 2003–06, deposits of non-residents in U.A.E. banks constituted about 17 percent of total foreign liabilities.
- 3/ An increase is a real appreciation.

### Statement by A. Shakour Shaalan, Executive Director (summarized)
- Appreciation conveyed for constructive engagement with the Fund; authorities broadly agree with staff appraisal.
Recent developments
- GDP growth at 9.4 percent in 2006, generating over 220 thousand jobs.
- Non-oil activity momentum over 10 percent in 2006, particularly in construction, trade, and tourism.
- Hydrocarbon output accelerated in 2006.
- Economy weathered the equity market correction in 2006 and recent financial turbulence from the U.S. subprime mortgage sector.
- Tightening capacity constraints have stoked inflationary pressures; rise in inflation in 2006 largely driven by sharp increase in rental prices—particularly in Dubai and Abu Dhabi.
- Inflationary pressures expected to abate in 2007 onwards with the coming on market of several property and housing projects.

Prospects and policies
- Authorities share staff’s assessment of a strong macroeconomic outlook.
- Near-term concern: inflation and the risk of entrenching higher expectations if inflation persists.
- Measures initiated include introduction of a temporary cap on rent increases in Dubai and Abu Dhabi, to be lifted once housing pressures ease.
- Medium-term development strategy to deepen diversification along each emirate’s competitive advantage; services industry likely to become a key driver of non-oil growth.
- Comprehensive reform plan announced setting out government’s agenda for the coming three years.
- Ambitious investment program underway to expand capacity in tourism, transportation, manufacturing, and hydrocarbon sectors—expected to raise productivity growth and output potential.
- Execution of strategy will take into account absorptive capacity and implementation considerations to safeguard price stability.
- Public finances reported resilient to slides in oil prices as low as US$32 per barrel.

Fiscal policy and reforms
- Fiscal policy aims to balance saving oil revenues and increasing spending to expand absorptive capacity given oil price volatility.
- Overall budget balance registered a record surplus of 29 percent of GDP in 2006.
- Non-oil deficit as a proportion of non-oil GDP narrowed to about 15 percent in 2006—half its value just three years earlier.
- Current expenditure relative to GDP registered a modest decline, underpinned by a diminished share of the wage bill.
- Abu Dhabi efforts include outsourcing non-core budget activities and retrenchment of the size of government; wage increases partly offset by retrenchment.
- Non-oil revenues as a share of non-oil GDP rose by 3 percentage points in 2006 to 19.2 percent.

*IMF Public Information Notice (PIN) No. 07/125 — October 9, 2007; Executive Board concluded the 2007 Article IV consultation with the United Arab Emirates on September 21, 2007.*

### introduction of a value added tax (VAT) in advance of the Gulf Cooperation Council (GCC)

### introduction of a value added tax (VAT) in advance of the Gulf Cooperation Council (GCC)

### Fiscal stance and public financial management reforms
- Target date should further broaden the revenue base, and provide the federal government with more instruments to calibrate fiscal policy.
- Complementing the disciplined fiscal stance has been substantial progress on structural reforms to enhance the budget structure and improve its effectiveness.
- Federal-level achievements:
  - Establishment of a treasury single account.
  - Revision of the budget classification and chart of accounts.
  - Development of a government financial management information system.
- Strategic reform plan to enhance fiscal coordination between the federal and emirate levels, including better capturing of off-budget investment spending by government and quasi-public entities.
- Authorities are working toward setting up a macro-fiscal unit at the federal level.

### Monetary and exchange rate policies
- Given the full convertibility of the capital account, monetary policy in the U.A.E. is primarily geared toward maintaining credibility of the currency peg.
- Monetary and liquidity developments:
  - Growth in money aggregates was robust in 2006, but decelerated markedly compared to 2005.
  - The Central Bank of the U.A.E. (CBU) has stepped up issuance of certificates of deposits, which helped ease the growth in liquidity.
  - The deceleration in money growth largely reflects the decline in net foreign assets by commercial banks.
  - Banks have increased their foreign borrowing to finance strong growth in credit in support of investment, taking advantage of the favorable external environment and successive ratings upgrades.
  - Authorities are aware of the importance of monitoring external borrowing by financial institutions and corporations; a debt management unit will be established in Dubai.
- Exchange rate policy and GCC monetary union:
  - Authorities reconfirm their commitment to the U.S. dollar peg in the transition to the GCC monetary union in 2010.
  - The peg has enhanced policy credibility; authorities view the current exchange level as appropriate and agree with staff’s assessment outlined in Box 3.
  - There are inherent difficulties in the application of the 2007 Surveillance Decision to oil producing countries.
  - Consistent with the broader GCC strategy, authorities remain open to discussing all options for the common exchange rate regime under the monetary union.

### Financial sector issues and supervision
- Financial Sector Stability Update (FSSA) confirms soundness and increased sophistication of the U.A.E. financial system.
- Banking sector conditions:
  - Benefiting from rapid economic expansion, the banking sector enjoys comfortable levels of profits and capitalization.
  - The sector is opening to foreign competition: licenses granted to three GCC banks and two Islamic banks in 2006.
  - Islamic banks are becoming an increasingly important part of the banking system; the CBU is contemplating issuance of Shariah-compliant instruments to assist liquidity management.
- Regulatory and supervisory progress:
  - Introduction by the CBU of a comprehensive risk assessment approach.
  - Preparation for full implementation of Basel II principles by end-2007.
  - Approval of several key pieces of AML/CFT legislation.
- Stress testing and real estate exposure:
  - Stress testing established banking system resilience to shocks, including deterioration in asset quality, and interest rate and foreign exchange risks.
  - A few banks could be affected by a severe correction in the real estate market, but authorities view related risks as relatively muted.
  - Two considerations supporting the muted-risk view:
    - Banking sector exposure to the real estate sector (mortgage and construction) is relatively limited and concentrated within some institutions and geographic areas, helping contain spillovers.
    - Staff’s assessment is for strong demand in housing and property to continue over the medium term; if correct, this would substantially diminish the risk of a sharp price correction in the real estate sector.
  - CBU is reviewing classification of bank exposure to the real estate sector and contemplating more appropriate prudential oversight.
  - Planned establishment of a federal credit bureau should help strengthen banking supervision more generally.
- Capital markets and governance:
  - U.A.E. capital markets are gaining depth and sophistication; supervision is being strengthened.
  - Transfer of responsibility for oversight of Initial Public Offerings (IPO) from the Ministry of Economy to the Emirates Securities and Commodities Authority (ESCA) in early 2007, with IPO pricing undertaken in collaboration with the private sector.
  - A new code of good governance has been issued to enhance governance practices and disclosure of listed companies.
- Dubai International Financial Center (DIFC):
  - DIFC is promoting the U.A.E. as a regional financial hub, supported by impressive physical infrastructure and a sound legal framework aligned with best international practices.
  - Banking activities in the DIFC remain relatively limited; the stock exchange, DIFX, is competing successfully with other U.A.E. and GCC markets.

### Structural policies, labor markets, and statistics
- Structural and labor market policies:
  - Authorities pursue an outward oriented and private sector friendly strategy with highly open and flexible labor markets.
  - To strengthen the business climate and safeguard private sector competitiveness, authorities are intensifying efforts including revision of corporate and competition laws, and updating labor market legislation to allow greater labor mobility across sectors.
- Statistical capacity and data improvements:
  - Significant steps taken to upgrade the statistical database.
  - As part of a three-year strategy to overhaul federal government statistics, a National Bureau of Statistics (NBS) will be established by end-2007.
  - The 1974 Statistics Law is being revised to grant the NBS professional independence and authority to undertake its designated activities.
  - Progress on timeliness and quality of consumer price data with Fund assistance:
    - In March 2007, a technical assistance mission prepared a report including a work plan for development of a monthly Consumer Price Index (CPI), compiled in accordance with international standards.
    - The plan accounts for several requirements for CPI construction, most notably the implementation of a new Household Expenditure Survey (HES) launched in April 2007.
  - Authorities are working on finalizing their participation in the IMF General Data Dissemination System.

*IMF staff report: introduction of a value added tax (VAT) in advance of the Gulf Cooperation Council (GCC).*

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