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### Background
- UAE benefits from perceived safe-haven status amid regional instability; tourism and hospitality expanded, and capital inflows continued.
- Real estate, impaired since the 2008/9 crisis, has been recovering quickly, especially in the Dubai residential market.
- Economic diversification efforts:
  - Dubai: expanding as a hub for retail and wholesale trade, tourism, and regional real estate investment; successful bid for the World Expo 2020 expected to increase confidence and medium-term growth.
  - Abu Dhabi: expanding hydrocarbon production capacity and pursuing diversification into petrochemicals, logistics, financial services, aviation, renewable energy, and cultural tourism.
- Authorities implemented reforms consistent with IMF staff advice to mitigate vulnerabilities and strengthen the macroeconomic policy framework, including measures to bolster the GRE and banking sectors and to strengthen fiscal policy coordination and economic statistics.
- Status of selected 2013 Article IV recommendations (summary):
  - Fiscal stance in 2013 tightened by around 1 percent of non-hydrocarbon GDP; consolidated 2014 budget implies significant consolidation.
  - Major debt restructurings from 2008/9 completed; further progress needed on transparency and coordination of GREs.
  - Dubai raised real estate registration fee from 2 percent to 4 percent in October 2013; regulatory measures introduced.
  - Central Bank introduced maximum loan-to-value ratios, debt-service-to-income limits, and loan concentration limits for GREs and local governments in early 2014.
  - Ministry of Finance compiles consolidated fiscal data in GFS 2001 format for federal and emirate governments.
  - Improvements in GFS reporting; project to compile the international investment position; implementing an international transactions reporting system for the balance of payments.

### Recent developments
- Growth and sector performance:
  - Economic growth reached 5.2 percent in 2013.
  - Current account surplus declined to 16 percent of GDP (from 18½ percent in 2012).
  - Dubai sales prices increased 27 percent year-over-year in May 2014 (source: Dubai Land Department).
  - Headline inflation increased to 1.9 percent year-on-year in March 2014 (from 1 percent a year ago).
- Financial markets and capital flows:
  - Dubai Financial Market (DFM) stock index rose by 100 percent year-over-year in May 2014.
  - Credit default swap spreads tightened; foreign capital flows, particularly to domestic banks, rose.
- Fiscal developments:
  - Fiscal consolidation slowed in 2013: fiscal stance tightened by around 1 percent of nonhydrocarbon GDP (about half of what had been expected).
  - Overall fiscal surplus estimated to have declined to 6.5 percent of GDP (from 8.9 percent of GDP in 2012).
  - Estimated fiscal breakeven oil price increased to US$84 (from US$78 in 2012).
- Banking and GREs:
  - Private sector credit growth: 8.2 percent year-over-year in 2013, accelerating further in Q1 2014.
  - Banks increased exposure to government and public enterprises by AED15 billion (equivalent to 6 percent of bank capital) during 2013.
  - Banks remain amply capitalized; NPLs have begun declining but remain high, especially among Dubai banks.
  - Recent GRE actions: Dubai Group debt restructuring in January ($10 billion) completed with a large NPV haircut; $20 billion in Dubai government debt to the Central Bank and Abu Dhabi falling due this year was rolled over at reduced interest rates; Nakheel began prepaying bank debt due in 2015; Dubai World stepped up asset sales; financially healthy GREs stepped up debt issuance; Abu Dhabi contained total government and GRE debt.
- Bank financial soundness indicators (national banks; percent for 2008–2013 and Mar-14 sequence):
  - Capital adequacy ratio: 13.0, 19.9, 20.7, 20.0, 21.2, 19.3, 18.3.
  - Return on assets: 1.4, 1.4, 1.3, 1.5, 2.0, 2.0, 1.7.
  - Return on equity: 13.0, 10.9, 10.4, 11.4, 11.5, 15.3, 13.5.
  - Nonperforming loans to total loans: 2.3, 4.3, 5.6, 7.2, 8.4, 7.3, 7.1.
  - Provisions to nonperforming loans: 78.0, 85.0, 89.0, 90.0, 85.1, 93.4, 102.1.

### Outlook and risks
- Baseline outlook:
  - Real GDP growth expected to be about 4¾ percent in 2014 and 4½ percent in coming years.
  - Nonhydrocarbon economy expected to grow at about 5½ percent in 2014 and beyond.
  - Hydrocarbon production growth likely limited due to an amply supplied global oil market.
  - Inflation expected to increase, driven by higher rents.
  - Current account set to further decrease, reflecting a projected moderate decline in hydrocarbon prices and continued import growth.
- Key downside risks and policy responses:
  - Strengthening real estate cycle and speculative demand (Likelihood: Medium; Impact: High)
    - Dubai total government and GRE debt estimated at $142 billion (141 percent of Dubai GDP) with $92 billion falling due in 2014–19.
    - Policy responses: consider targeted increases in real estate–related fees; continue strengthening macroprudential framework; prioritize and sequence major projects; assess quality of planned spending; contain GREs’ risk-taking; improve GRE risk management, reporting, and governance.
  - Sustained decline in commodity prices (Likelihood: Medium; Impact: High)
    - Policy responses: continue fiscal consolidation; deleveraging and reforming GREs; continue economic diversification and explore options to increase revenue base.
  - Protracted slower growth in emerging economies (Likelihood: High; Impact: High)
    - Policy responses: temporary fiscal countercyclical measures for short shocks; continued fiscal consolidation, particularly in Dubai, for persistent shocks.
  - Surges in global financial market volatility (Likelihood: High; Impact: Medium)
    - Policy responses: CBU readiness to provide liquidity to banks; avoid transferring ailing GRE debt to domestic banks; a moderate increase in interest rates could be beneficial as a countercyclical measure.

### Policy discussions and recommendations
- Fiscal policy and sustainability:
  - Continued fiscal consolidation in 2014 recommended to unwind earlier stimulus, reduce fiscal vulnerabilities, and bequeath future generations an equitable share of resources.
  - Federal budget is balanced; Dubai plans gradual consolidation; Abu Dhabi’s budget implies large fiscal tightening (estimated at nearly 6 percent of nonhydrocarbon GDP), though midyear amendments may moderate consolidation.
  - Staff recommended a cautious approach to midyear budget amendments.
  - Dubai government debt (including extrabudgetary obligations) expected to decline to 56 percent of Dubai GDP this year.
  - Overall UAE gross government debt is 15 percent of GDP and considered manageable given large net foreign asset position.
  - Rebalance expenditure composition: reduce energy and water subsidies while protecting those in need; limit further increases in the wage bill.
- Macroprudential, banking, and liquidity measures:
  - Monitor pickup in private credit growth; if credit growth accelerates significantly, tighten macroprudential regulations (advances-to-stable-resources ratio; capital adequacy ratio; risk weights; reserve requirements on time deposits).
  - CBU liquidity stress-test results (LCR under narrow Basel III application): eight (mostly small) banks would fall below a 60 percent LCR; forthcoming customization expected to lower that number.
  - Solvency stress tests: increases in sectoral NPLs ranging from 50 percent to 130 percent resulted in only one bank with a Tier 1 capital ratio below 8 percent.
  - New loan concentration limits for GREs and local governments introduced by the CBU; agree transition paths for banks exceeding new limits.
- Real estate and GRE project coordination:
  - With most residential purchases cash-based, fee-based measures are likely most effective to address speculation.
  - Staff recommended higher fees for reselling properties within a relatively short time and restrictions on reselling off-plan properties.
  - CBU should further tighten maximum loan-to-value ratios and debt-service-to-income limits if prices remain very high and real estate lending accelerates.
  - GRE projects should be executed gradually and in line with expected demand; improve GRE transparency, risk management, reporting, and governance.
- Financial sector supervision and governance:
  - Phase in Basel III capital and liquidity standards over 2015–19; consult with banks on definitions (e.g., high-quality liquid assets).
  - Strengthen CBU’s supervisory toolkit and sanction framework; consider an FSAP assessment.
  - Enforce and tighten corporate governance rules to assure independence of banks’ decision making amid interconnectedness.
- AML/CFT and external-flow risks:
  - Adopted the 2002 AML law; AML suspicious cases unit in the CBU established; amended AML legislation will come into force shortly.
  - Staff recommended a national risk assessment and strengthening supervisors of financial and nonfinancial businesses, including real estate agents; an AML/CFT assessment in the context of the FSAP would help define priorities.
- Structural and statistical priorities:
  - Only 12 percent of nationals currently work in the private sector; priority to steer nationals toward private-sector jobs via training, placement programs, incentives, and SME support.
  - Passage of draft Public Debt Law (under consideration) would allow federal government to issue debt and require establishment of debt management offices in the emirates.
  - Ministry of Finance now produces government finance statistics for general government; NBS, with IMF technical assistance, started compiling the International Investment Position; international transactions reporting system implementation underway.
  - Remaining data gaps: limited data on Dubai GRE debt and potential contingent liabilities; demographic and labor market statistics very limited.

### GRE governance, Dubai debt, and DSA findings
- Governance and oversight:
  - Continue strengthening GRE sector; close oversight by Dubai Supreme Fiscal Committee essential to ensure projects are executed gradually and to avoid new large-scale risk-taking.
  - Improve GRE transparency, governance, and proactive management of upcoming debt maturities.
- Dubai DSA highlights:
  - Dubai’s government debt peaked at 66 percent of Dubai’s GDP in 2009 and declined to 60 percent in 2013.
  - Baseline assumes steady recovery and gradual fiscal consolidation; Dubai debt projected to decline under baseline.
  - Stress scenarios:
    - Sharp decline in GDP growth in 2014 (by 3/4 of standard deviation) raises debt-to-GDP by 11 percentage points in 2019 versus baseline.
    - Severe global downturn raises Dubai government debt to 71 percent of GDP in 2019.
    - Global downturn combined with a real estate shock where government takes over 20 percent of GREs’ total debt raises government debt-to-GDP to 86 percent in 2019.
- Dubai maturing debt (as of end-April 2014; total Dubai debt maturing by year, In millions of U.S. dollars):
  - 2014: 6,882; 2015: 9,111; 2016: 15,999; 2017: 12,930; 2018: 39,841; 2019: 2,340; Beyond: 22,122; Unallocated: 26,079; Total: 135,303.
  - In percent of Dubai 2013 GDP by column: 7.3; 9.1; 17.9; 13.7; 40.1; 3.8; 23.3; 26.0; 141.1.

### Exchange rate assessment and external sustainability
- Longstanding exchange rate peg has served the UAE well; as a commodity-based open economy with open labor markets, UAE would benefit little from expenditure switching under flexible rates.
- CGER-type models produce widely-dispersed assessments:
  - Equilibrium exchange rate approach points to moderate undervaluation (around 9 percent in March 2014 based on a long-run REER–real oil price model).
  - Macroeconomic balance (MB) approach indicates currency broadly in line with fundamentals; MB yields a current account norm of 6.4 percent of GDP in 2019 versus projected 5.6 percent.
  - External sustainability approach indicates current account surpluses are too low and, using conventional elasticities, a devaluation of about 15 percent would be required to correct the indicated external imbalance.
- Policy implication: imbalance driven largely by fiscal factors; adjustment should occur through fiscal consolidation rather than exchange rate devaluation.

### Key macroeconomic and fiscal figures (selected exact series and projections)
- Real GDP growth: 5.2 percent in 2013; projected 4.7 percent in 2014; 4.5 percent in 2015.
- Nominal GDP (UAE dirhams, billions): 2010: 1,051; 2011: 1,276; 2012: 1,367; 2013: 1,478; 2014: 1,551; 2015: 1,624.
- Nominal GDP (U.S. dollars, billions): 2010: 286; 2011: 347; 2012: 372; 2013: 402; 2014: 422; 2015: 442.
- CPI inflation (average): 2010: 0.9; 2011: 0.9; 2012: 0.7; 2013: 1.1; 2014: 2.5; 2015: 2.8.
- Current account balance (percent of GDP): 2013: 16.1; 2014 proj.: 12.1; 2015 proj.: 11.8.
- Gross official reserves (billions of U.S. dollars): 2013: 68.1; 2014: 79.8; 2015: 94.5.
- Fiscal breakeven oil price: US$84 in 2013; projected to fall to about US$82 in 2019 under baseline consolidation.
- Long-term fiscal baseline assumptions (Box 3):
  - long-term real rate of return of assets: 4 percent;
  - inflation: 2 percent;
  - population growth: 1.5 percent;
  - oil reserves depletion in 70 years;
  - oil price: US$87 per barrel in 2019 and constant in real terms thereafter.
- Staff’s baseline fiscal consolidation path reduces gap between projected and sustainable nonhydrocarbon deficits from about 10 percent of nonhydrocarbon GDP in 2013 to 5 percent in 2019 under baseline assumptions.

### Boxes and targeted findings
- Box 1 (Real estate): Dubai residential sale prices recovered strongly; some sources suggest Dubai’s nominal residential sale prices have reached their 2008 peak; Dubai rental growth accelerated but yields remain below peak; policy tools: higher fees on rapid resales, differentiated fees for reselling off-plan properties, and further macroprudential tightening if lending accelerates.
- Box 2 (Capital flows): Equity allocations by ETFs and mutual funds to the UAE increased four-fold since end-2012 (EPFR Global); domestic banks’ foreign liabilities rose 32 percent in 2013 (by $28 billion).
- Box 3 (Long-term fiscal sustainability): Baseline consolidation reduces sustainable nonhydrocarbon deficit gap; alternative scenarios show sensitivity—e.g., a lower oil price by one standard deviation (US$26.5) lowers sustainable benchmark by 6 percentage points in 2019.
- Box 4 (Public spending efficiency): UAE’s DEA and PFDH scores are among highest in GCC but below some advanced economies; federal three-year, program-based budget introduced in 2011.
- Box 5 (Corporate governance): 20 domestic UAE banks; 162 board members associated with 492 job positions; average of three positions per board member; 109 board members hold positions in controlling shareholder institutions; independence concerns noted; recommend increasing qualified, independent nonexecutive directors.

### Recommended near-term actions
- Continue fiscal consolidation and cautious midyear budgeting, especially in Abu Dhabi.
- Strengthen GRE transparency, governance, and proactive debt management; execute GRE projects gradually and in line with demand.
- Monitor and, if needed, tighten macroprudential measures (loan-to-value, debt-service-to-income, loan concentration limits).
- Strengthen CBU supervisory toolkit, complete Basel III phasing plans, and consider FSAP assessment.
- Conduct national AML/CFT risk assessment and strengthen supervisors of financial and nonfinancial professions.
- Improve economic statistics: complete International Investment Position compilation, implement international transactions reporting system, and expand demographic and labor market statistics.
- Recommended next Article IV consultation on standard 12-month cycle.

*IMF staff report (2014).*

### 2014. The staff team comprised Harald Finger (head), Andre Santos,

### UNITED ARAB EMIRATES: Selected IMF Staff Findings (2014)

### Background
- The UAE benefits from perceived safe-haven status amid regional instability; tourism and hospitality expanded, and capital inflows continued.
- Real estate, impaired since the 2008/9 crisis, has been recovering quickly, especially in the Dubai residential market.
- Economic diversification efforts:
  - Dubai: expanding as a hub for retail and wholesale trade, tourism, and regional real estate investment; successful bid for the World Expo 2020 expected to increase confidence and medium-term growth.
  - Abu Dhabi: expanding hydrocarbon production capacity and pursuing diversification into petrochemicals, logistics, financial services, aviation, renewable energy, and cultural tourism.
- Authorities have implemented reforms consistent with IMF staff advice to mitigate vulnerabilities and strengthen the macroeconomic policy framework, including measures to bolster the GRE and banking sectors and to strengthen fiscal policy coordination and economic statistics.

- Status of selected 2013 Article IV recommendations (current status summary):
  - Continue fiscal consolidation: Fiscal stance in 2013 tightened by around 1 percent of non-hydrocarbon GDP; consolidated 2014 budget implies significant consolidation.
  - Continue to focus on strengthening the GRE sector: Major debt restructurings from 2008/9 completed; further progress needed on transparency and coordination of GREs.
  - Consider targeted increases in real-estate-related fees: Dubai raised real estate registration fee from 2 percent to 4 percent in October 2013; regulatory measures introduced.
  - Introduce new prudential regulations for mortgage lending and loan concentration: Central Bank introduced maximum loan-to-value ratios, debt-service-to-income limits, and loan concentration limits for GREs and local governments in early 2014.
  - Further strengthen fiscal policy coordination: Ministry of Finance compiles consolidated fiscal data in GFS 2001 format for federal and emirate governments.
  - Further improve economic statistics: Improvements in GFS reporting; project to compile the international investment position; implementing an international transactions reporting system for the balance of payments.

*Source: IMF staff.*

### Recent developments
- Growth and sector performance:
  - Economic growth reached 5.2 percent in 2013, supported by tourism, hospitality, public projects in Abu Dhabi, and robust growth in Dubai’s service sectors.
  - Current account surplus declined to 16 percent of GDP (from 18½ percent in 2012), reflecting buoyant imports.
  - Dubai sales prices increased 27 percent year-over-year in May 2014 (source: Dubai Land Department).
  - Headline inflation increased to 1.9 percent year-on-year in March 2014 (from 1 percent a year ago), driven by rents rising only gradually relative to prices.
- Financial markets and capital flows:
  - Dubai Financial Market (DFM) stock index rose by 100 percent year-over-year in May 2014, in part due to UAE’s inclusion in MSCI’s emerging markets index.
  - Credit default swap spreads tightened; foreign capital flows, particularly to domestic banks, rose.
- Fiscal developments:
  - Fiscal consolidation slowed in 2013: fiscal stance tightened by around 1 percent of nonhydrocarbon GDP (about half of what had been expected).
  - Dubai reduced its deficit slightly faster than planned; Abu Dhabi’s consolidation was less than budgeted due to higher security, defense, and other current spending.
  - Overall fiscal surplus estimated to have declined to 6.5 percent of GDP (from 8.9 percent of GDP in 2012).
  - Estimated fiscal breakeven oil price increased to US$84 (from US$78 in 2012).
- Banking and GREs:
  - Private sector credit growth: 8.2 percent year-over-year in 2013, accelerating further in Q1 2014.
  - Banks increased exposure to government and public enterprises by AED15 billion (equivalent to 6 percent of bank capital) during 2013.
  - Banks remain amply capitalized; NPLs have begun declining from post-crisis peak but remain high, especially among Dubai banks.
  - Recent GRE developments: debt restructuring of Dubai Group in January ($10 billion) completed reportedly with a large NPV haircut; $20 billion in Dubai government debt to the Central Bank and Abu Dhabi falling due this year was rolled over at reduced interest rates; Nakheel began prepaying bank debt due in 2015; Dubai World stepped up asset sales; financially healthy GREs stepped up debt issuance; Abu Dhabi contained total government and GRE debt.

- Bank financial soundness indicators (national banks; percent):
  - Capital adequacy ratio: 13.0, 19.9, 20.7, 20.0, 21.2, 19.3, 18.3 for 2008–2013 and Mar-14 (table sequence).
  - Return on assets: 1.4, 1.4, 1.3, 1.5, 2.0, 2.0, 1.7 for 2008–2013 and Mar-14.
  - Return on equity: 13.0, 10.9, 10.4, 11.4, 11.5, 15.3, 13.5 for 2008–2013 and Mar-14.
  - Nonperforming loans to total loans: 2.3, 4.3, 5.6, 7.2, 8.4, 7.3, 7.1 for 2008–2013 and Mar-14.
  - Provisions to nonperforming loans: 78.0, 85.0, 89.0, 90.0, 85.1, 93.4, 102.1 for 2008–2013 and Mar-14.
  - (Source: Country authorities; specific and general provisions noted.)

### Outlook and risks
- Baseline outlook:
  - Real GDP growth expected to be about 4¾ percent in 2014 and 4½ percent in coming years.
  - Nonhydrocarbon economy expected to grow at about 5½ percent in 2014 and beyond, supported by public investment projects and strength in tourism, logistics, finance, and real estate.
  - Hydrocarbon production growth likely limited due to an amply supplied global oil market.
  - Inflation expected to increase, driven by higher rents.
  - Current account set to further decrease, reflecting a projected moderate decline in hydrocarbon prices and continued import growth.
- Key downside risks and policy responses (from the Risk Assessment Matrix):
  - Strengthening real estate cycle and speculative demand (Likelihood: Medium; Impact: High)
    - Risk: unsustainable price dynamics and disruptive correction; acceleration of megaprojects could exacerbate risk and weaken Dubai’s indebted GREs.
    - Facts: Dubai total government and GRE debt estimated at $142 billion (141 percent of Dubai GDP) with $92 billion falling due in 2014–19.
    - Policy responses: consider targeted increases in real estate–related fees; continue strengthening the macroprudential framework; develop mechanisms to prioritize and sequence major projects; assess quality of planned spending; contain GREs’ risk-taking; improve GRE risk management, reporting, and governance.
  - Sustained decline in commodity prices (Likelihood: Medium; Impact: High)
    - Risk: lower oil prices reduce export earnings and fiscal revenues; large, prolonged falls would reverse savings accumulation and reduce fiscal spending.
    - Policy responses: continue fiscal consolidation; mitigate Dubai’s fiscal vulnerabilities by deleveraging and reforming GREs; continue economic diversification and explore options to increase revenue base.
  - Protracted slower growth in emerging economies (Likelihood: High; Impact: High)
    - Risk: lower demand from emerging Asia (notably India and China) would reduce oil prices, weaken nonhydrocarbon goods exports, and reduce tourism and foreign real estate demand.
    - Policy responses: temporary fiscal countercyclical measures for short shocks; continue fiscal consolidation, particularly in Dubai, for persistent shocks.
  - Surges in global financial market volatility (Likelihood: High; Impact: Medium)
    - Risk: reversal of capital flows, increased risk premiums, tighter liquidity for Dubai government and GREs; spillovers to banking system due to GRE interconnectedness.
    - Policy responses: CBU readiness to provide liquidity to banks; avoid transferring ailing GRE debt to domestic banks; a moderate increase in interest rates could be beneficial as a countercyclical measure.

### Policy discussions and recommendations
A. Pursuing prudent macroeconomic policies
- Fiscal policy:
  - Continued fiscal consolidation in 2014 is appropriate to unwind earlier stimulus, reduce fiscal vulnerabilities (higher breakeven oil price), and bequeath future generations an equitable share of resources (Box 3).
  - Federal budget is balanced; Dubai plans gradual consolidation to reduce debt-related vulnerabilities; Abu Dhabi’s budget implies large fiscal tightening (estimated at nearly 6 percent of nonhydrocarbon GDP), though midyear amendments may moderate consolidation.
  - Staff recommended a cautious approach to midyear budget amendments, particularly if aggregate demand strengthens further.
- Debt sustainability:
  - Dubai government debt (including extrabudgetary obligations) expected to decline to 56 percent of Dubai GDP this year.
  - Dubai debt could still become unsustainable under severe shocks, but outlook improved with fiscal consolidation and better growth prospects.
  - Overall UAE gross government debt is 15 percent of GDP and considered manageable given large net foreign asset position.
- Medium-term fiscal frameworks:
  - Federal government plans a balanced budget until 2016; Dubai targets continued gradual consolidation; Abu Dhabi’s informal medium-term framework aims at consolidation but is loosely binding.
  - Staff recommended rebalancing expenditure composition:
    - Reduce energy and water subsidies while protecting those in need to create fiscal space and improve energy efficiency.
    - Limit further increases in the wage bill to maintain budgetary flexibility and make private sector employment more attractive to nationals.

*Italicized source attribution: IMF staff report (2014).*

### 13. The authorities are further strengthening intergovernmental fiscal coordination.

### 13. The authorities are further strengthening intergovernmental fiscal coordination.

### Intergovernmental fiscal coordination and budgeting reforms
- Spending is dominated by Abu Dhabi; the federal government is responsible for a smaller share of spending than in any other country.
- Each emirate has full autonomy over its fiscal policies.
- The Fiscal Policy Coordination Council, supported by the Ministry of Finance, now prepares consolidated backward-looking fiscal data for the UAE as a whole.
- Fiscal coordination work is supported by a self-financed program of IMF technical assistance.
- Federal government reforms:
  - Introduced a three-year budget cycle with a thorough evaluation of costs between cycles.
  - Spending ceilings are set top-down and spending is presented on a program basis with associated performance indicators.
- Emirate-specific developments:
  - Dubai: has a medium-term fiscal framework setting budget targets through 2017, though targets are not published.
  - Abu Dhabi: produces a report on the medium-term fiscal outlook and has started work on performance-based budgeting.
- Staff recommendations:
  - Abu Dhabi should strengthen its annual budget process to avoid frequent mid-year budget amendments.
  - Abu Dhabi should adopt a formal medium-term fiscal framework to set more clearly the direction for fiscal policy for the emirate and the UAE as a whole.
  - Improvements in budgeting could further increase the efficiency of public spending.

### Exchange rate policy and external position
- The longstanding exchange rate peg has served the UAE well.
- As a commodity-based open economy with open labor markets, the UAE would benefit little from expenditure switching under flexible rates.
- Staff estimates of the three alternative CGER-type models produce widely-dispersed exchange rate assessments (Appendix II).
- The projected current account balance is:
  - Close to the norm implied by the macro-balance approach.
  - Significantly below the level implied by the external sustainability approach — pointing to the need to generate more savings and consistent with fiscal consolidation.
- The equilibrium exchange rate approach points to moderate undervaluation.
- Short-term capital flows have been more vulnerable to the change in US monetary policy since mid-2013.
- External buffers are ample in the form of international reserves and sovereign wealth fund assets.
- Higher U.S. interest rates have not prevented rises in stock and real estate prices.
- Higher interest rates as a result of a normalization of U.S. monetary policy, unless disruptive, would help the UAE mitigate the risk of potentially large private credit growth.

### Credit growth, macroprudential options, and banking liquidity
- Recent pickup in private credit growth amid ample banking-system liquidity warrants close monitoring.
- Staff and authorities agreement: should credit growth accelerate significantly, tightening macroprudential regulations could be appropriate, including:
  - Advances-to-stable-resources ratio.
  - Capital adequacy ratio.
  - Risk weights for lending.
  - Reserve requirements on time deposits.
- CBU liquidity stress-test results (LCR under narrow Basel III application):
  - Liquidity stress tests implied that eight (mostly small) banks would fall below a 60 percent liquidity coverage ratio (LCR).
  - CBU noted forthcoming customization of rules to the UAE context will provide a more accurate assessment with fewer banks likely below the threshold.
- Solvency stress tests:
  - Increases in sectoral NPLs ranging from 50 percent to 130 percent resulted in only one bank with a Tier 1 capital ratio below 8 percent.
- New loan concentration limits for GREs and local governments introduced by the CBU will help contain risks from planned megaprojects.
- It is important to agree on transition paths for banks that exceed the new limits while avoiding further build-up of exposures.

### Real estate market risks and GRE project coordination
- Real estate risks:
  - Situation differs from 2008: price increases still partially reflect recovery from the post-crisis trough and demand is significantly less bank-financed.
  - By some measures, nominal residential real estate prices in Dubai have already reached their 2008 peak.
  - Rapid nominal price increases, if continued, could trigger intensification of destabilizing speculative demand.
- Policy measures and recommendations:
  - With most residential purchases being cash-based, fee-based measures are likely most effective to address speculation.
  - Dubai increased its real estate registration fee from 2 percent to 4 percent last October; regulatory measures to assure orderly market conditions for new real estate development were welcomed.
  - Staff and the authorities agreed that imposing additional fees and restrictions on reselling off-plan properties would further discourage speculative demand.
  - Staff recommended setting higher fees for reselling properties within a relatively short time.
  - Staff recommended that the CBU should further tighten maximum loan-to-value ratios and debt-service-to-income limits if real estate price increases remain very high and if growth in real estate lending increases.
- GREs and project execution:
  - GREs will plan and execute upcoming real estate and hospitality projects to a large extent.
  - Staff recommended projects be executed gradually and in line with expected demand, requiring close coordination and oversight.
  - Care should be taken to prevent GRE activities from crowding out private sector activity.
  - For highly indebted GREs, continue proactive management of upcoming debt repayments, including timely communication to guide market expectations.
  - Continue improving availability of information on Dubai GRE debt, terms of asset transfers among GREs, risk management, reporting, and governance to strengthen GRE balance sheets.
- Authorities’ stance:
  - Agreed on need for further policy actions in real estate and intention to further strengthen GREs.
  - Consideration of higher, targeted fees to address speculative demand.
  - Believe recently introduced macroprudential regulations are sufficiently comprehensive in the current situation but agreed to review them if real estate prices continue to increase rapidly or if real estate lending picks up more markedly.
  - Intend to execute new megaprojects gradually and flexibly in line with demographic forecasts.
  - GRE debt management: GREs have been exploring refinancing options, prepaying debt before maturity, diversifying funding sources, and extending maturities.
  - Authorities noted most GREs are financially healthy and aim to strengthen commercial viability of remaining GREs; improvements in transparency noted for listed GREs or those issuing debt.

### Financial system supervision, Basel III, and governance
- Continued focus on banking-system health amid a strong cyclical position and accelerating deposit growth.
- CBU conducted stress tests to assess risks:
  - Liquidity stress tests identified LCR vulnerabilities for some small banks under narrow Basel III assumptions.
  - Solvency stress tests showed limited solvency vulnerabilities under severe NPL increase scenarios.
- CBU actions:
  - Recently introduced loan concentration limits for GREs and local governments.
  - Planning to phase in Basel III capital and liquidity standards over 2015–19; consulting with banks on technical issues such as definition of high-quality liquid assets and a simple liquidity rule for smaller banks.
- Staff recommendations:
  - Strengthen the CBU’s supervisory toolkit, including improvements to the sanction framework (to be advanced in the forthcoming Financial Services Law).
  - An FSAP assessment could help further strengthen the CBU and other regulatory and supervisory agencies and facilitate financial sector development.
  - Assure independence of banks’ decision making amid significant interconnectedness among bank, GRE, and private enterprise board members by enforcing and tightening corporate governance rules where needed.
- Corporate governance:
  - Staff recommended strict enforcement of existing corporate governance rules—and tightening rules where weaknesses are identified—for banks and GREs to address potential conflicts of interest.

### AML/CFT and external-flow risks
- Open economy and geographic location create risks from potential illicit financial flows entering banking, real estate, and gold markets.
- Progress and measures:
  - Adoption of the 2002 AML law, establishment of the AML suspicious cases unit in the CBU, and increasing international cooperation.
  - Amended AML legislation will come into force shortly.
- Staff recommended further improvements:
  - Conduct a national risk assessment once legislative and regulatory framework is upgraded.
  - Strengthen role of supervisors of financial and nonfinancial businesses and professions, including real estate agents, to ensure adequate preventive measures and reporting of suspicious transactions.
  - Improve understanding of origins of financial flows and refine identification of beneficial owners of deposits and loans.
  - An AML/CFT assessment in the context of the FSAP would help define priority areas for further improvements.
- Authorities noted strong efforts in AML/CFT, including domestic regulation and international cooperation.

### Structural and statistical issues
- Employment and nationals in private sector:
  - Only 12 percent of nationals currently work in the private sector.
  - Priority: steer nationals toward private-sector jobs; nonhydrocarbon private sector expected to be engine of growth and job creation in the medium term.
  - Government actions: developing training and placement programs, partnership initiatives with private sector, supporting internal labor mobility, providing financial incentives to companies hiring highly skilled nationals, and supporting SMEs.
  - Policy target: at least 10 percent of new government contracts are expected to be awarded to SMEs starting 2014.
- Local debt market development:
  - Timely development would provide alternative financing and support banks’ liquidity management under Basel III.
  - Passage of draft Public Debt Law (currently under consideration) would allow federal government to issue debt and require establishment of debt management offices in the emirates.
  - Abu Dhabi has made significant progress in technical preparations for potential regular debt issuance.
- Statistics and data gaps:
  - Data provision has some shortcomings but is broadly adequate for surveillance.
  - Ministry of Finance now produces government finance statistics for general government.
  - With IMF technical assistance, National Bureau of Statistics (NBS), in cooperation with CBU and others, has started compiling the International Investment Position.
  - Implementation of an international transactions reporting system is under way to improve balance of payments statistics; adequate staffing for balance of payments statistics is important.
  - Participation of NBS in GCC-Stat is an important step.
  - Remaining data gaps: limited data on Dubai GRE debt and potential contingent liabilities to the government; demographic and labor market statistics remain very limited.

### Staff appraisal: risks, priorities, and recommended policies
- Growth outlook:
  - Nonhydrocarbon economy expected to grow at around 5½ percent this year and beyond, supported by improving global environment, safe-haven status, returning confidence, and public projects including Expo 2020.
  - Domestic and external conditions pose risks, but sizeable foreign assets provide significant buffers.
- Key priorities and recommendations:
  - Strengthen economy’s resilience and mitigate risk of renewed boom-bust by:
    - Further fiscal consolidation.
    - Considering additional measures to contain speculative real estate demand.
    - Limiting new risk-taking by GREs.
    - Strengthening financial sector regulation.
  - Continued prudent fiscal policy to manage aggregate demand and set clear direction for public spending; further withdrawal of fiscal stimulus is appropriate.
  - Strengthening budget process in Abu Dhabi would support medium-term fiscal planning and clarify fiscal policy for the emirate and the UAE.
  - Monitor recent pickup in private credit growth; with limited monetary policy space under fixed exchange rate and open capital account, tightening macroprudential regulations would be appropriate should credit growth accelerate significantly.
  - Real estate-specific actions:
    - Set higher fees for reselling properties within a relatively short time.
    - Impose restrictions on reselling off-plan properties.
    - If real estate lending picks up strongly, tighten loan-to-value ratios and debt-service-to-income limits further.

*Source: IMF staff report excerpt — "13. The authorities are further strengthening intergovernmental fiscal coordination."*

### 35.  Building on the recent progress in restructuring the debt of GREs, Dubai should

### _cr14187 - 35.  Building on the recent progress in restructuring the debt of GREs, Dubai should

### Governance and financial oversight of GREs
- Continue to focus on strengthening the GRE sector and build on recent progress in restructuring GRE debt.
- Continued close oversight of GREs by the Dubai Supreme Fiscal Committee is essential to:
  - ascertain that projects continue to be executed gradually and in line with expected demand;
  - avoid new large-scale risk-taking by GREs that are still in a vulnerable financial position.
- Further improvements in the transparency and governance of GREs, and a continuation of the proactive approach to upcoming debt maturities, will be essential to support market confidence.

### Banking system soundness
- The strong cyclical position and accelerating deposit growth highlight the need for continued focus on banking system soundness.
- Ongoing monitoring and reporting of risks, including through the CBU’s financial stability reports, will be important.
- After the introduction of loan concentration limits for GREs and local governments:
  - ensure that banks that do not meet these limits gradually reduce their exposures.
- Adherence to best practices in corporate governance and risk management is needed to safeguard the independence of banks’ decision making given significant interconnectedness among board members.
- The planned assessment under the FSAP will be a welcome opportunity to review the financial sector’s strengths and weaknesses.

### AML/CFT framework
- Build on progress with developing the AML/CFT framework to mitigate potential risks.
- Following the adoption of legislation and establishment of AML infrastructure at the CBU, focus now on:
  - conducting a national risk assessment;
  - strengthening the regulatory framework and the role of the supervisors.

### Statistics and data transparency
- Maintain momentum in strengthening economic statistics.
- Press ahead with plans to compile the International Investment Position and provide adequate resources for improving the quality of overall balance of payments statistics.
- Develop more comprehensive demographic and labor markets statistics.
- Disseminate complete data on Dubai GRE debt and potential contingent liabilities to the government.

### Article IV consultation timing
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Real estate market developments (Box 1) — key findings and policy options
- Residential segment: strong recovery in Dubai; lesser recovery in Abu Dhabi.
  - Some data sources suggest Dubai’s residential sale prices have already reached their previous peak in nominal terms.
  - Recovery in Abu Dhabi’s residential market started much later and price level is still well below its peak.
- Rents:
  - Dubai: residential rental growth has accelerated strongly, but rents are, so far, below their peak; rental yield has been slowly declining.
  - Abu Dhabi: rents started rising only in the second half of 2013 and remain well below their peak, with a broadly stable rental yield.
  - The recent removal of the 5 percent rent cap, together with the new requirement for public sector employees to reside in Abu Dhabi, is expected to put upward pressure on rents.
- Valuation indicators:
  - Dubai’s price-income ratio has been rising back to its 2008 peak, which could indicate a risk of overvaluation.
  - Price-rent ratios also increased in Dubai and Abu Dhabi.
- Other segments:
  - Dubai retail rent prices were broadly stable in 2013.
  - Average daily hotel rates increased by 5 percent in 2013, supported by a 10 percent increase in tourists visiting Dubai.
  - Office segment: rental growth has been slow amid a high vacancy rate of 29 percent.
  - Abu Dhabi commercial segments: rental growth sluggish, reflecting oversupply.
- Policy instruments:
  - International experience suggests real estate fees can be a successful tool to reduce price pressures.
  - For the UAE, real estate fees are especially useful given a largely cash-based market; fees could be raised substantially for properties re-sold within a short time.
  - Imposing differentiated fees for reselling off-plan properties could help discourage speculative demand.
  - Measures could be accompanied by further tightening of macroprudential measures, such as loan-to-value ratios and debt-service-to-income ratios, if rapid price growth continues and real estate lending accelerates.

### Capital flows to the UAE (Box 2) — key figures and trends
- Capital inflows, alongside strong rises in real estate and stock market prices, reflect improved confidence in the economy.
- Equity allocations by ETFs and mutual funds to the UAE have increased four-fold since end-2012 (EPFR Global).
- Bond allocations by ETFs and mutual funds have declined significantly within the same period.
- Both bond and equity funds have been posting net inflows into the UAE since April 2014.
- Domestic banks’ foreign liabilities rose 32 percent in 2013 (by $28 billion).
- Foreign banks’ claims on nonbank UAE sectors have been recovering gradually, reflecting improved market access by GREs through syndicated loans and bond issuances.

### Long-term fiscal sustainability (Box 3) — scenarios and benchmarks
- Staff’s fiscal sustainability analysis based on the permanent income hypothesis suggests the UAE’s fiscal stance is too expansionary to ensure intergenerational equity.
- Staff’s baseline fiscal consolidation path would reduce the gap between projected and sustainable nonhydrocarbon deficits from about 10 percent of nonhydrocarbon GDP in 2013 to 5 percent in 2019 under baseline assumptions.
- Fiscal breakeven oil price would fall to about US$82 in 2019, from US$84 in 2013 under the baseline consolidation.
- Baseline assumptions include:
  - long-term real rate of return of assets: 4 percent;
  - inflation: 2 percent;
  - population growth: 1.5 percent;
  - oil reserves depletion in 70 years;
  - oil price: US$87 per barrel in 2019 and constant in real terms thereafter.
- Alternative scenarios show sensitivity:
  - slightly lower real return on assets or a lower oil price would lower the sustainable nonhydrocarbon deficit benchmark in 2019 by 2 percentage points and 6 percentage points, respectively;
  - lower population growth or a higher rate of return on domestic investments would add 4 percentage points and 4½ percentage points, respectively, to the baseline.
- Alternative scenario specifications (as presented):
  - (i) lower population growth by 0.5 percentage point;
  - (ii) lower real return on assets by 0.5 percentage point;
  - (iii) lower oil price by one standard deviation (US$26.5);
  - (iv) more productive capital spending (half of domestic public investment assumed to yield the same rate of return as investments abroad).

### Public spending efficiency (Box 4)
- The efficiency of public investment spending in the UAE compares favorably to GCC peers but could be improved further.
- Methodology: Data Envelopment Analysis (DEA) and Partial Free Disposal Hull (PFDH) techniques; infrastructure quality proxied by Global Competitiveness Indicators sub-component; inputs measured as public capital stock.
- UAE’s DEA and PFDH scores are among the highest in the GCC, but lower than some advanced economies with strong institutions (e.g., Canada, Chile, Singapore).
- Federal budgeting reforms:
  - Since 2011 the federal government adopted a top-down three-year budget organized into programs and services, tracking financial and nonfinancial performance indicators.
  - Expected benefits: clarifying objectives, measuring performance, and setting relatively firm medium-term spending limits to improve spending efficiency.
  - Caveats: measurement difficulties, risk of gaming performance targets, importance of organizational culture, and rigorous evaluation of spending programs outside the budget.
- Greater efficiency gains might be possible through further strengthening of the emirates’ budget processes (Abu Dhabi and Dubai account for most public spending).

### Corporate governance and board independence in UAE banks (Box 5) — structure and concerns
- Role of the board: overall responsibility for banks, approval and oversight of objectives, risk tolerance and management, internal controls, corporate governance, and compensation; oversight of senior management.
- Good practice: appoint a large number of qualified, independent nonexecutive board members, including representation for minority shareholders.
- UAE bank board inter-linkages (aggregate figures):
  - 20 domestic UAE banks;
  - total of 162 board members;
  - associated with 492 different job positions in other institutions;
  - average of three positions per board member;
  - 109 board members hold positions directly in the controlling shareholder institutions;
  - 40 board members are associated with institutions that might have an indirect interest in the controlling shareholder institutions, including public sector officials;
  - 13 board members only hold positions in their respective banks;
  - UAE banks have 18 controlling shareholder institutions that can appoint board members.
- Implication: this network of related institutions, shareholders, and board members could pose challenges to the objectivity and independence of board decisions in UAE banks.
- Comparative finding: OECD et al. (2009) found that 54 percent of MENA banks do not have independent directors and that national guidelines require at least half of the board to be nonexecutive directors.

*International Monetary Fund staff report content as provided in the source PDF.*

### Box 5. How Independent Are the Boards of Directors in UAE Banks? (Concluded)

### Box 5. How Independent Are the Boards of Directors in UAE Banks? (Concluded)

### Real Sector Developments
- GCC Non-oil GDP Growth: comparative bars for Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates for 2012 and 2013 (chart present).
- Dubai: Total Hotel Guests, 2008–2013 (Millions) shown by year; chart range 0–12 (Millions).
- Traffic at Dubai International Airport, 2009–13:
  - Passengers per month (Thousands) and Cargo (tons per month, RHS) trends shown from Jan-09 to Jan-14.
- Key observations from figure captions:
  - "The hospitality sector is one of the major drivers of Dubai's growth..."
  - "...along with the transportation sector."
  - "...and the UAE compared favorably to most of its GCC peers in 2013."
  - "The recovery in nonhydrocarbon growth is gaining strength..."
- CPI Inflation, 2009−March 2014 (Annual percent change): Housing and Non-Housing components plotted from Mar-09 to Mar-14.
- Real GDP Growth, 2003−13 (Annual percent change): Real GDP, Real Non-oil GDP, Real oil GDP series shown.
- Residential Real Estate Prices, 2008 – March 2014 (AED per sq foot): Abu Dhabi (REIDIN), Dubai (REIDIN), Abu Dhabi (NBAD), Dubai (NBAD) series shown; caption: "...in both Abu Dhabi and Dubai."
- Caption: "Inflation has started to pick up moderately, driven by rising housing prices..."
- Sources: Country authorities; Haver; and IMF staff estimates.

### Fiscal Developments
- Consolidated Revenues (Percent of GDP) 2003–13: Hydrocarbon, Non-hydrocarbon, Investment income, Oil price (RHS) series.
- Consolidated Spending Components (Percent of GDP) 2003–13: Wages and salaries, Subsidies and transfers, Development, Net Lending (Loans and Equity: Net), Other.
- Abu Dhabi Government Expenditures (Percent of Abu Dhabi GDP): Current expenditure, Development expenditures, Grants, Loans and equity (net) series.
- Wage Bill Growth Rate and the Oil Price (In percent): Abu Dhabi, Dubai, Federal series plotted 2003–13.
- Dubai Government Expenditures (Percent of Dubai GDP): Current expenditure, Development expenditures, Grants, Loans and equity (net).
- Fiscal Stance, 2003–13: Overall fiscal bal. (% GDP) and Adjusted non-oil primary bal. (% non-oil GDP) series.
- Key captions:
  - "With the economic recovery in the UAE, loans and equity in Abu Dhabi have dropped, but current spending remains high."
  - "Similarly, government expenditure in Dubai has declined, driven by a phase-out of loans and equity."
  - "Wage bill growth dropped during the crisis but has picked up again moderately."
  - "The adjusted non-oil primary balance continued to improve, though more gradually, in 2013."
- Sources: Country authorities; and IMF staff calculations.

### Monetary and Financial Developments
- Policy Rates, 2007–13 (Percent): U.S. Fed Funds Rate and CBU Policy Rate series (Dec-07 to Dec-13).
- Bank Liquidity, 2008–13 (Billions of Dirham): Foreign Assets, CDs held by banks, Banks' deposits with CBU, Loan to deposit ratio (RHS) series.
- Bank Deposits, 2007–13 (Billions of Dirham): Government deposits, Deposit of residents, Deposit of non-residents.
- Stock Market Indices, 2006–14 (Index, Dec. 31, 2005=100): MSCI EM (RHS), Dubai, Abu Dhabi series.
- GCC: CDS Spreads, 2008–May 2014 (Basis points): Dubai and Abu Dhabi series.
- Debt Issuance by Borrower Type, 2001–13 (US$ billions): General government, Private sector bank, Public sector bank, Other public sector, Other private sector.
- Key captions and observations:
  - "Monetary conditions remain accommodative, with a stable spread to the U.S. policy rate."
  - "Resident deposits drove deposit growth in 2013."
  - "Banking sector liquidity continues to be comfortable."
  - "Debt issuance has remained stable since 2011, with the private sector and GREs increasingly issuing debt."
  - "UAE equity markets were among the best performers in 2013."
  - "Dubai's CDS spread continued to fall in 2013 amid high global liquidity."
- Notes: Loans are net of provisions. Sources: Haver; Markit; Bloomberg; Dealogic; and country authorities.

### Business Environment and Governance
- Ease of Doing Business (Percentile rank): UAE relative to MENAP, LIC, EM; 2010–2014 improvement shown.
- WGI-4 and GDP per capita (Log PPP): plotted to indicate "Better governance → Higher PPP per capita".
- Changes in WGI-4 (Percentile rank) and Voice and Accountability (Percentile rank): UAE versus Oil exporters, EM, LIC, World for 2000 and 2012.
- Political indices plotted: Political Stability and No Violence (WGI); Political and Social Integration (BTI); Political Stability (ICRG); Democracy Index (EIU) — showing UAE relative to EM, LIC, MENAP.
- Note: Labor Market Efficiency and Young Population Ratio plotted; caption: "Less efficient labor market — Young population".
- Sources: Worldwide Governance Indicators; Global Competitiveness Report (2013-14; pillar 7 without female participation and brain drain); World Development Indicators (2012); World Bank Doing Business (2014); EIU; BTI; ICRG; and IMF staff calculations.
- Footnote: "WGI-4 is a general governance indicator that reflects quality of governance and institutions in a given country."

### United Arab Emirates: Selected Macroeconomic Indicators, 2010–19 (Table 1 — selected series and observations)
- Hydrocarbon sector:
  - Exports of oil, oil products, and gas (in billions of U.S. dollars): 2010: 74.6; 2011: 111.6; 2012: 120.0; 2013: 123.0; 2014: 122.5; 2015: 120.0; 2016: 116.5; 2017: 114.6; 2018: 114.1; 2019: 114.3.
  - Average crude oil export price (in U.S. dollar per barrel): 2010: 77.0; 2011: 109.6; 2012: 112.0; 2013: 110.0; 2014: 108.0; 2015: 103.0; 2016: 98.2; 2017: 94.9; 2018: 92.8; 2019: 91.3.
  - Crude oil production (in millions of barrels per day): 2010: 2.3; 2011: 2.6; 2012: 2.7; 2013: 2.7; 2014: 2.8; 2015: 2.9; 2016: 2.9; 2017: 3.0; 2018: 3.1; 2019: 3.1.
- Output and prices:
  - Nominal GDP (in billions of UAE dirhams): 2010: 1,051; 2011: 1,276; 2012: 1,367; 2013: 1,478; 2014: 1,551; 2015: 1,624; 2016: 1,697; 2017: 1,795; 2018: 1,923; 2019: 2,074.
  - Nominal GDP (in billions of U.S. dollars): 2010: 286; 2011: 347; 2012: 372; 2013: 402; 2014: 422; 2015: 442; 2016: 462; 2017: 489; 2018: 523; 2019: 565.
  - Real GDP (annual percent change): 2010: 1.6; 2011: 4.9; 2012: 4.7; 2013: 5.2; 2014: 4.7; 2015: 4.5; 2016: 4.4; 2017: 4.4; 2018: 4.6; 2019: 4.6.
  - CPI inflation (average): 2010: 0.9; 2011: 0.9; 2012: 0.7; 2013: 1.1; 2014: 2.5; 2015: 2.8; 2016: 3.5; 2017: 4.0; 2018: 4.5; 2019: 5.0.
- Investment and saving:
  - Gross domestic investment (percent of GDP): 2010: 25.7; 2011: 22.7; 2012: 20.3; 2013: 20.2; 2014: 21.3; 2015: 22.0; 2016: 23.2; 2017: 24.4; 2018: 25.4; 2019: 26.7.
  - Gross national saving (percent of GDP): 2010: 28.2; 2011: 37.4; 2012: 37.6; 2013: 36.3; 2014: 33.5; 2015: 33.8; 2016: 34.0; 2017: 33.1; 2018: 32.2; 2019: 32.3.
- Public finances:
  - Revenue (percent of GDP): 2010: 29.9; 2011: 34.6; 2012: 36.2; 2013: 34.6; 2014: 33.9; 2015: 32.6; 2016: 31.5; 2017: 29.9; 2018: 28.3; 2019: 26.9.
  - Expenditure and net lending (percent of GDP): 2010: 31.7; 2011: 30.4; 2012: 27.3; 2013: 28.1; 2014: 26.7; 2015: 26.3; 2016: 26.2; 2017: 25.9; 2018: 25.5; 2019: 25.0.
  - Overall balance (percent of GDP): 2010: -1.9; 2011: 4.2; 2012: 8.9; 2013: 6.5; 2014: 7.2; 2015: 6.3; 2016: 5.3; 2017: 4.0; 2018: 2.9; 2019: 1.9.
  - Adjusted non-hydrocarbon primary balance (excluding investment income, percent of nonhydrocarbon GDP): 2010: -34.6; 2011: -39.4; 2012: -35.2; 2013: -34.2; 2014: -31.6; 2015: -29.8; 2016: -28.3; 2017: -26.6; 2018: -24.9; 2019: -23.4.
- Monetary sector:
  - Net foreign assets (levels notation present and series): 2010: 67.7; 2011: 17.7; 2012: 44.0; 2013: 52.6; 2014: 46.2; 2015: 25.3; 2016: 14.4; 2017: 13.5; 2018: 14.8; 2019: 12.0.
  - Credit to private sector (annual percent change series): 2010: 1.2; 2011: 2.3; 2012: 2.3; 2013: 10.3; 2014: 15.3; 2015: 15.3; 2016: 14.1; 2017: 11.1; 2018: 10.7; 2019: 10.2.
  - Broad money (annual percent change): 2010: 6.2; 2011: 5.0; 2012: 4.4; 2013: 22.5; 2014: 23.4; 2015: 17.1; 2016: 11.6; 2017: 9.4; 2018: 9.3; 2019: 9.4.
- External sector:
  - Exports and re-exports of goods (Billions of U.S. dollars): 2010: 214; 2011: 302; 2012: 349; 2013: 379; 2014: 402; 2015: 433; 2016: 467; 2017: 508; 2018: 562; 2019: 630.
  - Imports of goods (Billions of U.S. dollars): 2010: 165; 2011: 195; 2012: 217; 2013: 242; 2014: 274; 2015: 301; 2016: 336; 2017: 377; 2018: 430; 2019: 492.
  - Current account balance (Billions of U.S. dollars): 2010: 7.2; 2011: 50.9; 2012: 9.0; 2013: 64.7; 2014: 51.3; 2015: 52.0; 2016: 50.0; 2017: 42.7; 2018: 35.5; 2019: 31.7.
  - Current account balance (percent of GDP): 2010: 2.5; 2011: 14.7; 2012: 8.5; 2013: 16.1; 2014: 12.1; 2015: 11.8; 2016: 10.8; 2017: 8.7; 2018: 6.8; 2019: 5.6.
- Memorandum:
  - Local currency per U.S. dollar (period average): 3.67 for 2010–2013 (series shown).
  - Per capita GDP-2013: $43,876; unemployment rate: 4.2% (2009).
- Sources: UAE authorities; and IMF staff estimates.

### Balance of Payments, 2010–19 (Table 2 — selected series)
- Current account balance (Billions of U.S. dollars): 2010: 7.2; 2011: 50.9; 2012: 9.0; 2013: 64.7; 2014: 51.3; 2015: 52.0; 2016: 50.0; 2017: 42.7; 2018: 35.5; 2019: 31.7.
- Trade balance (Billions of U.S. dollars): 2010: 49.0; 2011: 106.6; 2012: 132.0; 2013: 137.2; 2014: 128.0; 2015: 131.4; 2016: 131.7; 2017: 131.0; 2018: 132.5; 2019: 138.6.
- Exports (Billions of U.S. dollars): 2010: 213.5; 2011: 302.0; 2012: 349.5; 2013: 378.7; 2014: 402.1; 2015: 433.8; 2016: 467.2; 2017: 507.9; 2018: 562.4; 2019: 630.1.
  - Oil and oil products: 2010: 66.8; 2011: 107.5; 2012: 113.5; 2013: 108.3; 2014: 108.3; 2015: 106.3; 2016: 103.1; 2017: 101.5; 2018: 101.2; 2019: 101.3.
  - Re-exports 1/: 2010: 87.9; 2011: 119.6; 2012: 133.1; 2013: 147.7; 2014: 164.8; 2015: 184.5; 2016: 207.2; 2017: 232.2; 2018: 261.0; 2019: 296.9.
- Imports (f.o.b.) (Billions of U.S. dollars): -164.6; -195.4; -217.5; -241.5; -274.1; -301.5; -335.5; -376.9; -429.9; -491.5 for 2010–2019 respectively.
- Financial account balance (Billions of U.S. dollars): 2010: 5.0; 2011: -29.7; 2012: -39.7; 2013: -44.6; 2014: -39.6; 2015: -37.3; 2016: -30.3; 2017: -20.9; 2018: -8.9; 2019: -6.6.
- Overall balance (Billions of U.S. dollars): 2010: 7.3; 2011: 4.5; 2012: 9.9; 2013: 21.0; 2014: 11.7; 2015: 14.7; 2016: 19.7; 2017: 21.8; 2018: 26.6; 2019: 25.1.
- Change in central bank reserves (Billions of U.S. dollars): -7.3; -4.5; -9.9; -21.0; -11.7; -14.7; -19.7; -21.8; -26.6; -25.1 for 2010–2019 respectively.
- Memorandum items:
  - GDP (billions of U.S. dollars): 2010: 286.0; 2011: 347.5; 2012: 372.3; 2013: 402.3; 2014: 422.2; 2015: 442.3; 2016: 462.0; 2017: 488.7; 2018: 523.5; 2019: 564.9.
  - Gross reserves of central bank (billions of U.S. dollars): 2010: 32.8; 2011: 37.2; 2012: 47.1; 2013: 68.1; 2014: 79.8; 2015: 94.5; 2016: 114.2; 2017: 136.0; 2018: 162.6; 2019: 187.8.
- Sources: UAE authorities; and IMF staff estimates.
- Footnote 1/: "Not separately compiled; estimated at 40 to 70 percent of emirates imports."
- Footnote 3/: "Including estimated changes in SWF net external assets."

### Consolidated Government Finances, 2010–15 (Table 3 — selected series)
- Total revenue (billions of UAE dirhams): 2010: 313.1; 2011: 440.9; 2012: 494.2; 2013: 511.2; 2014: 524.7; 2015: 528.1 (Est./Proj. columns).
- Hydrocarbon revenue (billions): 2010: 234.0; 2011: 362.5; 2012: 395.3; 2013: 402.3; 2014: 400.5; 2015: 389.5.
  - Of which: Profit transfers from ADNOC to ADIA: 2010: 59.0; 2011: 94.4; 2012: 100.1; 2013: 101.7; 2014: 102.5; 2015: 99.4.
- Nonhydrocarbon revenue (billions): 2010: 79.1; 2011: 78.4; 2012: 98.9; 2013: 108.9; 2014: 124.1; 2015: 138.6.
- Expense (billions): 2010: 233.4; 2011: 260.6; 2012: 278.3; 2013: 324.1; 2014: 317.0; 2015: 322.5.
  - Compensation of employees: 2010: 31.1; 2011: 32.1; 2012: 34.8; 2013: 39.0; 2014: 42.4; 2015: 45.8.
  - Purchase of goods and services: 2010: 36.6; 2011: 40.6; 2012: 42.3; 2013: 42.5; 2014: 47.8; 2015: 51.7.
  - Abu Dhabi "federal services": 2010: 72.7; 2011: 80.4; 2012: 79.7; 2013: 100.5; 2014: 96.8; 2015: 97.4.
- Gross operating balance (billions): 2010: 79.7; 2011: 180.3; 2012: 215.9; 2013: 187.1; 2014: 207.6; 2015: 205.6.
- Net lending(+)/borrowing(-) (billions): 2010: 44.6; 2011: 141.8; 2012: 186.1; 2013: 156.3; 2014: 174.6; 2015: 167.8.
- Memorandum:
  - Nonhydrocarbon primary balance incl. net loans and equity; excl. investment income: 2010: -37.0; 2011: -41.1; 2012: -35.8; 2013: -36.5; 2014: -32.7; 2015: -30.4.
  - Hydrocarbon share of revenue (in percent): 2010: 74.7; 2011: 82.2; 2012: 80.0; 2013: 78.7; 2014: 76.3; 2015: 73.8.
- Sources: Federal government; Emirate finance departments; and IMF staff estimates.

### Abu Dhabi Government Finances, 2010–15 (Table 3a — selected series)
- Total revenue (billions of UAE dirhams): 2010: 192.4; 2011: 281.6; 2012: 324.5; 2013: 332.1; 2014: 335.6; 2015: 335.7.
- Hydrocarbon (billions): 2010: 169.1; 2011: 261.5; 2012: 288.7; 2013: 295.0; 2014: 292.6; 2015: 284.8.
- Expense (billions): 2010: 174.0; 2011: 201.4; 2012: 214.4; 2013: 254.1; 2014: 241.3; 2015: 241.4.
- Net lending(+)/borrowing(-) (billions): 2010: -5.4; 2011: 51.2; 2012: 90.0; 2013: 55.6; 2014: 69.7; 2015: 67.4.
- Memorandum: Overall balance incl. net loans and equity: -11.1; -4.6; 3.1; -0.5; 0.6; 0.1 for 2010–2015 respectively.
- Sources: Abu Dhabi Department of Finance, and IMF staff estimates and projections.

### Dubai Government Finances, 2010–15 (Table 3b — selected series)
- Total revenue (billions of UAE dirhams): 2010: 29.9; 2011: 32.7; 2012: 34.3; 2013: 36.0; 2014: 42.0; 2015: 45.0.
- Nontax revenue (billions): 2010: 22.8; 2011: 24.7; 2012: 26.0; 2013: 26.3; 2014: 31.1; 2015: 33.3.
- Expense (billions): 2010: 27.0; 2011: 29.2; 2012: 30.3; 2013: 31.4; 2014: 33.8; 2015: 35.1.
- Net lending(+)/borrowing(-) (billions): 2010: -6.0; 2011: -3.7; 2012: -1.7; 2013: -1.0; 2014: 1.8; 2015: 1.4.
- Memorandum: Loans and equity, net (Dubai Financial Support Fund) (billions): 2010: 14.7; 2011: 7.0; 2012: 2.9; 2013: 0.0; 2014: 0.0; 2015: 0.0.
- Sources: Dubai Department of Finance; and IMF staff estimates and projections.

### Monetary Survey, 2010–15 (Table 4 — selected series)
- Net foreign assets (Billions of UAE dirhams): 2010: 789; 2011: 216; 2012: 124; 2013: 535; 2014: 844; 2015: 49 (table entries as provided).
- Net domestic assets (Billions): 2010: 708; 2011: 733; 2012: 702; 2013: 812; 2014: 946; 2015: 1,077.
- Claims on private sector (Billions): 2010: 892; 2011: 912; 2012: 933; 2013: 1,031; 2014: 1,186; 2015: 1,368.
- Broad money (M2) (Billions of UAE dirhams): 2010: 786; 2011: 826; 2012: 862; 2013: 1,057; 2014: 1,304; 2015: 1,527.
- Foreign currency deposits / total deposits (in percent): 2010: 17.2; 2011: 18.2; 2012: 16.8; 2013: 19.3; 2014: 19.0; 2015: 18.7.
- Note: "As a result of changes in economic sector classifications in bank report forms during 2013, readings for annual percent changes for broad money, private sector credit, and customer deposits for 2013 are inaccurate. The central bank estimates that private sector credit growth was around 8.2 percent in 2013."
- Sources: Central Bank of the UAE, and IMF staff estimates and projections.

### Dubai: Maturing Bonds and Syndicated Loans (Table 5 — as of end-April 2014)
- Total Dubai Debt maturing by year (In millions of U.S. dollars):
  - 2014: 6,882
  - 2015: 9,111
  - 2016: 15,999
  - 2017: 12,930
  - 2018: 39,841
  - 2019: 2,340
  - Beyond: 22,122
  - Unallocated: 26,079
  - Total: 135,303
- Total Dubai Inc. (GREs and related entities) debt: 4,862; 8,460; 14,710; 11,207; 19,817; 2,340; 18,576; 79,971 (by year breakdown).
- Memorandum:
  - Restructured debt of Dubai Inc.: 0; 5,642; 7,345; 4,148; 10,450; 0; 2,700; 30,285.
  - Government guaranteed: 2,911; 478; 547; 426; 2,606; 0; 545; 54,893.
  - Total Government of Dubai including guarantees: 2,311; 1,129; 1,836; 2,149; 22,630; 0; 4,091; 34,146.
- In percent of Dubai 2013 GDP: 7.3; 9.1; 17.9; 13.7; 40.1; 3.8; 23.3; 26.0; 141.1 (by column).
- Sources: Dealogic; Zawya; Bloomberg; Dubai authorities; and IMF staff estimates.

### Abu Dhabi: Maturing Bonds, Syndicated and Bilateral Loans (Table 6 — as of end-April 2014)
- Total Abu Dhabi debt maturing by year (In millions of U.S. dollars):
  - 2014: 15,059
  - 2015: 8,726
  - 2016: 12,137
  - 2017: 6,889
  - 2018: 7,739
  - 2019: 7,276
  - Beyond: 26,553
  - Total: 84,379
- Total Abu Dhabi Inc. (GREs and related entities): 13,002; 8,169; 11,596; 6,362; 7,213; 5,250; 25,658; 77,250 (by year breakdown).
- Including banks (ADCB, NBAD, and UNB) and other entries:
  - Total Abu Dhabi debt, including banks: 17,293; 10,381; 13,694; 8,264; 9,385; 8,068; 28,477; 95,562.
  - Total, including GREs with minority ownership: 19,457; 13,506; 15,256; 9,755; 9,385; 8,068; 29,650; 105,076.
- In percent of Abu Dhabi 2013 GDP: 7.5; 5.2; 5.9; 3.8; 3.6; 3.1; 11.4; 40.5 (by column).
- Memorandum: Of total debt: bonds and loans by banks shown as 2,234; 1,655; 1,558; 1,375; 1,646; 791; 1,924; 11,182.
- Sources: Dealogic; Zawya; Bloomberg; Abu Dhabi authorities; and Fund staff estimates.

_Italic: Source: Bloomberg; and IMF staff calculations; and figures/tables as cited in the provided IMF content._

### Appendix I. Debt Sustainability Analysis

### Appendix I. Debt Sustainability Analysis

### UAE Government DSA — Baseline and Alternative Scenarios
- Composition and projections presented for government debt and alternative scenarios (figures and charts in source).
- UAE Government DSA — Baseline Scenario: tabulated projections and stress tests provided (see figures in source for time series 2003–19).
- External debt baseline (percent of GDP), 2009–2019:
  - 2009: 51.6
  - 2010: 48.5
  - 2011: 39.7
  - 2012: 38.2
  - 2013: 42.5
  - 2014: 41.7
  - 2015: 41.0
  - 2016: 40.5
  - 2017: 39.4
  - 2018: 37.9
  - 2019: 36.2
- Debt-stabilizing non-interest current account: -2.2
- Change in external debt, 2009–2019:
  - 2009: 8.5
  - 2010: -3.2
  - 2011: -8.7
  - 2012: -1.6
  - 2013: 4.4
  - 2014: -0.8
  - 2015: -0.7
  - 2016: -0.6
  - 2017: -1.1
  - 2018: -1.5
  - 2019: -1.7
- Identified external debt-creating flows (2009–2019): 6.0; -10.0; -25.0; -23.2; -20.9; -16.1; -15.6; -14.6; -12.4; -10.5; -9.3 (year sequence as in source).
- Current account deficit, excluding interest payments (2009–2019): -5.2; -4.2; -16.1; -19.9; -17.5; -13.6; -13.3; -12.8; -11.1; -9.4; -8.3.
- Net non-debt creating capital inflows (negative), 2009–2019: -1.5; -1.6; -1.8; -2.1; -2.0; -2.0; -2.0; -2.0; -2.0; -2.1; -2.1.
- Automatic debt dynamics contributions (2009–2019): 12.6; -4.2; -7.2; -1.2; -1.4; -0.5; -0.2; 0.2; 0.6; 1.0; 1.1.
- Contribution from nominal interest rate (2009–2019): 2.1; 1.7; 1.4; 1.4; 1.5; 1.4; 1.6; 2.0; 2.3; 2.7; 2.7.
- Contribution from real GDP growth (2009–2019): 2.8; -; 0.7; -1.9; -1.7; -1.8; -1.9; -1.8; -1.7; -1.7; -1.7; -1.6 (as presented).
- Residual, incl. change in gross foreign assets (2009–2019): 2.6; 6.8; 16.3; 21.7; 25.3; 15.3; 14.9; 14.0; 11.4; 9.0; 7.6.
- External debt-to-exports ratio (percent), 2009–2019: 64.8; 61.5; 43.9; 39.0; 43.2; 41.8; 40.0; 38.1; 36.0; 33.5; 30.7.
- Gross external financing need (in billions of US dollars), 2009–2019: 67.9; 65.7; 26.3; 8.0; 14.6; 44.1; 46.2; 51.2; 61.5; 71.8; 78.8.
- Gross external financing need (percent of GDP), 2009–2019: 26.8; 23.0; 7.6; 2.2; 3.6; 10.4; 10.5; 11.1; 12.6; 13.7; 14.0.

### Dubai — Government Debt Sustainability Analysis
- Key narrative findings:
  - "Dubai’s government debt sustainability has improved on account of better growth prospects and fiscal consolidation plans."
  - Government debt peaked at 66 percent of Dubai’s GDP in 2009 and declined to 60 percent in 2013.
  - The baseline scenario assumes a steady recovery of growth, projected to accelerate in the medium term due to the upcoming Expo 2020 event, and a gradual fiscal consolidation in Dubai going forward.
- Stress-test outcomes and scenario impacts:
  - A sharp decline in GDP growth in 2014 (by 3/4 of standard deviation from the baseline) and a gradual recovery in 2015–19 would raise the debt-to-GDP ratio by 11 percentage points in 2019 compared to the baseline.
  - Under a severe global downturn scenario (real GDP shock, lower real interest rates, deterioration in the primary balance), Dubai’s government debt would increase to 71 percent of GDP in 2019.
  - A scenario combining a global downturn with a real estate shock, under which the government would take over 20 percent of the GREs’ total debt in the medium term, would raise the government debt-to-GDP ratio to 86 percent in 2019.
- Alternative scenario numeric series for Dubai government debt (selected years as presented):
  - Baseline government debt series (2007–2019): 15.4; 27.9; 65.9; 65.7; 61.8; 60.0; 60.2; 56.3; 53.7; 51.0; 47.4; 44.6; 41.6 (table row labeled Government debt 1/).
  - A1. Real GDP growth shock (series shown): 59.1; 58.6; 57.4; 55.2; 53.9; 52.4.
  - A2. Global downturn scenario (series shown): 62.6; 65.4; 67.4; 68.3; 69.8; 70.9.
  - A3. Real estate shock with global downturn (series shown): 62.6; 68.7; 74.0; 77.9; 82.1; 85.6.
- Memorandum items (Dubai):
  - Real GDP growth baseline: 5.2 5.3 5.4 5.6 5.9 6.0 (sequence as in source).
  - Real GDP growth path in the global downturn scenario: 1.0 2.5 4.0 4.2 4.6 4.6.

### External Debt Stress Tests and Historical Scenarios
- Figures present bound tests and individual shocks:
  - Permanent one-half standard deviation shocks applied for individual sensitivity tests (interest-rate, growth, current-account).
  - Combined shocks include permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - A one-time real depreciation of 30 percent occurs in 2015 in one scenario.
- Growth and non-interest current account shock statistics shown in figures:
  - Baseline and scenario averages (examples in figures): Baseline: 6.0; Scenario: 7.9; Historical: 6.6 (labels as presented).
  - Baseline: 4.5; Scenario: 2.4; Historical: 4.2 (labels as presented).
  - Baseline: 11.0; Scenario: 8.1; Historical: 12.2 (labels as presented).

### Key Macroeconomic Assumptions Underlying Baseline
- Historical average and standard deviation table entries (selected items as presented):
  - Real GDP growth (in percent): historical average and projected path displayed in source (table).
  - GDP deflator in US dollars (change in percent): table entries presented in source.
  - Nominal external interest rate (in percent): table entries presented in source.
  - Growth of exports (US dollar terms, in percent) and growth of imports (US dollar terms, in percent): table entries presented in source.
  - Current account balance, excluding interest payments: sequence in table (as presented).
  - Net non-debt creating capital inflows: sequence in table (as presented).
- Formula notes from source:
  - 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation, and a = share of domestic-currency denominated debt in total external debt.
  - 2/ Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock.
  - 4/ Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
  - 5/ Key variables in historical-average scenario include real GDP growth; nominal interest rate; dollar deflator growth; non-interest current account; and non-debt inflows in percent of GDP.
  - 6/ Long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year.

### Appendix II. Exchange Rate Assessment — Key Findings
- General conclusion: "Estimates from the standard methodologies for exchange rate assessment indicate mixed results."
- Point 1: Recent movements in exchange rates
  - The trade-weighted real effective exchange rate (REER) index appreciated by 4.5 percent from December 2012 to March 2014.
  - The nominal effective exchange rate (NEER) appreciated by 8 percent over the same period, in line with the U.S. dollar.
  - Most of the appreciation took place in 2013; since December 2013, rates have been broadly stable.
- Point 2: Equilibrium exchange rate approach
  - The equilibrium exchange rate approach indicates a moderate undervaluation.
  - Based on a model of the long-run relationship between the REER and the real oil price, the undervaluation is around 9 percent in March 2014.
  - The extent of undervaluation decreased marginally relative to December 2012.
- Point 3: Macroeconomic balance (MB) approach
  - The MB approach indicates the currency has remained in line with fundamentals.
  - The MB yields a current account norm of 6.4 percent of GDP in 2019, compared to a projected current account surplus of 5.6 percent, indicating the current account is broadly appropriate given projected fiscal balances and other fundamentals.

*Source: _cr14187 - Appendix I. Debt Sustainability Analysis (PDF chapter), IMF staff estimates and projections as presented in the provided content.*

### 4.      The external sustainability approach indicates an overvaluation of the dirham. The

### _cr14187 - 4.      The external sustainability approach indicates an overvaluation of the dirham. The

### External sustainability approach — concept and main finding
- Underpinning: sustainability of the current account trajectory requires that the net present value (NPV) of all future oil and financial or investment income (wealth) be equal to the NPV of imports of goods and services net of nonhydrocarbon exports.
- Current account norm: the level that supports intergenerational equity, given volatile oil prices and exhaustible oil reserves, through an appropriate pace of accumulation of net foreign assets.
- Main diagnostic: This approach indicates that current account surpluses are too low (Figure 3).
- Using conventional elasticities (Faruqee and Isard, 1998), a devaluation of about 15 percent would be required to correct the indicated external imbalance.

### Limitations, sectoral source of imbalance, and alternative adjustment
- Elasticities caveat: Some studies (Hakura and Billmeier, 2008) indicate there is limited scope for expenditure switching between imports and domestic goods in oil exporters, which implies the current account may not be responsive to the exchange rate.
- Fiscal origin of imbalance: The imbalance stems largely from the government sector, as indicated by a misalignment in fiscal balances relative to levels consistent with the permanent income hypothesis (see Box 3).
- Policy implication: Because the imbalance is driven largely by fiscal factors, adjustment should occur through fiscal consolidation rather than exchange rate devaluation.

### CGER-type analysis results (Table 1 excerpt and interpretation)
- Current account balance (2019 proj.): 5.6 (percent of GDP)
- Current account norm: 13.5 (percent of GDP)
- Deviation from norm: -7.8 (percent of GDP)
- ER over/undervaluation (percent): 15.2
- Note: Alternative specification numbers shown include:
  - Current account balance (2019 proj.) shown also as 5.6...
  - Current account norm shown also as 6.4...
  - Deviation from norm shown also as -0.7...
  - ER over/undervaluation (percent) shown also as 1.4 and -8.8 for other specifications
- Sources for methodological variants:
  - MB: Specification II in Beidas-Strom and Cashin (2011).
  - ES: Follows a constant real per capita allocation rule.
  - ERER: Equilibrium exchange rate approach.
- Figure 3 depiction: Plots CA Norm (annuity constant in real per capita terms), CA Norm (annuity constant in real terms), CA Norm (annuity constant in percent of GDP), and Projected current account for 2014–2019 (percent of GDP).

### Policy recommendations and suggested actions
- Primary recommendation: Adjust through fiscal consolidation because the imbalance largely reflects government sector behavior and a fiscal misalignment relative to permanent income-consistent levels.
- Exchange rate stance: A devaluation of about 15 percent is suggested by a simple external sustainability elasticity exercise, but limited expenditure switching and the fiscal origin of the imbalance argue against relying on devaluation as the primary corrective measure.
- Complementary measures: Where relevant, consider strengthening fiscal planning (noted elsewhere in the document) and coordination of fiscal policies between the federal and emirate governments to support the needed consolidation.

### Key contextual macroeconomic and external statistics (selected figures preserved exactly)
- Real GDP growth: 5.2 percent in 2013; projected 4.7 percent in 2014; 4.5 percent in 2015.
- Nominal GDP (billions of UAE dirhams): 1,051 (2010); 1,276 (2011); 1,367 (2012); 1,478 (2013); 1,551 (2014); 1,624 (2015).
- Nominal GDP (billions of U.S. dollars): 286 (2010); 347 (2011); 372 (2012); 402 (2013); 422 (2014); 442 (2015).
- CPI inflation (average): 0.9 (2010); 0.9 (2011); 0.7 (2012); 1.1 (2013); 2.5 (2014); 2.8 (2015).
- Public finances (percent of GDP): Revenue 29.9 (2010); 34.6 (2011); 36.2 (2012); 34.6 (2013); 33.9 (2014); 32.6 (2015).
- Hydrocarbon revenue (percent of GDP): 22.3 (2010); 28.4 (2011); 28.9 (2012); 27.2 (2013); 25.8 (2014); 24.0 (2015).
- Non-hydrocarbon balance (percent of non-hydrocarbon GDP): -35.3 (2010); -39.9 (2011); -33.1 (2012); -33.9 (2013); -29.8 (2014); -27.1 (2015).
- External sector (billions of U.S. dollars): Exports of goods 214 (2010); 302 (2011); 349 (2012); 379 (2013); 402 (2014); 433 (2015).
- Oil and gas exports (billions of U.S. dollars): 75 (2010); 112 (2011); 120 (2012); 123 (2013); 123 (2014); 120 (2015).
- Imports of goods (billions of U.S. dollars): 165 (2010); 195 (2011); 217 (2012); 242 (2013); 274 (2014); 301 (2015).
- Current account balance (billions of U.S. dollars): 7.2 (2010); 50.9 (2011); 69.0 (2012); 64.7 (2013); 51.3 (2014); 52.0 (2015).
- Current account balance (percent of GDP): 2.5 (2010); 14.7 (2011); 18.5 (2012); 16.1 (2013); 12.1 (2014); 11.8 (2015).
- Gross official reserves (billions of U.S. dollars): 32.8 (2010); 37.2 (2011); 47.1 (2012); 68.1 (2013); 79.8 (2014); 94.5 (2015).
- Reserves in months of next year imports of goods and services, net of re-exports: 2.9 (2010); 2.9 (2011); 3.3 (2012); 4.2 (2013); 4.5 (2014); 4.9 (2015).
- Real effective exchange rate (2000=100): 107.8 (2010); 104.4 (2011); 100.3 (2012); 104.6 (2013).

*Source: IMF staff estimates and projections, UNITED ARAB EMIRATES STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX.*

### 8.2 percent in 2013.

### _cr14187 - 8.2 percent in 2013.

### Recent Economic Developments and Outlook
- Statement date and author: Statement by Mr. Shaalan on United Arab Emirates, June 26, 2014.
- Growth and stability:
  - The United Arab Emirates continues to record a high economic growth rate in an environment of relative price stability.
  - Growth was driven mainly by robust tourism activity, the trade and transport sectors and, more recently, a rebound in real estate activity.
  - These developments reflect the country’s diversification policy, which contributed to a marked expansion of the non-hydrocarbon sector and are expected to sustain strong growth going forward.
  - Investments related to Expo 2020 as well as the expanding tourism and real estate sectors will further support the growth momentum.
- Risks and buffers:
  - Authorities remain vigilant about macroeconomic risks, including those related to speculative real estate demand and a possible decline in oil and gas prices.
  - These risks are cushioned by the country’s substantial foreign assets and fiscal surplus which provide ample buffers and policy space to mitigate these potential risks.
- Key statistic:
  - 8.2 percent in 2013.

### Fiscal Policy
- Fiscal position and objectives:
  - The fiscal position remains strong, and is characterized by budget surpluses, low gross debt, and sizeable reserves.
  - Authorities are pursuing their fiscal consolidation plan to lower the budget’s dependence on oil revenues.
- 2014 fiscal consolidation measures:
  - Fiscal consolidation will continue at a stronger pace in 2014 at both the federal and emirates levels.
  - The government of Abu Dhabi intends to eliminate spending overruns and to reduce current expenditures, while prioritizing health, education and capital spending.
  - These measures are likely to increase the overall fiscal surplus.
- Revenue diversification initiatives:
  - Authorities are considering several initiatives to reduce the dependence of fiscal revenues on the hydrocarbon sector, including the introduction of a value-added tax in the context of a GCC-wide initiative.
- Government Related Entities (GREs):
  - GREs, which encountered severe financial difficulties during the financial crisis, have made considerable progress in restructuring and financing their debts.
  - Progress achieved through a combination of refinancing, assets sales, and early repayments of liabilities as domestic economic conditions improved and real estate prices increased.
  - Large intergovernmental debt was rolled over, such as the US$ 20 billion in Dubai government debt which was extended to 2018 at reduced rates.
  - Authorities are determined to strengthen the commercial viability of the remaining GREs, increase their transparency and disclosure policies, and complete restructuring efforts.

### Financial Sector Policies
- Banking sector performance:
  - The financial sector continued to perform strongly, and the banking sector remains highly capitalized and profitable.
  - Following a number of years of sluggish growth, bank credit growth has picked up and non-performing loans have begun to decline for the first time since the crisis.
- Regulatory and macroprudential framework:
  - The Central Bank of the UAE’s (CBU) regulatory and macroprudential policies are aimed at preserving the soundness of the financial sector.
  - The CBU is reviewing and updating existing regulations to strengthen the prudential framework in line with the requirements of Basel III.
  - It is currently in the process of finalizing new liquidity regulations, which are expected to be issued later this year.
  - Staff’s analysis and the CBU’s stress testing point to the resiliency of the banking sector to severe shocks.
  - The CBU is working on establishing a financial stability stress index to identify possible vulnerabilities and monitor risks in the banking system.
- Macroprudential measures and monitoring:
  - Authorities will continue to closely monitor credit growth in the banking system and developments in the real estate markets as well as banks’ exposure to these markets.
  - Recently introduced macroprudential measures are considered sufficient for the time-being, taking into consideration that real-estate prices are recovering from very low levels.
  - Measures include regulations for mortgage lending and loan concentration limits for GREs and local governments.
  - The cap introduced on banks’ loan concentration to emirate governments and GREs will help contain bank exposures to mega projects as elaborated by staff.
  - The new maximum loan-to-value ratios for mortgage lending as well as debt-service-to-income limits will help to control speculation.
  - Authorities stand ready to tighten macroprudential regulations to prevent excessive risk-taking if needed; these measures could include higher fees to limit speculative real estate demand.

### Other Reforms
- Business environment and labor policy:
  - The federal government intends to further improve the business environment in order to attract foreign investment.
  - Labor policy will continue to focus on increasing the employment of nationals in the private sector.
  - A number of initiatives have been taken to develop training and partnerships with the private sector.
- Statistics and data improvements:
  - Authorities have taken steps to improve the quality and dissemination of economic statistics.
  - They have improved GFS reporting and started a project to compile the International Investment Position with IMF technical assistance.
  - They have also begun implementing an international transactions reporting system for the balance of payments.

*Statement by Mr. Shaalan on United Arab Emirates, June 26, 2014*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14187.pdf_