IMF Executive Board Concludes 2016 Article IV Consultation with the United Arab Emirates

July 20, 2016

On July 20, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with the United Arab Emirates.

Persistently lower oil prices continue to weigh on economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, limited negative inward spillovers and contained the weakening of investor appetite.

Non-oil economic activity has slowed to 3.7 percent in 2015 driven by a contraction of public investment in the context of fiscal consolidation, and lower contribution from domestic private demand. Negative effects on overall growth were partially offset by the increase in oil production. Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1 percent of GDP, while the current account surplus declined to 3.3 percent of GDP. Banks remained well capitalized and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs.

Economic activity is expected to moderate further in 2016, before improving over the medium term. Nonhydrocarbon growth is projected to slow to 2.4 percent in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions. Over the medium-term, nonhydrocarbon growth is forecast to increase to above 4 percent as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions as oil prices rise, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand.

Executive Board Assessment 2

Executive Directors welcomed the United Arab Emirates’ resilience to the oil price shock. Directors commended the authorities for their prudent policies, which helped build large fiscal and external buffers and strengthened the economy. Nevertheless, persistent lower oil prices continue to pose challenges. Directors underscored the need for sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability, and promote long-term growth.

Directors welcomed the authorities’ commitment to pursue fiscal consolidation. For the near term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimize the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure intergenerational equity.

Directors encouraged the authorities to diversify revenues and rationalize current spending, while further strengthening public financial management. They welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax. Directors also recommended phasing out remaining energy subsidies, while protecting the vulnerable. Priority should also be given to curb other current spending, while preserving public investment and enhancing its efficiency. Directors noted that developing a consolidated forward-looking medium-term fiscal framework would assist the authorities in setting direction for fiscal policy, and in aligning resource allocation with the UAE 2021 vision. They encouraged the authorities to strengthen the debt management framework to better account for contingent liabilities from Government Related Entities and Public-Private Partnerships.

Directors noted that the peg remains an appropriate anchor for price and financial stability. They supported continued efforts to enhance the monetary framework, particularly by improving liquidity management. Directors encouraged further steps to develop domestic debt markets and reduce private sector foreign exchange exposure. They also encouraged the authorities to tap into sovereign wealth funds and international capital markets to finance the deficit.

Directors welcomed the ongoing revision of the central bank and banking law and plans to strengthen banking regulation and supervision. They emphasized that the new law should further enhance central bank independence and governance, align the macroprudential institutional framework with best practices, upgrade banking sector regulation and supervision in line with global standards, strengthen safety nets, and improve the resolution framework. Directors encouraged the authorities to implement their plans to phase in the Basel III capital framework, enforce loan concentration limits, strengthen corporate governance, and move toward risk-based supervision. They supported ongoing efforts to strengthen the AML/CFT framework and address de-risking.

Directors commended the efforts to further diversify the economy away from oil. They encouraged continued action to increase productivity and foster competitiveness. Efforts should continue to improve the business environment, ease restrictions on FDI in the new investment law, and spur competition. In addition, priority should be given to upgrading the quality of education, promoting innovation and entrepreneurship, and facilitating SMEs’ and startups’ access to finance, notably through an approval of the bankruptcy law and further broadening the credit bureau’s coverage.

United Arab Emirates: Selected Macroeconomic Indicators, 2013–17

(Quota: SDR 752.5 million as of March. 2016)

(Population: 9.4 million, nationals: 1 million)

(Per capita GDP-2014: $43,180; poverty rate: n.a.; unemployment rate: 4.2% (2009))

Est.

Proj.

Proj.

2013

2014

2015

2016

2017

Hydrocarbon sector

Exports of oil, oil products, and gas (in billions of U.S. dollars)

129.4

101.9

61.5

54.5

64.8

Average crude oil export price (in U.S. dollar per barrel)

110.0

98.9

52.4

45.3

52.6

Crude oil production (in millions of barrels per day)

2.8

2.8

3.0

3.0

3.1

(Annual percent change, unless otherwise indicated)

Output and prices

Nominal GDP (in billions of UAE dirhams)

1,427

1,476

1,360

1,380

1,490

Nominal GDP (in billions of U.S. dollars)

389

402

370

376

406

Real GDP

4.7

3.1

4.0

2.3

2.5

Real hydrocarbon GDP

2.9

0.8

4.6

2.0

2.0

Real nonhydrocarbon GDP

5.6

4.1

3.7

2.4

2.7

CPI inflation (average)

1.1

2.3

4.1

3.3

2.8

(Annual percent change, unless otherwise indicated)

Public finances

Revenue

40.8

37.3

28.5

26.4

27.0

Taxes

22.4

19.0

11.9

11.1

12.6

Other revenue 1/

18.1

18.0

16.2

15.0

14.1

Expenditures

30.4

32.3

30.6

29.9

28.3

Expense 2/

28.1

29.6

28.1

27.3

25.6

Net acquisition of nonfinancial assets

2.3

2.7

2.5

2.6

2.6

Net lending(+)/borrowing(-) (Revenue minus expenditures)

10.4

5.0

-2.1

-3.5

-1.3

Adjusted non-hydrocarbon primary balance 3/

-35.2

-37.6

-29.0

-26.0

-24.5

Gross central government debt

16.3

14.2

16.6

18.3

17.8

Net of government deposits in the banking system

0.1

-4.1

1.4

2.6

1.4

(Annual percent change)

Monetary sector 4/

Net foreign assets

53.0

16.2

-11.5

2.2

8.4

Net domestic assets

15.6

5.5

11.2

6.5

5.8

Credit to private sector

3.5

11.5

8.7

5.0

6.1

Broad money

22.5

8.0

5.5

5.6

6.3

(Billions of U.S. dollars, unless otherwise indicated)

External sector

Exports and re-exports of goods, of which:

371

343

300

304

323

Hydrocarbon

129

102

61

55

65

Nonhydrocarbon, excluding re-exports

104

101

104

110

116

Imports of goods

230

235

224

232

242

Current account balance

74.1

40.3

12.3

5.3

12.2

Current account balance (in percent of GDP)

19.1

10.0

3.3

1.4

3.0

External debt (in percent of GDP)

44.3

48.8

60.2

60.1

56.3

Gross official reserves 5/

68.2

78.5

94.0

95.1

100.9

In months of next year's imports of goods & services,
net of re-exports

5.0

6.0

6.9

6.6

6.5

Memorandum items:

Local currency per U.S. dollar (period average)

3.67

3.67

3.67

..

..

Nominal effective exchange rate (2010 = 100)

106.1

110.7

..

..

..

Real effective exchange rate (2010 = 100)

93.7

96.8

..

..

..

Sources: UAE authorities; and IMF staff estimates.

1/ Includes staff estimates on profit transfers from the national oil company to SWF and SWF returns.

2/ Includes loans and equity to finance development projects.

3/ In percent of nonhydrocarbon GDP. Excludes staff estimates on SWF investment income.

4/ As a result of changes in economic sector classifications in bank report forms during 2013, readings for annual percent

changes for broad money and private sector credit for 2013 are inaccurate. The central bank estimates that private

sector credit growth was around 8.2 percent in 2013.

5/ Excludes staff estimates on foreign assets of sovereign wealth funds.



1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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