IMF Executive Board Concludes 2024 Article IV Consultation with the United Arab Emirates

IMF News, December 5, 2024

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On July 11, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Arab Emirates and considered and endorsed the staff appraisal without a meeting.
Staff propose that the next Article IV consultation with the UAE follow the standard 12-month cycle.

GDP growth: 3.6 percent in 2023.
Inflation: 1.6 percent in 2023.
Outlook:
- Overall GDP projected to grow by 3.7 percent in 2024.
- Overall GDP projected to grow by 4.5 percent in the medium-term.
Drivers:
- Strong domestic non-hydrocarbon activity supported by tourism, construction, manufacturing, and financial services.
- Contraction in hydrocarbon growth in 2023 due to OPEC+ and UAE voluntary oil production cuts; rapid expansion in hydrocarbon production expected from the UAE’s OPEC+ quota increase from 2025.
Fiscal and external balances: described as remaining high, supported by relatively high oil prices.
External risks: intensification of geopolitical tensions and geoeconomic fragmentation, abrupt global slowdown, sharp correction in global asset prices, or commodity price volatility could reduce flows of goods, capital, and tourism.
Upside risks: accelerated public investment (including higher hydrocarbon production) and structural reform efforts.
Climate: accelerated climate reforms will help the UAE meet long-term challenges from global decarbonization.

Capital inflows: continued strong inflows reflecting commodity revenue, safe haven flows, and investment drawn by social and business-friendly reforms.
Central bank foreign reserves and surplus domestic liquidity: boosted by capital inflows.
Real estate: notable growth in real estate prices, particularly in high-end segments in Dubai, with increases in some other segments.
Banking sector:
- Bank balance sheets have strengthened further, with capital buffers well above regulatory minima.
- Credit has continued to grow despite policy interest rate hikes.
- Nonperforming loans have declined but remain elevated in the construction sector.
AML/CFT: major efforts under the AML/CFT Strategy and Action plan resulted in the removal of the UAE from enhanced monitoring under the Financial Action Task Force.

Overall: banking system remains resilient to shocks, but continued close monitoring of financial stability is needed.
Macroprudential recommendations:
- Strengthen macroprudential framework and financial stability monitoring, including for the insurance sector.
- Finalize the Standards for Bank Real Estate Exposure with a lower threshold and implement higher capital requirements for large exposures.
- Consideration of a countercyclical capital buffer would further enhance banks’ resilience.
- Establishment of the Financial Stability Council is highly welcome and should ensure coordinated monitoring across emirates and regulatory bodies.
- Staff encourage the authorities to request an FSAP to support analysis and assessment of risks.
- Continued progress on strengthening the AML/CFT framework is essential.

Surplus liquidity: management should be strengthened through a finalized monetary framework.
Policy instruments:
- Implement the M-bill buyback program and remaining fine tuning facilities to help develop the M-Bills market, absorb surplus liquidity, and tighten transmission of policy rate changes.
- Efforts to develop domestic capital markets and creation of green and Islamic finance products will support domestic liquidity management and enhance climate resilience.
Reserve requirements: further hikes in reserve requirements beyond 14 percent should be avoided.
Digitalization and virtual assets:
- Development of an Instant Payments Platform and exploration of a CBDC should continue with careful assessment of risks and well-defined policy objectives.
- Initiatives to develop the virtual asset industry should be informed by careful assessment of macroeconomic and financial stability risks and ensure adequate regulatory capacity.

Fiscal stance: sustaining fiscal prudence and reforms will balance medium-term fiscal sustainability and development objectives.
Policy measures and priorities:
- Contain current expenditure and advance tax policy reforms.
- Gradual removal of subsidies and measures to enhance spending efficiency to support consolidation and further declines in public debt, which remains sustainable.
- Finalize implementation of the CIT, phase out current fee structures, review wide-ranging incentives and exemptions, and enhance tax administration to ensure efficiency and close the tax revenue gap.
Fiscal frameworks:
- Develop harmonized medium-term fiscal (MTF) and sovereign asset-liability management (SALM) frameworks to ensure fiscal policy efficiency and strengthen transparency.
- Enhance and harmonize emirate-specific and federal fiscal rules and objectives in MTF frameworks to define a national fiscal stance, improve budgeting efficiency, track fiscal risks, and ensure efficient management of public investments.
- SALM framework will promote sound balance sheet management and inform policymaking for long-term fiscal sustainability.
Public investment risks: careful prioritization of reform initiatives and strategies needed to support medium-term potential growth and climate resilience while avoiding crowding out of the private sector; improve SMEs’ access to credit.

Reform priorities:
- Leverage trade and FDI, harness digitalization and AI, and integrate net zero emissions goals.
- Underpin reforms with robust governance frameworks, strengthen institutions, modernize labor markets, and close gender gaps.
Data:
- UAE data provision to the Fund has some gaps but remains broadly adequate for surveillance.
- Authorities committed to closing existing data gaps by increasing capacity, undertaking TA, and harmonizing data collection across emirates.
- Further progress needed to ensure compliance with the IMF’s enhanced e-GDDS and advance toward higher standards.

International Monetary Fund — Executive Board conclusion and staff appraisal, December 5, 2024.