Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

United Arab Emirates—2012 Article IV Consultation Concluding Statement of the IMF Mission

March 14, 2012

An International Monetary Fund (IMF) mission visited the United Arab Emirates from February 28 to March 14, 2012, to hold discussions for the United Arab Emirates’ 2012 Article IV consultation.1 Discussions focused on: pursuing adequate near-term macroeconomic policies; managing the ongoing risks stemming from Government-Related Entities (GRE); and bolstering confidence in the financial sector. The mission would like to thank the authorities for the open and fruitful discussions and for their hospitality.

Recent Developments

1. Following the 2009 crisis, the economy has been slowly recovering and repairing its balance sheets. The Dubai World debt restructuring was completed, but several other troubled GREs are still in the process of restructuring. The authorities strengthened the banking sector through liquidity support, recapitalization, and deposit guarantees, and the emirate of Abu Dhabi provided financial support to the emirate of Dubai. The Dubai Financial Support Fund was called to support troubled entities in the emirate and has now almost exhausted its funding of $20 billion.

2. The economic recovery continued in 2011. While the construction and real estate sectors still remained subdued in the aftermath of the 2009 crisis, real GDP growth nonetheless reached an estimated 4.9 percent, supported by high oil prices and production in response to disruptions in Libya. Non-hydrocarbon growth also strengthened, to around 2.7 percent, backed by strong trade and a buoyant tourism sector. In light of the supportive external environment, the current account surplus increased markedly, to around 9 percent of GDP. Average inflation remained subdued at 0.9 percent, largely due to declining rents.

3. The recovery was supported by an expansionary fiscal policy. The non-hydrocarbon primary deficit (including loans and equity) rose to nearly 42 percent of non-hydrocarbon GDP in 2011 (from 36 percent in 2010), as Abu Dhabi increased its current and development expenditures and its support for the ailing real estate sector. Nonetheless, backed by high oil prices, the overall fiscal balance improved substantially.

4. Supported by accommodative monetary policy, banks remained amply liquid but private sector credit growth did not pick up. In light of low U.S. interest rates, monetary policy stayed accommodative under the fixed exchange rate regime, which has continued to serve the economy well. Lending to the private sector has nonetheless remained sluggish as excess capacity in the real estate sector and the debt overhang still limit lending opportunities. Despite a continued rise in non-performing loans, the banking sector has remained well-capitalized and profitable. In October 2011, the authorities quickly resolved Dubai Bank through an arranged take-over by Emirates NBD.

Economic Outlook and Risks

5. The recovery in non-hydrocarbon growth looks set to continue in 2012. Despite the continued domestic deleveraging and the ongoing oversupply in the real estate market, real non-hydrocarbon GDP growth is projected to further strengthen to 3.5 percent, supported by buoyant trade, tourism, logistics, and manufacturing. With limited potential for further increases in oil production in light of production levels already close to capacity and an expected partial recovery in Libyan oil production, overall GDP growth is expected to moderate to 2.3 percent. Inflation is likely to remain subdued at around 1½ percent.

6. Downside risks to this outlook reflect the UAE’s reliance on hydrocarbon exports and its close links with international markets:

  • A decline in oil prices in light of weak growth prospects in the advanced economies would lower export earnings and fiscal revenues. While the UAE maintains significant buffers in the form of international reserves and sovereign wealth fund assets, a prolonged fall in oil prices would ultimately imply reduced fiscal spending and non-hydrocarbon GDP growth, and an adverse impact on asset prices. This would also further expose vulnerabilities in GREs and private companies affected by the ailing real estate sector.
  • A renewed worsening of global financing conditions could make it more difficult to roll over some of the GREs’ maturing external debt, and would raise the overall cost of their borrowing from international markets, thus further straining their balance sheets. About $32 billion of sovereign and GRE debt is estimated to mature in 2012, of which $15 billion in Dubai. Moreover, while the banking system has remained very liquid, some individual banks, especially those that rely on wholesale funding, might face liquidity pressures.
  • A more pronounced impact of the international sanctions on Iran could adversely impact the UAE economy through a reduction in bilateral trade, real estate demand, tourism, and financial services to Iran-based customers.
  • A pronounced economic slowdown in emerging Asia would affect trade, tourism, and external financing conditions. Robust external demand from Asia has helped limit the impact on the UAE of the European recession and of the international sanctions on Iran. Moreover, increasing capital flows from Asia have dampened the effect of the European financial sector deleveraging on UAE foreign funding conditions. While currently a tail risk, the potential loss of Asian demand and capital flows could thus have a noticeable impact on the UAE.

7. There are also a number of upside risks to the outlook. Higher oil prices in the context of heightened regional geopolitical tensions would further support fiscal revenues and the external current account, as long as oil exports are not disrupted. Heightened regional tensions could also lead to renewed safe-haven capital inflows and increased real estate demand.

Maintaining Macroeconomic Stability and Supporting the Economy

8. Following last year’s fiscal expansion, the UAE plans to start consolidating its fiscal accounts in 2012. The federal and emirate budgets imply a modest consolidation of the fiscal stance by 0.5 percentage point as a substantial salary increase for federal employees and a large increase in Abu Dhabi’s planned development expenditures are more than offset by reductions in other expenditures and increases in non-tax revenues.2

9. The planned fiscal correction is appropriate. The fiscal break-even oil price (the theoretical oil price at which fiscal accounts would be in balance) has markedly increased in recent years, from $23 in 2008 to $84 in 2012), exposing the UAE to the risk of falling oil prices. Moreover, the non-hydrocarbon fiscal deficit exceeds levels consistent with intergenerational equity. Prudent fiscal plans are also appropriate in light of the risk that further funds may be needed to support ailing GREs. At the same time, the gradual pace of fiscal consolidation implies that the fiscal stance is unlikely to undermine the economic recovery. The recovery will also continue to be supported by an accommodative monetary stance under the peg to the U.S. dollar.

10. Both Abu Dhabi and Dubai plan to balance their fiscal accounts in the medium term.

  • Abu Dhabi’s recently approved capital spending plan will be an important contribution to supporting demand, but the projected large magnitude of the increase in development spending suggests a need for careful project evaluation to ensure that spending is productive. With the increase in development spending more than offset by other savings, Abu Dhabi’s planned gradual fiscal consolidation (excluding last year’s support for Dubai and Aldar) appears appropriate. Looking ahead, Abu Dhabi plans a continued fiscal consolidation through 2017.
  • Dubai’s continued fiscal consolidation is crucial for its medium-term sustainability given fiscal risks posed by contingent liabilities related to GREs. In this light, the Dubai government’s plans for fiscal tightening this year, and to bring the fiscal accounts close to balance by 2014, are welcome.

11. Several initiatives are under way to diversify the sources of government revenues and to improve budgetary practices. The federal government works on an overhaul of multiple fees collected by federal ministries, also with a view to reducing the associated collection costs. Technical preparations are under way for an eventual introduction of a value added tax, which is under discussion at the GCC level. The authorities are also conducting an economic impact study of a possible corporate income tax. Passage of the draft organic budget law would help improve budgetary practices, as it mandates the preparation of a medium-term expenditure framework for the federal government and requires the use of a treasury single account for federal entities.

12. Given the federal structure, effective intergovernmental coordination is key for strengthening both short-term demand management and medium-term fiscal sustainability. Information sharing on budgets and other aspects of public finances that can create important spillovers is a key precondition for effective fiscal coordination. The mission welcomes the progress made in information sharing, facilitated by the Fiscal Coordination Council (FCC), for the federal and emirate governments, and encourages the authorities to extend the information sharing to include the GREs. Looking ahead, it will be important to extend the FCC’s work to the effective coordination of fiscal policy plans, including the joint determination of aggregate revenue, expenditure, and financing plans in light of macroeconomic and other policy considerations, and the breakdown of these goals into plans for the federal and emirate level authorities. The IMF stands ready to provide technical assistance to support the further expansion of the FCC’s activities.

Managing Risks Stemming from the GREs

13. While substantial progress has been made, the GREs are still faced with considerable risks. While the debt of some GREs has been restructured (including Dubai World), the process has been more protracted in other cases, such as Dubai Holding. The total debt of Dubai GREs is estimated to have declined marginally to $76 billion in 2011 (from $77 billion in 2010), while the debt of Abu Dhabi GREs rose to $99 billion (from $92 billion in 2010). Moreover, the GREs are still faced with high refinancing needs and continued reliance on foreign funding. While they are increasingly managing their upcoming rollovers proactively, the current uncertain global financial environment still constitutes a key risk.

14. Improved transparency and communication would support the market refinancing of GRE debt. The mission welcomes the progress made in improving the monitoring of GRE borrowing and dissemination of information on GRE debt, particularly by Abu Dhabi’s debt management office. However, more needs to be done to improve the availability of data on the financial conditions, debt stock and the maturity profile of Dubai GREs. The Abu Dhabi government has also disclosed the list of GREs it would support in case of financial difficulties, while the Dubai authorities opted for a different approach, emphasizing to markets that the government does not explicitly back any GRE obligations. In any case, increased transparency and a proactive strategy for communicating with financial markets would help reduce uncertainties and improve financing prospects.

15. Looking ahead, local Emirates’ authorities should continue to improve regulation and oversight to manage the remaining GRE risks. Impaired GREs’ balance sheets should be cleaned, including, where needed, through debt restructuring. Further risk taking should be contained within a proper risk management framework entailing effective identification, assessment, monitoring, and reporting of contingent liabilities arising from GREs, and disclosure of these liabilities in government accounts. A statement of contingent fiscal risks should be prepared together with annual budget documents. Strengthening the GREs’ corporate governance will also be important. This includes delineating clearly their commercial and noncommercial operations, and standardizing the accounting, auditing, and financial reporting practices.

Financial Sector Soundness and Financial Spillovers

16. The banking system maintains significant buffers to address a further deterioration in asset quality, though individual banks may be affected. From their
pre-crisis levels in 2008, NPLs have already increased more than threefold in Dubai (to 10.6 percent) and Abu Dhabi (4.6 percent) and will likely rise substantially further this year, including from the ongoing restructuring of Dubai Holding, the potential restructuring of other maturing GRE debt, and distressed real estate companies. Despite higher provisioning, profitability has been maintained but will remain constrained by cautious credit growth and the ongoing provisioning required to cover potential NPLs. The mission’s preliminary stress tests show that the domestic banking system could absorb a significant increase in non-performing loans. Nevertheless, some individual banks with high loan concentration in the real estate sector may maintain fewer buffers to deal with any shocks.

17. The central bank has made significant headway in strengthening bank regulation. The mission is encouraged by the CBU’s efforts to induce banks to further increase general and specific provisioning and capital adequacy, including in some cases by restricting dividend distribution, as there remain substantial amounts of restructured and renegotiated loans in the banking system that could turn problematic in the future. Tailoring the CBU’s early warning system to system-wide risks (including GREs, real estate) would be appropriate in this respect. The mission also encourages the authorities to develop a formal macroprudential framework for calibrating regulation from a systemic perspective.

18. The CBU will continue to closely monitor the liquidity of individual banks and encourage them to proactively manage liquidity risks. The funding structure of the banking system has significantly improved since the 2009 crisis. Nonetheless, since last summer, as earlier deposit inflows have partially reversed, banks have increased their liabilities to foreign banks. Although the banking system has remained comfortably liquid, a foreign funding shock may generate some foreign currency liquidity tightening in the banking sector, which needs to be managed, in particular, at the individual bank level. The CBU mainly relies on certificates of deposit to manage banking system liquidity and has started work towards creating a marginal lending facility as a means of providing standing liquidity when needed. Looking ahead, the implementation in the coming years of the Basel 3 liquidity norms should be supported by the development of domestic money and bond markets. This would facilitate banks’ liquidity management and eventually allow corporates to raise funding from domestic capital markets.

19. Shielding the banking system from further GRE risks will be key. In 2011, the net exposure of the banking system to government and public institutions increased by Dh 44 billion (3.5 percent of GDP). Some of these exposures are not consistently classified across banks’ balance sheets and government fiscal accounts, which could lead to non-transparency in bank regulatory compliance. There is a risk that GREs could increasingly turn to domestic banks for their funding needs in the period ahead in case they face difficulties in external market financing. The mission stresses the importance of avoiding channeling bank funding to non-viable GREs in order to maintain the integrity of the banking system. The CBU should enforce the limits on bank exposure to individual GREs and could consider imposing higher capital charges or forward provisioning on risky GREs. The planned introduction of aggregate limits on bank lending to GREs would also be welcomed to contain banks’ risks from GREs and should be introduced in a phased manner.

20. Effective bank governance is fundamental to support financial sector soundness. Although the central bank has issued corporate governance guidelines for bank directors, in light of the government’s control of banks and the banks’ high exposure to GREs, a clear governance framework is needed to safeguard the banks’ financial integrity. The mission encourages the central bank to adopt the newly evolving international principles on governance standards for banks and recommends conducting a bank governance diagnostic in the context of the forthcoming Financial Sector Assessment Program.3

Improving the Statistical Capacity

21. The mission stresses the importance of further improving the statistical capacity. The authorities have made good progress in establishing databases and improving the quality of economic statistics. The establishment of the National Bureau of Statistics and Debt Management Offices were important steps in developing statistical capacity. Nevertheless, more progress is needed towards harmonization of the compilation process and coordination among respective statistics agencies across the Emirates, and towards improvement in methodologies and timely compilation and dissemination of key statistics, including on balance of payments, national accounts, and fiscal accounts.

Table 1. United Arab Emirates: Selected Macroeconomic Indicators, 2010–13
    Est. Proj. Proj.
  2010 2011 2012 2013

Hydrocarbon sector


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

74.6 111.6 122.1 118.4

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

77.0 109.6 119.7 115.0

  Crude oil production (millions of barrels per day)

2.3 2.6 2.6 2.6
  (Annual percent change, unless otherwise indicated)

Output and prices


  Nominal GDP (billions of U.S. dollars)

298 360 386 394

  Real GDP

0.9 4.9 2.3 2.8

    Real hydrocarbon GDP

-1.5 9.2 0.0 1.0

    Real nonhydrocarbon GDP

2.1 2.7 3.5 3.8

  CPI inflation (average)

0.9 0.9 1.5 1.7
  (Percent of GDP, unless otherwise indicated)

Public finances



28.7 33.3 34.6 33.2


21.4 27.4 28.5 26.9


7.2 5.9 6.1 6.2

  Expenditure and net lending

30.8 30.4 26.9 26.2


21.0 19.4 18.3 18.2


9.5 10.5 8.2 7.5

  Overall balance

-2.1 2.9 7.7 7.0

  Non-hydrocarbon primary balance (excluding investment  income)1

-35.5 -41.5 -36.5 -33.8

  Adjusted non-hydrocarbon primary balance 1,2

-33.6 -37.0 -36.5 -33.8

  Central government debt to banking system 3

21.3 16.9 14.6 14.3
  (Annual percent change, unless otherwise indicated)

Monetary sector


  Net foreign assets

67.7 17.9 18.9 8.4

  Net domestic assets

2.0 3.6 5.8 9.2

  Credit to private sector

1.2 2.3 3.1 5.7

  Broad money

6.2 5.0 7.2 9.2
  (Billions of U.S. dollars, unless otherwise indicated)

External sector


  Current account balance

9.1 33.3 40.0 40.9

  Current account balance (percent of GDP)

3.1 9.2 10.3 10.4

  External debt (in percent of GDP) 4

47.2 41.0 39.0 39.5

  Gross official reserves 5

32.8 36.4 40.8 44.4

    In months of next year's imports of goods & services

1.6 1.6 1.7 1.8

Memorandum items:


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

3.67 3.67 ...

Sources: UAE authorities; and IMF staff estimates.

1 In percent of nonhydrocarbon GDP.

2 Excludes DFSF related transactions for Dubai, and 2011 ALDAR support and investment income for Abu Dhabi

3 Banking system claims only. Excludes debt raised by federal and Emirati governments in the international markets.

4 Foreign liabilities of banking system only due to incomplete coverage of debt raised by non-banks in the international markets.

5 Excludes foreign assets of sovereign wealth funds.

1 The mission, comprising Mmes. Arvai and Minasyan, and Messrs. Finger (head), Prasad (all MCD), and Jonas (FAD) met with H.E. Minister of State for Financial Affairs Obaid Humaid Al Tayer, H.E. Minister of Economy Sultan Bin Saeed Al Mansoori, H.E. Governor of the Central Bank of United Arab Emirates Sultan Bin Nasser Al Suwaidi, the heads of economy and finance departments of the emirates, as well as other senior officials and representatives from the business and financial community. Ms. Koranchelian (SPR) and Mr. Kammer (MCD) joined for parts of the mission.

2 The fiscal stance is defined as the consolidated non-hydrocarbon primary balance for the federal, Abu Dhabi, Dubai and Sharjah budgets including loans and equity but excluding (i) the operations of Dubai Financial Support Fund, (ii) Abu Dhabi government’s support for the real estate company Aldar in 2011, and (iii) the investment income from the sovereign wealth funds. The fiscal stance is expressed as a percentage of non-hydrocarbon GDP. Abu Dhabi’s 2012 budget is not yet available; numbers are staff estimates.

3 The Financial Sector Assessment Program is a joint program of the IMF and World Bank. The World Bank can assess bank governance upon the authorities’ request.


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