Press Release No. 16/203

Press Release: IMF Staff Completes 2016 Article IV Mission to the United Arab Emirates

May 9, 2016

An International Monetary Fund (IMF) mission, led by Mr. Zeine Zeidane, visited the United Arab Emirates (UAE) from April 26 to May 9, 2016 for the annual Article IV discussions. The consultation will conclude with the preparation of a report that, subject to management approval, will be discussed by the IMF Executive Board by end-July 2016.

At the end of the mission, Mr. Zeidane issued the following statement:

“The UAE is facing the oil price shock from a strong position as past prudent macroeconomic policies have helped build large fiscal and external buffers, its economy is more diversified, and it has continued to benefit from its safe haven status.

“The growth outlook is expected to moderate in 2016 amid low oil prices, with non-hydrocarbon growth projected at 2.4 percent due to sizeable fiscal consolidation, softer economic sentiment, and somewhat tighter monetary and financial conditions. With expected improvements in oil prices, growth is projected to pick up over the medium-term, also supported by increased investment ahead of the World Expo2020 hosted in Dubai, and more favorable external conditions. Average inflation is expected to decline to 3.2 percent in 2016 from 4.1 percent in 2015.

“Despite the strong policy response to adjust to the low oil prices, the fiscal deficit is projected to widen in 2016 to about 7.2 percent of GDP, before improving over the medium-term. The current account surplus is projected to decline to 0.3 percent of GDP in 2016. Private sector credit growth is expected to moderate due to the slowing economy and larger fiscal financing needs.

“Against this backdrop, the macroeconomic policy mix should focus on gradual fiscal consolidation, while maintaining the peg and supporting conditions for private sector credit growth. In view of the large buffers, the pace of fiscal consolidation could be somewhat more gradual in 2016 than presently envisaged, in order to minimize the impact on the economy as it is adjusting to the decline in oil prices over the past year. As the oil price related cyclical weakness dissipates, consolidation should accelerate over the medium-term to balance the budget and reduce the gap of the non-oil deficit to the level consistent with inter-generational equity. As regards the composition of fiscal consolidation, public investment should be preserved while enhancing its efficiency, plans to introduce VAT and increase excise taxes timely implemented, and remaining energy subsidies gradually phased out. The recent issuance by Abu Dhabi of Eurobonds is welcome, and the financing of its fiscal deficit should continue to tap into international markets and sovereign wealth funds rather than drawing down deposits so as to minimize the impact on domestic liquidity conditions. Efforts to strengthen public financial and debt management frameworks should also be pursued.

“The banking sector remains resilient and has enough liquidity and capital buffers to withstand severe shocks. The central bank actions to ensure adequate provisioning, phase in Basel III liquidity and capital requirements, and strengthen corporate governance are steps in the right direction and should be pursued. The new central bank and banking law should be swiftly approved to develop a fully-fledged macroprudential framework, accelerate progress toward compliance with Basel core principles for effective supervision, and beef up safety nets and resolution frameworks. Continued repair of government-related entities (GREs) balance sheets is important to contain systemic risks. Ongoing efforts to further strengthen the AML/CFT framework and address de-risking should also continue.

“The authorities’ vision to further diversify the economy away from oil is commendable. Diversification requires stepping up structural reforms aimed at further developing the private sector, transitioning towards a knowledge-driven economy, and promoting export sectors. These could include: improving selected areas of business environment; developing adequate public-private partnerships frameworks; relaxing restrictions to foreign ownership; fostering competition, promoting innovation, including through appropriate financing tools as planned by the authorities, easing access to finance for startups and small and medium enterprises (SMEs), and creating the right incentives for entrepreneurship and job creation, notably for women.

“The team met with H.E. Minister of State for Financial Affairs Obaid Humaid Al Tayer, H.E. Governor of the Central Bank Mubarak Al Mansoori, senior federal and local government officials, and representatives from the business and financial community.

“The IMF team expresses appreciation for the authorities’ cooperation and candid discussions.”