Dubai: The Executive Board of the International Monetary Fund (IMF) which concluded 2016 Article IV Consultation with the UAE has said the country’s large fiscal and external buffers built over time have provided ample policy space to deal with the challenges posed by the persistently lower oil prices.
While the IMF notes that the decline in oil prices weigh on economic sentiment and fiscal and external positions it has only limited negative inward spillovers and weakening of investor appetite is largely contained.
Executive Directors welcomed the UAE’s 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, but noted that persistent lower oil prices continue to pose challenges. The IMF said the country needs sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability, and promote long-term growth.
Non-oil economic activity has slowed to 3.7 per cent 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.
Banks
Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1 per cent of GDP (gross domestic product), while the current account surplus declined to 3.3 per cent of GDP.
Banks remained well capitalised 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. Non-hydrocarbon growth is projected to slow to 2.4 per cent in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions.
Over the medium-term, non-hydrocarbon growth is forecast to increase to above 4 per cent 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.
Competitiveness
The IMF 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 foreign direct investment (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 start-ups’ access to finance, notably through an approval of the bankruptcy law and further broadening the credit bureau’s coverage,” the IMF said in a statement.
