Dubai: The UAE’s 2016 fiscal deficit is seen widening to about 7.2 per cent of gross domestic product (GDP) before improving over the medium term, aided by improving oil prices, World Expo 2020 investments and more favourable external conditions, the International Monetary Fund (IMF) has said.

“The growth outlook is expected to moderate in 2016 amid low oil prices, with non-hydrocarbon growth projected at 2.4 per cent due to sizeable fiscal consolidation, softer economic sentiment and somewhat tighter monetary and financial conditions,” Zeine Zeidane, IMF adviser in the Middle East and Central Asia Department, said in a statement.

While average inflation is seen declining to 3.2 per cent in 2016 from 4.1 per cent in 2015, according to the fund, private sector growth is expected to bear the brunt of a slowing economy and larger fiscal financing needs.

The IMF expects the country’s current account surplus to decline to 0.3 per cent of GDP during the period and has urged authorities to focus on gradual fiscal consolidation while maintaining the dirham’s dollar 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 minimise the impact on the economy as it is adjusting to the decline in oil prices over the past year,” said Zeidane, who led an IMF team that was in the country from April 26 to Monday, May 9 for the annual Article IV discussions.

The team met with Obaid Humaid Al Tayer, Minister of State for Financial Affairs; Mubarak Al Mansouri, UAE Central Bank governor, senior federal officials and captains of industry and commerce.

“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,” he added in the statement.

Zeidane said this fiscal consolidation would take the form of more efficient public investment, in addition to the introduction of value-added tax (VAT), the timely implementation of plans to increase excise taxes and phasing out of remaining energy subsidies.

The IMF official said the prudent macroeconomic policies and diversified economy boosted the country’s safe haven status.

“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,” Zeidane said.

“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 fund also commended Abu Dhabi’s recent issuance of Eurobonds.

“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 minimise the impact on domestic liquidity conditions,” Zeidane said. “Efforts to strengthen public financial and debt management frameworks should also be pursued.”

 

Box: UAE banking sector ‘resilient’

 

The International Monetary Fund (IMF) gave the UAE’s banking sector a clean bill of health, saying the sector remained resilient, with 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,” Zeine Zeidane, IMF adviser in the Middle East and Central Asia Department, said in a statement.

The fund urged the UAE to swiftly approve the new central bank and banking law 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.”

However, in a word of caution, the IMF called for continued repair of the balance sheets of government-related entities (GREs) as part of efforts to contain systemic risks.

“Ongoing efforts to further strengthen the AML/CFT [Anti-Money Laundering/Combating the Financing of Terrorism] framework and address de-risking should also continue.