Dubai: The International Monetary Fund said the UAE's real gross domestic product (GDP) will grow at 2.3 per cent this year, down from 4.9 per cent growth rate recorded last year, while inflation will remain at 1.5 per cent this year.

“The economic recovery looks set to continue. Real GDP growth reached an estimated 4.9 percent in 2011, supported by increases in oil production. Non-hydrocarbon growth also strengthened, to around 2.7 percent, backed by strong trade, tourism, and manufacturing, and despite continued oversupply in the real estate sector. Real non-oil GDP growth is projected to further strengthen to 3.5 percent in 2012," said Harald Finger, an IMF team leader following the conclusion of a two-week visit to the UAE.

"With limited potential for further increases in oil production in the near term, overall GDP growth is expected to moderate to 2.3 percent. Inflation is likely to remain subdued at around 1.5 percent this year."

An International Monetary Fund (IMF) mission led by Harald Finger visited the UAE during February 28 to March 14, 2012 to conduct discussions for the Article IV consultation with the UAE. The mission met with Minister of State for Financial Affairs Obaid Humaid Al Tayer, Minister of Economy Sultan Bin Saeed Al Mansoori, Governor of the UAE Central Bank Sultan Bin Nasser Al Suwaidi, other senior government officials, as well as representatives from the business and financial community.

“The current uncertain global economic and financial environment poses a number of risks to this outlook. The weak growth prospects in the advanced economies could lead to a pronounced decline in oil prices if regional geopolitical risks subside," Finger said. "Moreover, a renewed worsening of global financing conditions could make it more difficult to roll over some of the GREs’ maturing external debt and affect liquidity conditions in the banking system."

In this environment, he said, the authorities’ plans to gradually consolidate fiscal policy are appropriate. The large increases in public expenditure that took place in response to the 2009 crisis should now be unwound as they expose the UAE to the risk of falling oil prices.

"The planned gradual pace of fiscal tightening will strengthen public finances without undermining the economic recovery. The recovery will also continue to be supported by an accommodative monetary stance under the peg to the US dollar," he said.

Substantial progress has been made in the debt restructuring of government-related entities (GRE), but several troubled GREs are still in the process of restructuring. 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. Improved transparency and communication would support the market refinancing of GRE debt. Looking ahead, the authorities should continue to improve regulation, oversight and governance to manage the remaining GRE risks," Finger said.

“The banking sector remains resilient to shocks, thanks to substantial liquidity and capital buffers. Although the banking system has remained comfortably liquid, a foreign funding shock could generate some foreign currency liquidity tightening in the banking sector. Despite a considerable rise in non-performing loans since 2008, the banking system remains well-capitalised. However, care should be taken to avoid a further increase in banks’ loan concentration to the government and GREs. The authorities have made good progress in establishing databases and improving the quality of economic statistics. Nevertheless, more progress is needed to strengthen key statistics, including balance of payments, national accounts, and fiscal accounts,” Finger said.