Dubai: The UAE will see non-oil growth hitting 3.3 per cent this year on the back of fiscal consolidation, stronger global trade and higher Dubai Expo 2020 investment, a senior International Monetary Fund (IMF) official said.
Overall growth is expected to ease to 1.3 per cent in 2017 owing to lower oil production before rebounding to above 3 per cent in the medium term, Natalia Tamirisa, who led an IMF mission to the UAE, said in a statement.
Tamirisa said the UAE was “adjusting well to the new oil market realities” and voiced approval for of the country’s “robust policy responses” underpinned by its large financial buffers and well-diversified economy.
The country’s budget deficit is seen falling to 4.5 per cent of gross domestic product (GDP) in line with an oil market that looks to be firming up and as spending cuts yield dividends.
Tamirisa added that the UAE’s current account is expected to improve to 2.4 per cent of GDP.
The IMF mission visited the UAE from April 30 to May 14 for the annual Article IV discussions.
“Existing financial buffers allow fiscal consolidation to proceed gradually. Reaching the goal of returning gradually to a balanced budget over the medium term would save resources for future generations,” she said.
“This requires continued efforts to rationalise spending and improve its efficiency, including through careful cost-benefit analysis and continued review of government-related enterprises’ (GREs) infrastructure investments. A timely introduction of the VAT and excises would diversify government revenues.”
The UAE will implement value-added tax (VAT) at the rate of 5 per cent starting January 1, 2018 and expects to generate Dh12 billion in revenue in the first year of its roll-out.
Average inflation is expected to rise to 2.2 per cent in 2017, the IMF official said, adding that close coordination of “cash-flow and liquidity management among the governments, GREs and sovereign wealth funds would improve the predictability in government financing flows and banking sector liquidity, fostering continued healthy credit growth in support of private sector activity.”
She added that a stronger fiscal policy framework aided by better fiscal data would help align government and GRE spending more closely with the UAE’s goal of raising productivity and diversifying even further. Authorities were called on to keep a close eye on contingent liabilities to help mitigate the undue build-up of fiscal risks.
Commenting on the IMF assessment, Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB), said “inflation has picked up because of fuel prices but we expect it to moderate. We see it increasing in 2018 as VAT is introduced. However, the overall benefits of fiscal diversification will be positive.”
On GRE spending, Malik said: “We are seeing part of fiscal consolidation focusing on GREs, which will improve revenues and is positive for the fiscal outlook going forward.”
Pradeep Unni, head of trading at Richcomm Global Trading, said market sentiment was generally positive.
“We have a clear positive attitude [across the market]. In areas that a lot of trade happens, we see on a daily basis positive sentiment and an expectation that this [bullish] trend will be sustained,” he said. “On VAT, a lot of market players appear to have absorbed the coming of value-added tax and are looking forward to the future. Oil markets are doing rather decently, if not great, and the majority in the market are of the view that this will hold. Come 2018, we may see some kind of slowness but that will likely not hold as trade flows increase.”