Dubai: The UAE is adjusting to the new ‘lower-for-longer’ oil environment with a host of fiscal reforms ranging from subsidy reforms, the proposed introduction of excise taxes in the fourth quarter of this year as well as value-added tax from 2018, according to a recent report from the International Monetary Fund (IMF).
“Although the UAE’s fiscal position remains sustainable, an improvement in the budget balance is needed to ensure that an equitable share of the oil income is saved for future generations. Ample fiscal space allows deficits to decline gradually while mitigating the adverse impact on the economy and the financial sector,” the IMF staff paper said.
Fiscal vulnerabilities have risen across GCC with the decline in oil prices, calling for strengthened analysis of fiscal risks, including from a sustained further decline in oil prices, a larger increase in financing costs, and an unexpected increase in contingent liabilities arising from government-related entities (GREs) and public-private partnership investment (PPPs).
The rapid pace of fiscal adjustment in the UAE in 2015‒16 and measures to be introduced to improve public revenue through VAT and excise duties, combined with the rationalisation of government subsidies, are expected to strengthen government finances. A moderate current account gap is expected to close over time as fiscal savings rise.
Authorities’ efforts to make the economy more productive are key to alleviating the impact of the oil shock on medium-term growth prospects.
“A consolidated Medium-Term Fiscal Framework [MTFF] could set a clear direction for fiscal policy for the country as a whole and better align resource allocation with local and national developments plans underpinned by goals embodied in the Vision 2021. [The] high quality of public financial management systems overall is also key ingredient of an appropriate MTFF,” the IMF said.
The UAE has been following a three-year budget cycle for the three previous cycles — 2008-2010, 2011-2013 and 2014-2016. The first cycle completed most of the well-developed infrastructure projects, while the second focused on enhancing federal services and maximising people’s well-being. Starting this year the country has adopted a five-year budget for the 2017-2021 period.
Over the past years, local and federal governments have made progress in strengthening their medium-term frameworks for fiscal policymaking and risk analysis. The federal government has introduced a medium-term budget cycle. Spending ceilings are set top-down and spending is presented on a programme basis with associated performance indicators.
Abu Dhabi produces an internal medium-term fiscal outlook based on realistic oil price assumptions, which orientates its annual budget process. Dubai has a medium-term fiscal framework with three-year budget targets, although the targets are not published.
The IMF agrees that the UAE initiatives have been broadly in line with global and regional trends. Many countries, including resource-rich countries, have been re-orienting their budget processes to lengthen the period covered by their fiscal frameworks. Reform initiatives have included: a fiscal policy statement establishing a medium-term path for expenditure aggregates; medium-term macroeconomic forecasts; requirements for ministries to maintain budget estimates beyond the budget year and explicitly cost new measures; and hard cash budget constraints for ministries.
Coordinating GREs key to medium-term planning
The new oil price environment has underscored the importance of enhanced coordination between governments and government-related entities (GREs) regarding their investment and borrowing plans, and sovereign wealth funds (SWFs) and the central bank to facilitate cash management and liquidity forecasting.
A Medium-Term Fiscal Framework (MTFF) lays out medium-term fiscal targets and projections, based on a consistent set of assumptions and reflecting the economic and development goals of the country.
Formally adopting a multi-year framework and integrating it with the annual budget process can set a direction for fiscal policy and enhance fiscal policy credibility.
In particular, an MTFF can help:
(i) improve macroeconomic management by delinking expenditure from short-term volatile oil revenues;
(ii) anchor medium-term fiscal policy on goals of intergenerational equity and/or fiscal sustainability;
(iii) integrate medium-term fiscal policy with the country’s diversification agenda;
(iv) facilitate risk analysis and decision-making.
International experience shows that many resource-rich countries which have upgraded their fiscal policies, rules and institutions were successful in saving a larger share of their resource revenue during the 2000s, while also scaling up public investment and social spending.
