Dubai: The UAE’s decision to pay one month’s basic salary to all federal government employees and retirees, civilians and military, as well as beneficiaries of social welfare services is expected to boost consumer spending in the country while the overall fiscal impact is likely to be muted, according to economists.
The bonus announced in celebration of the 100th birth anniversary of the UAE’s Founding Father, the late Shaikh Zayed Bin Sultan Al Nahyan is estimated to deliver a windfall of Dh1.6 billion to government employees which is widely expected to incentivise people to spend more.
“It [the bonus] is timely and needed to stimulate private consumption and non-oil real GDP growth, which slowed last year to about 2 per cent. However, the bonus to public employees of Dh1.6 billion is very small (equivalent only to 0.1 per cent of GDP). It’s impact on the fiscal situation will also be very small. We at the Institute of International Finance (IIF) still expect a small surplus in the consolidated fiscal accounts for 2018, of 0.3 per cent of GDP, helped by higher oil revenues,” said Garbis Iradian, Mena economist, IIF.
The bonus pay out has come at a time overall consumption the country has been impacted by higher fuel and energy costs and the introduction of value added tax. Economists expect government to loosen spending this year in the context of improved oil prices and stronger fiscal position resulting from fiscal consolidation efforts during the last two year.
“We had projected an increase in government spending on wages and salaries this year so the bonus announcement is not wholly surprising. It should support household consumption, helping to offset the impact of VAT and higher fuel costs in the UAE. The impact on the overall budget position is not significant, and is mitigated by higher than expected oil prices so far this year,” said Khatija Haque, Head of Mena Research at Emirates NBD.
While the UAE is expected to report a small fiscal surplus this year, the impact of higher government spending on wages and the one-time bonus is not seen as very significant to government finances.
“The total value of the bonus payments will be Dh1.6 billion ($436 million), which we estimate will be about 0.1 per cent of GDP. The impact on the fiscal balance is expected to be contained; ahead of the bonus payment being announced we were forecasting a small fiscal surplus of 0.9 per cent of GDP in 2018,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
Weak consumption
There have been indications of weakness in consumption spending in the first quarter of 2018. Although first quarter data on consumer card spending in the UAE from Network International showed an 8.33 per cent increase, the increase was largely driven by spending on food and entertainment while spending on consumer goods which includes spending at shops, supermarkets and malls declined by 5.7 per cent. Data also showed a year-on-year decline of 1.88 per cent in card-spend on health care.
“The payment should be moderately positive for private consumption, though we still expect overall weakness in this area. Indicators or household consumption remain weak, including card spending and retail credit growth. We expect the impact of VAT [introduced in January 2018] to gradually moderate in the second half of 2018, though rising interest rates and the weak labour market remaining key headwinds,” said Malik.
While the International Monetary Fund has recommended improving the efficiency of public spending across the GCC countries by reforming wages and pensions to strengthen the public finances, the one-off payout by the UAE government is seen as fiscally sustainable, because of the comfortable fiscal position the UAE enjoys.
