Dubai government’s decision to implement a new economic stimulus plan, which includes the setting up of a consultative council that will also involve international companies, is expected to boost growth. The plan comes at a time when many small and medium enterprises (SMEs) are facing challenges in securing funding for both working capital and business expansion. Tighter lending standards implemented by banks following loan defaults in the past two years and a disruption in cashflow chains have impacted business.
Banks which took the initial brunt of business failures and loan skips have more or less absorbed the loan losses and cleaned up their balance sheets over a period of six to eight quarters. Lenders had to incur high provisioning charges on their loan books and investments during the past two years, which dragged down their profitability. The hard lessons have made many banks reluctant to open their loan books to SMEs or they insist on collateral.
The recent spike in consumer price inflation in the UAE has taken its toll on overall demand. The one-off cost increase largely caused by the introduction of 5 per cent VAT is likely to linger for a while, hurting purchasing power and consumer demand. Clearly, amid the macro-economic backdrop of slowing consumer demand and credit growth, incentivising supply side through a robust stimulus package for business can revitalise job creation and demand growth, while improved retail credit growth could boost the consumption demand. Proposals such as allocation of 20 per cent of government tenders to SMEs, developing low-cost family tourism systems through a time-sharing concept and a revised mortgages law to support the real estate sector will help boost private sector confidence.