The economy is weathering the post-2014 oil shock well.
Dubai: The UAE’s economic growth, which faced a persistent slowdown from 2015, is expected to bounce back in 2018, according to the International Monetary Fund (IMF).
The IMF has projected a 1.3 per cent growth in the UAE’s real GDP in 2017, which it expects to surge to 3.4 per cent in 2018.
“Economic activity is expected to strengthen gradually in the coming years with firming oil prices and other global indicators, and an easing pace of fiscal consolidation,”
the IMF Executive Board said in a statement after concluding its Article IV Consultation with the UAE.
Economic performance was subdued during most of 2016. Together with weaker oil prices and slower oil output growth, the postponement of some public infrastructure
projects and a slowdown in global trade caused growth to moderate to 3 per cent last year from 3.8 per cent in 2015.
Inflation eased to 1.8 per cent from 4.1 per cent in 2015, reflecting softer domestic demand and declining rents. Despite continued fiscal consolidation, lower oil revenues widened the overall deficit to 4.3 per cent of GDP from 3.4 per cent of GDP in 2015. Likewise, the current account surplus shrank to 2.4 per cent of GDP from 4.7 per cent of GDP in 2015.
The IMF has projected the non-oil growth to rise to 3.3 per cent in 2017 from 2.7 per cent in 2016, reflecting increased domestic public investment and a pickup in global trade. Over the medium term, non-oil growth is expected to remain above 3 per cent, supported by accelerating investment in the run up to the Expo 2020. The planned VAT introduction in 2018 is not expected to have a significant adverse impact on growth.
Although impairment charges rose amid the economic slowdown, banks remained well capitalised and liquid. The weaker economy elevated risks of bank loan delinquency, requiring higher provisioning. Yet the UAE’s financial buffers, safe-haven status, sound banks, and diversified and business-friendly economy are helping it cope with the shock.
Growth is projected to recover over the next few years, as the pace of the necessary fiscal consolidation eases, global trade regains momentum, and investment, including for Expo 2020, accelerates. This outlook is subject to downside risks, stemming mainly from a further sustained decline in oil prices, tighter financial conditions, a rise in protectionism and an intensification of regional conflicts.
Although the UAE’s fiscal position remains sustainable, the IMF said 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.
As part of the fiscal adjustment, the IMF said momentum in reforms needs to be sustained and coordinated with structural reforms. Complementing recent significant subsidy
reforms, a timely introduction of the VAT and excise (duties) would be another major achievement, to diversify revenues away from oil. In tandem, efforts to contain growth of public spending and improve its efficiency are needed to generate the necessary fiscal savings while continuing to use public investment to diversify the economy, the IMF said.
The IMF has also called for coordinated fiscal efforts within in medium term policy framework. Adopting and publishing multi-year plans and integrating them with the annual budget process would clarify the direction for fiscal policy. Fiscal anchors and targets can be strengthened further to anchor fiscal sustainability and intergenerational equity. These efforts need to be supported by enhanced coordination between governments and GREs regarding their investment and borrowing plans, according to the IMF.
Source: Gulf News > Economy > Babu Augustine