Lower oil prices' impact slows down economic activity in UAE

ABU DHABI: Persistently lower oil prices continue to impact the economic condition of the United Arab Emirates resulting in a weakening of the investment climate.

According to the IMF, non-oil economic activity slowed to 3.7 percent in 2015 driven by a contraction of public investment in the context of fiscal consolidation, and lower contribution from domestic private demand.

The IMF, however, welcomed the UAE’s resilience to the oil price shock and commended the prudent policies, which helped build large fiscal and external buffers and strengthened the economy.

Despite large buffers built up over the years, the fiscal balance turned to a deficit of 2.1 percent of GDP, while the current account surplus declined to 3.3 percent of GDP. Banks remained well capitalized and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs.

Non-hydrocarbon growth is projected to slow to 2.4 percent in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions. Over the medium-term, nonhydrocarbon growth is forecast to increase to above 4 percent as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions as oil prices rise, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand.

Persistent lower oil prices continue to pose challenges.

Directors welcomed the authorities’ commitment to pursue fiscal consolidation. For the near term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimize the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure intergenerational equity.

The IMF Directors have hailed the plan to diversify revenues and rationalize current spending. They welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax. It was also recommended to phase out energy subsidies, while protecting the vulnerable.

The ongoing revision of the central bank and banking law and plans to strengthen banking regulation and supervision havre been described as welcome steps that should further enhance central bank independence and governance.

The IMF has proposed further diversification of the economy away from oil and action to increase productivity and foster competitiveness.