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Abu Dhabi, UAESaturday 20 October 2018

Higher oil prices and increased government spending prompt IMF to raise UAE growth outlook

International Monetary Fund lifts UAE's GDP forecast to 2.9% this year and 3.7% in 2019

Last year, Dubai attracted Dh23.7bn in FDI flows, a 7 per cent increase from 2016. Bloomberg
Last year, Dubai attracted Dh23.7bn in FDI flows, a 7 per cent increase from 2016. Bloomberg

The International Monetary Fund raised its forecast for the UAE's economic growth this year and next on expectations that oil production and government spending will increase.

The Gulf nation's economy is projected to expand 2.9 per cent this year and 3.7 per cent in 2019, Natalia Tamirisa, the IMF's UAE mission chief, said in a statement late on Sunday.

"Given large fiscal buffers, ample spare capacity, and rising investment needs for Expo 2020, the government has appropriately switched to providing stimulus to the economy," said Ms Tamirisa.

The UAE announced a series of new policies this year to spur economic growth and investment, including changes to the country’s sponsorship system and new regulations that permit companies to operate without a physical office. The measures follow from a three-year Dh50bn stimulus package for Abu Dhabi announced in June. The plan, called Ghadan 2021 (Tomorrow 2021), has 50 initiatives to stimulate investment and job creation. It aims to slash red tape for businesses and boost investor confidence in the emirate’s economy.

"Front-loading stimulus measures and focusing them on productive spending, consistent with the Vision 2021 goals of diversifying the economy and raising productivity, would augment their impact on growth," Ms Tamirisa added.

The comments followed an IMF staff mission to the UAE from September 16 to 30. In April, the IMF predicted that the Arab world's second-biggest economy would grow 2 per cent this year and 3 per cent in 2019. A rebound in oil prices to a four-year high has given the government more revenues to spend, prompting a stimulus package to bolster economic growth. Ahead of looming US sanctions against Iran, Opec's third largest producer, Brent crude oil prices rose to $83.27 a barrel on Monday. On Sunday, the UAE cabinet approved its largest federal budget ever, up by 17.3 per cent from last year. In mid-2018, global oil producers agreed to increase output, allowing the UAE to begin raising its production.

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The UAE's fiscal deficit is projected to turn into a surplus next year after remaining stable at 1.6 per cent of GDP this year, the IMF said. Its inflation rate is likely to reach 3.5 per cent this year because of the introduction of a 5 per cent VAT in January but is expected to ease going forward, the Washington-based lender said.

In the medium term, with crude prices projected to soften, the IMF urged UAE authorities to return to gradual fiscal consolidation to help sustain its petro-revenues.

"A return to the path of gradual fiscal consolidation would help save an adequate portion of the exhaustible oil income for future generations," Ms Tamirisa said.

The country's plans to liberalise foreign investment, introduce long-term visas for professionals, and ease licensing requirements and business fees — once implemented — will be a "welcome step" in fostering the private sector, the IMF said. The Fund called on the UAE to undertake deeper and broader reforms to increase the role of the private sector in order to boost economic growth and job creation.

Among the main reform priorities the Fund suggested privatising non-strategic government-related enterprises and improving financing to small and medium enterprises (SMEs).

"Developing domestic government debt markets would catalyse financial market development and expand sources of financing for SMEs," Ms Tamirisa said. “Tightening financial conditions and increased global and regional uncertainty call for continued vigilance in monitoring financial sector risks, including those from a prolonged downturn in real estate and concentrated loan portfolios."