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Abu Dhabi, UAEMonday 18 June 2018

What are UAE's priorities to withstand economic headwinds?

The process of fiscal consolidation will act like a headwind for economic activity, and new sources of growth and dynamism will need to be found to offset it.

The first economic transformation of the UAE during the quarter of the last century was, by any measure, one of the most extraordinary in recent history. In the 1970s, with industries based largely around fishing and trading and before that on pearl diving, the UAE. lagged behind global standards in health, education, life expectancy and infant mortality. Starting with the oil boom in the 1970s and continuing into the next decades, the country has reaped the benefits of growth in tourism, foreign investment and transportation hubs.

Indeed, the UAE economy has progressed to become the second largest economy in the Arab World. It now ranks among the best in the region on most indicators of quality of life and the ease of doing business.

In 2017 and the years ahead, the UAE needs to press ahead with a second economic transformation. The prolonged reality of lower oil prices means that the country can no longer rely on oil revenues to power the economy.

Instead, with lower oil revenues, the budgetary position has weakened and will need to be gradually rebuilt by finding new revenue sources and pruning spending. The adjustment process of fiscal consolidation will act like a headwind for economic activity, and new sources of growth and dynamism will need to be found to offset it. What are the policy priorities?

The first priority is to set the path of fiscal consolidation right - at the right pace, with the right mix of measures and the right supporting frameworks. With large financial buffers and safe-haven status, finding enough financing to cover the budget deficit is not a problem for the UAE, so fiscal consolidation can and should proceed at a measured pace. However, as the oil wealth will not last forever, it is important to save some of the resource revenues for future generations, so fiscal consolidation cannot be postponed altogether. To that end, progress achieved with key reforms of energy subsidies and the new excises and value added tax that are in the process of being introduced are a great start to increase efficiency of public spending and diversify sources of non-energy revenues in the budget.

Going forward, steps to make spending smarter will be crucial. Increasing the efficiency of government spending (for example, on education and health care) will be important for getting more “bang for the buck” while creating a more diversified, productive and inclusive economy. To do this, basing budget plans and spending decisions on a multi-year framework is important. Coupled with improved availability of fiscal data, such multi-year planning will help policymakers, citizens and investors alike to better track progress in implementing fiscal consolidation. Recently good progress has been made, especially at the federal level, where a medium-term framework for 2017 to 2022 was approved last October. Next steps should include an expansion of this medium-term framework to each of the emirates and coordination of the individual emirates’ frameworks into a consolidated one.

The second, and complementary, priority is to further diversify the economy in order to boost growth prospects and offset the potential adverse effects of fiscal consolidation on non-energy growth. The economy is already more diverse than others in the region, thanks to the important achievements over the last several decades. The authorities now have a new vision: turning the UAE into a knowledge-based economy. That could well be the foundation of the next economic transformation.

Achieving it will require focused policy initiatives to ensure an even-playing field and vibrant environment for a more diversified, job-creating, private sector-driven economy of the future. For example, subjecting private and government-related enterprises (GREs) to competition laws and regulations, and privatising non-strategic GREs would encourage firms to become more productive, thereby generating more jobs and boosting overall economic prospects. A law liberalizing rules for foreign investment outside the free zones is in progress; adopting it would open the door for further investment inflows, which could spur diversification and job creation across the economy. It would also increase liquidity in the stock markets, enabling local companies to raise capital more easily and facilitating privatisation of non-strategic GREs.

Transforming an economy is no small task, but it is one the UAE has shown it is capable of managing.

Natalia Tamirisa is IMF mission chief to the UAE