The UAE Government is cutting back on the billions of dollars in stimulus it injected into the country to get it through the financial crisis as it looks to return to sustainable levels of spending, the IMF has said.
Government cuts stimulus spending as UAE economy improves
The UAE Government is cutting back on the billions of dollars in stimulus it injected into the country to get it through the global financial crisis as it looks to return to sustainable levels of spending, the IMF said yesterday.
Four years ago as a deep freeze hit credit markets, property prices tumbled and job losses mounted, the Government responded with an unprecedented show of fiscal firepower.
The total outlay, estimated by Grail Research at the time as reaching US$52.6 billion in the year to July 2009, gradually helped to restructure the debts of struggling government-linked companies and soothe the frayed nerves of investors.
Now, the wounds from the downturn are largely healing.
The tide of bad loans in the banking system is easing, companies are hiring again and even the once-sickly property market is picking up, albeit patchily.
In response, the Government is gradually unwinding its largesse. Total spending as a percentage of GDP dropped to 26.9 per cent last year, from a peak of 40.2 per cent in 2009, according to the IMF. Spending will moderate further to 26.3 per cent of GDP this year, the fund estimated in a new report released yesterday.
Belt tightening in Abu Dhabi and Dubai will set the tone for a drop in consolidated spending by 2 per cent of non-hydrocarbon GDP this year, after a 3 per cent fall last year, it said.
"The fiscal consolidation is expected to be achieved by a rationalisation of capital spending and subsidies and transfers, while spending on goods and services, defence and security and the wage bill are expected to increase," the IMF said in the report, following a visit to the country in April and May.
In Abu Dhabi, spending on a large affordable housing scheme will be offset by cuts in other capital expenditure including loans and equity, it said.
Spending in Dubai will be scaled down this year after completing a series of infrastructure projects, except for a rise in wages.
The IMF called the pace of fiscal consolidation "appropriate". "The large fiscal stimulus in the wake of the 2009 crisis brought public spending to levels higher than sustainable for future generations, such that the fiscal consolidation that started last year is welcome in making inroads towards correcting that long-term structural imbalance," the report noted.
The more conservative budgeting stance should benefit the UAE in other ways, too.
The break-even oil price - the level at which the Government needs oil prices to be to balance its budget - would drop from $74 per barrel last year to $71 this year, the IMF said.
A scaling back of fiscal largesse is also a reflection of a rosier outlook for the economy. The IMF forecasts overall GDP growth to slip back from 4.3 per cent last year to 3.6 per cent this year.
But a significant factor behind the deceleration is a scaling back in oil output growth.
In the non-oil economy, output would rise from 3.8 per cent last year to 4.3 per cent this year.
"A broadening recovery in construction and real estate and ongoing growth in tourism-orientated sectors are expected to underpin a further acceleration in non-oil growth," the IMF said.