IMF recommends UAE go easy on austerity plans to protect growth
Fund’s country head says government plans to ease spending curbs are appropriate
The UAE should slow down its efforts to rein in spending this year in order to nudge growth and invest in preparation for Expo 2020, according to the IMF mission country head Natalia Tamirisa.
“There is some slowdown in the pace of fiscal consolidation that the Government is planning to implement and we believe that their plans are appropriate,” Ms Tamirisa said.
“Growth is just starting to recover this year.”
The IMF last week lowered its growth forecast for the country for this year and 2018, as low oil prices continue to impact the economy.
Overall growth this year is now projected to reach 1.3 per cent, compared with the fund’s 1.5 per cent forecast in April, due to a slower expansion in the non-oil economy, which will grow 3.3 per cent, compared with 3.8 per cent in its previous forecast.
The growth forecast for next year was lowered to 3.4 per cent from 4.4 per cent in April, due to oil growth easing to 3.2 per cent, compared with 6.2 per cent in the April forecast.
However, the IMF said over the medium term non-oil growth is forecast to stay at around 3 per cent, thanks to higher investment in the leadup to Expo 2020.
The fund also said the introduction of a 5 per cent value added tax (VAT) in January next year will not have a “significant adverse impact on growth”.
“Going forward, we recommend steady [fiscal] consolidation of about 1 percentage point of non-oil GDP,” said Ms Tamirisa.
“We believe that [the Government’s] intention is appropriate because the outlook over the medium term is for moderate recovery and also the Government has significant fiscal buffers and they have fiscal space to continue to make the necessary investments and they also have investment needs, including for Expo 2020.”
The IMF is projecting that the UAE will balance its budget by 2020. Dubai is forecast to continue to post fiscal deficits due to investments for Expo 2020, while Abu Dhabi is expected to continue to rein in spending.
“The UAE needs to continue to consolidate its budget mainly because it needs to share oil wealth equitably with the future generation,” Ms Tamirisa added. The country began to tighten its purse strings in 2015 and 2016 following the oil price plunge that started in mid-2014.
The UAE has implemented a number of reforms, including removing energy subsidies and raising electricity tariffs.
Along with its fellow Arabian Gulf countries, the UAE plans to introduce value added tax next year, which will help to shore up government revenue that has dwindled owing to the low oil prices.
The IMF is projecting that the 5 per cent tax will add 1.5 per cent to the country’s GDP.