Economic activity in the UAE is expected to strengthen gradually in the next few years, following weaker performance in 2016, the International Monetary Fund (IMF) has said in a detailed analysis of the country’s economy.
The UAE’s economic growth slowed to 3 percent in 2016, from 3.8 percent in 2015, the IMF said. But it forecasts non-oil growth to rise 3.3 percent this year compared to 2.7 percent in 2016, as domestic public investment increases and global trade picks up.
Non-oil growth would remain above 3 percent over the medium term, the IMF said, supported by accelerated investment leading up to Expo 2020.
The downturn last year, caused by a combination of weaker oil prices and slower oil output growth, the postponement of some public infrastructure projects and a slowdown in global trade, saw inflation in the UAE plummet to 1.8 percent, from 4.1 percent in 2015. The IMF said the decline reflected softer domestic demand and declining rents.
“Despite continued fiscal consolidation, lower oil revenues widened the overall deficit to 4.3 percent of GDP from 3.4 percent of GDP in 2015,” the IMF said.
“Likewise, the current account surplus shrank to 2.4 percent of GDP from 4.7 percent of GDP in 2015. Although impairment charges rose amid the economic slowdown, banks remained well capitalised and liquid.”
Despite the poorer figures, the IMF said the UAE’s economy was “weathering the post-2014 oil shock well”.
It said the UAE’s financial buffers, safe-haven status, sound banks and diversified and business-friendly economy were helping it cope with the shock.
“Growth is projected to recover over the next few years, as the pace of the necessary fiscal consolidation eases, global trade regains momentum and investment, including for Expo 2020, accelerates,” the IMF said.
However, it warned there were downside risks, mainly a further sustained decline in oil prices, tighter financial conditions, a rise in protectionism and an intensification of regional conflicts.
Appropriately adjusting to the new oil market reality should be the UAE economy’s key policy goal, the IMF said. It called for an improvement in the budget balance to ensure some of the oil wealth is saved for future generations.
The IMF said it does not expect the introduction of a value-added tax (VAT) on January 1 to have a significant adverse impact on growth and described it as “a major achievement” for diversifying revenues away from oil.