IMF calls for UAE to balance its budget

The Deira spice souq. The IMF is forecasting the UAE’s cumulative fiscal deficit to reach $18.4bn between now and 2021. Karim Sahib / AFP

To help nudge growth higher this year, the UAE should ease the pace of spending cuts and instead use its ample financial reserves to balance the budget, the IMF said on Wednesday.

The fund’s growth forecast for the UAE is 2.3 per cent for this year, down from the 4 per cent growth of last year.

“In view of the ample policy space provided by the UAE’s large buffers, the pace of consolidation should be eased in 2016 to minimise its impact on growth at a time when sentiment is weak on account of the drop in oil prices,” said the fund in a report.

The country has embarked on a number of cost-reducing initiatives since oil prices fell from their summer 2014 peak, including a reduction in energy subsidies and other public spending cuts.

The IMF is forecasting that the UAE’s cumulative fiscal deficit will reach US$18.4 billion between this year and 2021 as low oil prices reduce government income. In the first nine months of last year, the country ran a smaller deficit of Dh34bn.

However, the UAE’s buffers include substantial sovereign wealth assets and ample central bank reserves. The country’s net international investment position is estimated at 181 per cent of GDP at the end of last year, largely because of the assets of sovereign wealth funds, the IMF said.

The Central Bank’s international reserves are estimated at 25 per cent of GDP at the end of last year, equivalent to 6.9 months of imports.

The IMF also recommended that the country tap the bond markets and its sovereign wealth fund assets instead of withdrawing local bank deposits to plug the fiscal gap as it did last year. The UAE should also boost domestic debt sales to develop the local bond market and avoid crowding out the private sector.

In April, Abu Dhabi raised $5bn from the international debt markets, its first bond sale since 2009.

As a result of expected higher debt issuance, the country’s gross public debt to GDP ratio is forecast to rise to 17 per cent next year from 16.6 per cent at the end of last year. The debt-to-GDP ratio averaged 18.5 per cent between 2005 and 2013.

“However, this ratio could double in a severe stress scenario with lower oil prices and higher default rate of GREs (government-related entities),” the IMF added.

Dubai’s debt maturities between this year and 2018 will reach $51.6bn, while Abu Dhabi maturities will stand at $28.9bn during the same period.

Authorities in Abu Dhabi and the wider UAE have reduced capital transfers to GREs among other measures to contain the fiscal deficit.

Dubai’s total public debt reached 126.2 per cent of GDP at the end of last year, a big proportion of which is held by GREs.

“Recent efforts by Dubai’s Supreme Fiscal Council and by Abu Dhabi’s Debt Management Office to closely review GREs’ debt issuances are welcome and should be pursued, as envisaged by the authorities,” said the fund.

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