Significant investments overseas have left finance ministries in the region with complicated portfolios. Sammy Dallal / The National
Significant investments overseas have left finance ministries in the region with complicated portfolios. Sammy Dallal / The National

Ministries must reform to tackle future crises



The worst effects of the global financial crisis have been contained but the range of extraordinary steps required to accomplish that, including stimulus spending and asset purchases and guarantees, have left ministries of finance with greater responsibility for national economies than ever.

Before the crisis, they focused on fiscal policy by managing taxes and public spending at the national level. After the crisis, that task became far more complicated, given that many countries have had to maintain stimulus spending to boost their economies and now operate with fiscal deficits.

But finance ministries now face other challenges as well. They must: handle more complex assets and new contingent liability, including overseeing the businesses they had to buy to stabilise their economies, such as banks, securities and manufacturing assets; strengthen economic management, which includes ensuring the growth of the national economy; and upgrade accountability and transparency to give investors confidence in the country's economic stewardship.

The UAE is no exception. Like many others in the Gulf region, the federal Ministry of Finance and the emirate-level departments of Abu Dhabi and Dubai have taken bold measures to address some of these challenges.

They have worked to reduce public spending by reforming government operations and eliminating redundant agencies. They are also strengthening their debt-management and risk-management functions and established stabilisation funds and facilities.

The UAE Government created a National Bureau of Statistics, which will compile and publish consolidated economic data at the national level, and it should aim to publish the financial statements and balance sheets of systemic state-owned enterprises.

Finally, the Ministry of Finance and key emirate-level departments are modernising some elements of their operating system, automating the cash-flow process and moving gradually to a zero-based budget.

But these measures will not be sufficient to address all of the new requirements of the post-crisis era. For instance, the UAE has still a lot to do on the federal-local and government-quasi government integration and co-ordination fronts. As such, many countries of the region, including the UAE, still have significantly improvable fiscal frameworks and institutions.

A host of significant overseas investments in recent years - along with a large number of state-owned enterprises and public-private partnerships - have left these ministries with a more complicated asset portfolio to oversee and more significant risks to assess, yet they still lack a standard balance-sheet approach for managing such risks. Furthermore the public sector in many of these countries is still too large and suffering from limited productivity.

Instead of individual steps aimed at addressing these issues one by one, the Ministry of Finance, like those around the world, must make substantial changes to its institutional set-up and operating model. More than any one individual policy, what's required now is a broad-based, fundamental reform agenda of the way the Ministry of Finance works.

The good news is that the UAE, and the Gulf region as a whole, are not alone in facing these issues. To explore the extent of the challenges facing finance ministries around the world, Booz & Co conducted a survey of more than 60 decision makers with influential roles in national economies worldwide, along with internationally recognised thought leaders in macroeconomic and fiscal policy.

The survey results indicate what fiscal and economic measures are being implemented or contemplated in these economies, and underscore the urgency of reforms. They also make it clear that reform will vary from one country to the next.

Determining the priorities for finance ministries will not come from geography - in fact, countries that share a border can have significantly different issues - but by clustering countries according to the fiscal and economic challenges they face. While the problems are global, the solutions are local.

To that end, we grouped countries around the world into seven clusters to determine how their finance ministries should approach reform.

For example, one cluster - which we call "countries with little room to manoeuvre" - includes those with high deficits and debt, a record of strong intervention during the crisis, and little flexibility for future fiscal and economic measures. Examples include Greece, Ireland, Italy and Spain.

Finance ministries in these countries must redefine their social safety nets, specifically healthcare and pension systems, to reduce public spending. They must also cut costs and increase efficiency in the public sector. And they must develop the capability to manage debt with a more sophisticated approach, the way corporations do.

Another cluster, "heavyweight countries with heavyweight problems", includes those with more flexibility in dealing with their economic issues, but correspondingly large problems. Examples include the US, France, Germany and Japan.

For these economies, the reform priorities are to reduce public spending, strengthen their regulation and supervision of the financial sector, and perhaps most important, rebuild market confidence by developing a clear plan to phase out stimulus spending.

A third, "growth economies", includes the developing markets with medium to high fiscal deficits, such as Brazil, Russia, India and China. These countries have rebounded fastest from the crisis and have returned to warp-speed growth. Yet they lack adequate risk-management frameworks and institutional set-ups, leaving them susceptible to external shocks.

For the UAE and other countries of the Gulf region, which we termed "countries where wealth provides a buffer", the finance ministries should focus on identifying and mitigating contingent liabilities and balance-sheet risks, particularly those from financial exposure to foreign markets.

In addition, while these countries do not currently suffer from fiscal deficits, they recognise that revenues from hydrocarbons will not last forever. Therefore, finance ministries should work to contain potential future deficits by aggressively improving the productivity of public services and other government functions. This will be more effective than periodically implementing across-the-board cuts to reduce public expenditure, a tactic used today in some governments within this group.

Finally, the biggest reform priority should be to address capability gaps within ministries of finance in key areas such as modern budget management, public debt and state assets management, economic forecasting and fiscal policymaking.

In finding the path forward, finance ministries will need to look not only to external circumstances but to their internal strengths as well. Fundamentally, success in the post-crisis era will come from a holistic, capabilities-driven approach for transforming the means by which these ministries deliver on their expanded mandate.

Key to this approach to reform are two elements: selection and focus. Before the crisis, finance ministries had the luxury of being able to focus on a few initiatives at a time. But in the post-crisis era, the size and complexity of the challenges have forced them to operate in all four areas of the national economy at once.

Finance ministries cannot choose their slate of responsibilities and they cannot choose the economic cycle they find themselves in, but they can choose to focus on the capabilities that will make the biggest difference in how they manage those responsibilities.

Nabih Maroun is a partner, Dr Jihad Azour a senior executive adviser and Dr Mazen Ramsay Najjar a principal at Booz & Co

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Rating: 4/5

UAE currency: the story behind the money in your pockets
COMPANY PROFILE
Name: Almnssa
Started: August 2020
Founder: Areej Selmi
Based: Gaza
Sectors: Internet, e-commerce
Investments: Grants/private funding
MATCH INFO

Day 2 at Mount Maunganui

England 353

Stokes 91, Denly 74, Southee 4-88

New Zealand 144-4

Williamson 51, S Curran 2-28

Why it pays to compare

A comparison of sending Dh20,000 from the UAE using two different routes at the same time - the first direct from a UAE bank to a bank in Germany, and the second from the same UAE bank via an online platform to Germany - found key differences in cost and speed. The transfers were both initiated on January 30.

Route 1: bank transfer

The UAE bank charged Dh152.25 for the Dh20,000 transfer. On top of that, their exchange rate margin added a difference of around Dh415, compared with the mid-market rate.

Total cost: Dh567.25 - around 2.9 per cent of the total amount

Total received: €4,670.30 

Route 2: online platform

The UAE bank’s charge for sending Dh20,000 to a UK dirham-denominated account was Dh2.10. The exchange rate margin cost was Dh60, plus a Dh12 fee.

Total cost: Dh74.10, around 0.4 per cent of the transaction

Total received: €4,756

The UAE bank transfer was far quicker – around two to three working days, while the online platform took around four to five days, but was considerably cheaper. In the online platform transfer, the funds were also exposed to currency risk during the period it took for them to arrive.

COMPANY PROFILE
Name: HyperSpace
 
Started: 2020
 
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
 
Based: Dubai, UAE
 
Sector: Entertainment 
 
Number of staff: 210 
 
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
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