UAE budget the right initiative, say experts

Dubai - Experts say slight cut in spending on non-essential projects makes sense.

The business community, corporate executives and experts on Monday welcomed the UAE's zero-deficit budget for fiscal year 2016, terming the finance document a positive initiative in the right direction despite cheap oil's blow to state revenues.
They also appreciated the government's cautious approach on spending after several straight years of increases and said the slight decrease in planned federal spending on non-essential projects makes sense due to the sharp fall of oil from around $110 per barrel in July 2014 to below $50 this year.
The experts also applauded the government's continued focus on social sector development and said appropriate allocations were also made for other important sectors like defence, public safety and the economy, among others. They said the UAE has been moving more aggressively than any other Gulf state to save money by reducing energy subsidies.
The UAE Cabinet on Sunday approved a slightly smaller federal budget for 2016 by curbing its expenditure and set a Dh48.56 billion outlay, down from Dh49.1 billion planned for this year. The zero-deficit budget accorded top priority to social sector development as education, health and public services received a major chunk of allocations.
Shailesh Dash, chief executive of Al Masah Capital Management, termed the budget a very positive move despite difficult challenges in the wake of a bearish oil market and said the finance document shows rational thinking on the part of the policymakers.
"It's a pragmatic budget steeped in right economics very similar to the removal of energy subsidies. The UAE has always been ahead in terms of its policies and forward thinking and I am sure in times to come other Gulf countries will be following the same policies," Dash told Khaleej Times.
He also pointed out that the budget for fiscal year 2016 shows there is not much cut in budgetary expenditure while still maintaining a zero deficit.
"It's helpful so that important investments needed for the future growth of the nation doesn't suffer because of the cutback."
Saad Maniar, managing partner at Crowe Horwath - DIFC Branch, said it's a bold move for the federal government to approve a slightly smaller federal budget for 2016.
He said the ramifications of the budget drop from this year's plan of Dh49.1 billion to next year's Dh48.56 billion will be felt not just in public expenditure, but on the economic front as well.
"Many see this move by the federal government that it doesn't want to risk by indexing its budget to oil owing to the current price trajectory. Global oil prices have more than halved since June 2014 and the International Energy Agency does not expect a strong price rebound in the short term, so this means there's very little prospect for oil prices to dramatically increase over the near term," Maniar told Khaleej Times.
He said the UAE federal budget doesn't amount to much - it's only around 14 per cent of total fiscal spending in the country.
However, the decision to approve a slightly smaller budget compared to previous years means that the government has a fiscal hole that will need to be filled to preserve the effectiveness of its public services and to ensure stimulation and stability of the economy going forward.
"Whether this is achieved through spending cuts programmes or looking at new initiatives, one thing remains clear: the fiscal hole will have to be filled."
Earlier last week, IMF director for Middle East and Central Asia Masood Ahmed said the UAE would record a fiscal deficit of 3.5 per cent of gross domestic product that may further go up in the coming years if the oil market remains bearish. The fund has also revised the forecast for the UAE's GDP in 2015 to three per cent compared to 4.3 per cent in 2014.
It also expects the UAE this year to post its first budget deficit this year since 2009.
Jitendra Gianchandani, chairman and managing partner of Jitendra Consulting Group, said the small cut in the budget was palpable due to the plunge in oil prices since last year.
"The UAE's budget is not only vulnerable to oil prices, but it's also susceptible to a great extent on ongoing slowdown in the international market Europe and Asian markets, hence curbing expenditure is need of the hour and a wise decision," Gianchandani said.
M.I. Taher, head of International business at Reliance Life Insurance Company, said the budget has prioritised education, health and social development, which suggests it's a people-focused budget.
"With oil revenue depleting I'm sure it's a big pressure on government to cut spends," he said.
Taher further said a zero-deficit budget is always good news for any economy; however, it appears aspirational goal given the geopolitical environment and risk of oil prices lowering from the current levels.
However, the government has to address the issue of "rental inflation" which is mounting tremendous cost pressure on businesses and working population.
Manair said the UAE's economy, as well as most of the other countries in the GCC region, is largely oil-driven, and in the current oil situation, the country has little choice but to turn to additional revenue sources to bolster the economy.
Recently in August, he said the country made a bold move to save money by reducing energy subsidies, where it abandoned a system of fixed gasoline prices in favour of one linked to global oil prices.
"To overcome the revenue hole stemming from low oil prices, authorities at the Emirates level need to act now. Any new strategy to protect the country from potential budget deficit, must be able to finance the UAE's spending as well."
"When times are tough, we need to be fiscally responsible and prudent. The choices made by the federal government on Sunday will set the table for the coming budgets for the seven individual emirates, in the months and years ahead," Manair said.
- muzaffarrizvi@khaleejtimes.com