IMF expects UAE inflation to decline to 3.2% in 2016

The UAE continues to benefit from its safe-haven status.

The UAE's average inflation is expected to decline to 3.2 per cent in 2016 from 4.1 per cent in 2015, says the International Monetary Fund.

"The UAE is facing the oil price shock from a strong position as past prudent macroeconomic policies have helped build large fiscal and external buffers, its economy is more diversified and it has continued to benefit from its safe-haven status," the IMF said in a statement issued after a mission, led by Zeine Zeidane, visited the UAE from April 26 to May 9.

The IMF estimates that the UAE's growth outlook is expected to moderate in 2016 amid low oil prices, with non-hydrocarbon growth projected at 2.4 per cent due to fiscal consolidation, softer economic sentiment and tighter monetary and financial conditions. With expected improvements in oil prices, growth is projected to pick up over the medium term, also supported by increased investment ahead of the Expo 2020 hosted in Dubai and more favourable external conditions.

However, the IMF forecasts that the UAE's fiscal deficit is projected to widen in 2016 to about 7.2 per cent of gross domestic product, before improving over the medium term. The current account surplus is projected to decline to 0.3 per cent of GDP in 2016. The IMF expects private sector credit growth to moderate due to the slowing economy and larger fiscal financing needs.

"Against this backdrop, the macroeconomic policy mix should focus on gradual fiscal consolidation, while maintaining the peg and supporting conditions for private sector credit growth. In view of the large buffers, the pace of fiscal consolidation could be somewhat more gradual in 2016 than presently envisaged, in order to minimise the impact on the economy as it is adjusting to the decline in oil prices over the past year," the statement adds.

The IMF calls for public investment to be preserved, introduce value-added tax and increase excise taxes in a timely manner and remaining energy subsidies to be gradually phased out.

The institution welcomed Abu Dhabi's recent issuance of eurobonds and encourages the emirate to continue tapping international markets and sovereign wealth funds rather than drawing down deposits. Efforts to strengthen public financial and debt management frameworks should also be pursued, the IMF suggests.

"The banking sector remains resilient and has enough liquidity and capital buffers to withstand severe shocks. The central bank actions to ensure adequate provisioning, phase in Basel III liquidity and capital requirements and strengthen corporate governance are steps in the right direction and should be pursued. Continued repair of government-related entities [GREs] balance sheets is important to contain systemic risks," the statement adds.

The IMF praised the UAE's vision to diversify its economy away from oil. The agency calls for stepping up structural reforms, transitioning towards a knowledge-driven economy and promoting export sectors. "Improve selected areas of business environment; develop adequate PPP frameworks; relax restrictions to foreign ownership; foster competition; promote innovation; ease access to finance for start-ups and SMEs; and create the right incentives for entrepreneurship and job creation, notably for women," the IMF suggests in the statement.

The IMF team met with Obaid Humaid Al Tayer, Cabinet Member and UAE Minister of State for Financial Affairs; Mubarak Al Mansoori, Governor of the Central Bank of the UAE; and senior federal and local government officials, as well as representatives from the business and financial community.

- business@khaleejtimes.com