UAE economy set for 3.1% growth in 2021: IIF

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Dubai - The UAE's external position would remain strong amid slow growth, and that the current account surplus is expected to remain significant while narrowing


Issac John

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Published: Tue 13 Oct 2020, 12:00 AM

Last updated: Wed 14 Oct 2020, 2:32 AM

The UAE is expected to record a strong economic resurgence with a 3.1 per cent growth in 2021 following a 5.7 per cent contraction in its gross domestic product this year, according to the latest forecast by the Institute of International Finance (IIF).
Washington-based IIF said that the UAE is expected to experience a deeper contraction this year than predicted in May. "We expect a contraction of 5.7 per cent in 2020, followed by a modest recovery of 3.1 per cent in 2021," said Garbis Iradian, IIF 's chief economist in the Middle East and North Africa region.
Dubai's economy could contract by at least 8.0 per cent because of its large exposure to tourism, aviation and other services make it more vulnerable to the effects of the pandemic, he said.
"The UAE should pursue a more diversified and knowledge-driven economy. Privatising non-strategic GREs and enforcing competition laws and regulations would improve efficiency and raise productivity. Building a new and more diverse growth model would enable the country to leverage its pool of well-trained workers and its effective partnership between the public and private sectors," said Iradian.
The IIF economist predicted that the UAE's external position would remain strong amid slow growth. The current account surplus is expected to remain significant while narrowing.
The IIF report noted that employment declined by about 10 per cent, affecting mostly expats, as firms were constrained by low cash flow and high expenses. The PMI rose to 51 points in September, signaling a renewed expansion in the private sector.
In June, the UAE Central Bank injected Dh16 billion, equivalent to 1.2 per cent of GDP, in cash into the financial system to boost liquidity. "While credit to the private sector declined by 1.5 per cent year on year in July, credit to government-related-entities has increased by 16.5 per cent, driven by various megaprojects."
The report said the real estate market faces a prolonged road to sustained recovery. "The continued decline in housing costs has been a major drag on inflation, and we expect the average CPI to decline by 2.0 per cent in 2020. Real estate prices have been falling since late 2014 mainly due to oversupply, weaker consumer sentiment in the context of prolonged low oil prices, and recently Covid-19."
The report said UAE's external position would remain strong. The current account surplus, while narrowing, will remain sizable. The UAE remains the main regional destination of FDI inflows, attracting about $11 billion in 2019 (3.0 per cent of GDP). "Elevated FDI inflow is explained by the friendly business environment, excellent infrastructure, and political stability. The authorities are seeking even higher FDI inflows, setting a target of 5.0 per cent of GDP for 2021," said the report.
Across the GCC, the IIF  expects a 5.0 per cent drop in the average GDP this year, while the oil exporting countries in the Mena region have an exceptionally challenging economic environment.
The IIF noted that the fall in oil prices and the associated reduction in Covid-19 led to deep recessions, widening fiscal deficits, shifting current account surpluses to large deficits and increasing financial stability risks. However, major GCC oil exporters are better off with large reserves, it said.

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