The Institute of International Finance (IIF) expects the UAE’s growth this year to come in below IMF forecasts and post a wider deficit because of lower spending and low oil prices.
The UAE economy is forecast to grow at 2.5 per cent this year and post a fiscal deficit of 8 per cent, according to the IIF.
The IMF, however, had UAE’s growth for 2016 at 2.6 per cent, a cut of 0.5 percentage point compared with its October projection of 3.1 per cent growth. The fund expects fiscal deficit at 7.5 per cent of GDP, but said that would depend heavily on what happens to oil prices this year.
“The slowdown is primarily arising, of course, from slower government spending,” said Giyas Gokkent, the senior economist for the Middle East and Africa region at the IIF. “You have some fiscal headwinds as a result of the crash in oil prices.”
The international crude benchmark Brent has plummeted 70 per cent to about US$35 per barrel since June 2014 because of an oil glut, weak demand in Asia and a strong dollar.
The Washington-based IIF has forecast an oil price of $35 per barrel this year.
Sultan Al Mansouri, the UAE Minister of Economy, said last month that government expectations for growth in 2015 have fallen to 3 per cent as a result of the lower oil prices. Mr Al Mansouri predicted in January last year that the UAE’s economy would grow by 4.5 per cent, before revising his estimate to 3.5 per cent in October.
Meanwhile, growth in Saudi Arabia is expected to average 1.2 per cent this year, according to Mr Gokkent, in line with IMF estimates.
Gulf governments have undertaken reforms to deal with the lower oil price scenario. They have raised energy and utility prices and set apace plans to introduce value-added tax.
The introduction of value-added tax, which is envisaged to come into effect in 2018 at a rate of about 5 per cent, will provide revenues equivalent to 1 to 1.5 per cent of GDP, according to Mr Gokkent.
There is more room for energy and utility price increases as well as broadening of the tax base, he said.
“I think the UAE still has some room to go in terms of [raising] utility prices,” said Mr Gokkent. “There could be some additional government fees and excise taxes that will be introduced and so on.”
Mr Gokkent praised reforms taking place in the region to tackle lower oil income, but said more needs to be done to lower fiscal dependence on oil and dependence on oil exports.
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