- Strong economic growth is being driven by robust domestic activity, while inflation remains contained. Relatively high oil prices will support continued fiscal and external surpluses.
- Bank balance sheets have strengthened further, but continued close monitoring of financial stability risks, including from the real estate sector, and enhanced efforts to address the domestic liquidity surplus are warranted.
- Over the medium term, the overall fiscal stance should be supported by additional efforts to enhance non-oil revenue and strengthen fiscal transparency. Structural reforms will support these efforts.
Washington, DC: A staff team from the International Monetary Fund (IMF), led by Mr. Ali Al-Eyd, held discussions with the UAE authorities for the 2024 Article IV Consultation from May 2 – 16, 2024. At the conclusion of the mission, Mr. Al-Eyd issued the following statement:
"Economic growth in the UAE is broad based, led by robust activity in the tourism, construction, manufacturing, and financial services sectors. Foreign demand for real estate, increased bilateral and multilateral ties, and the UAE's safe haven status continue to drive rapid growth in housing prices and an increase in rents, while adding to ample domestic liquidity. Hydrocarbon GDP growth is expected to increase this year, including on higher crude oil production from the UAE's OPEC+ quota increase. Impacts from geopolitical tensions have been contained thus far, while the authorities delivered a rapid response to address the recent flooding episode. Overall real GDP is projected to grow by around 4.0 percent in 2024, and average inflation is expected to remain contained close to 2 percent.
"Fiscal and external surpluses are expected to remain high on the back of relatively high oil prices. The general government surplus is projected to be around 5.0 percent of GDP in 2024 and public debt is on track to decline further towards 30 percent of GDP, benefitting from active debt management strategies. Capital spending is expected to meet ongoing infrastructure needs, and the introduction of the corporate income tax will support non-hydrocarbon revenue with its full implementation in the coming years. The current account surplus is projected at around 10 percent of GDP in 2024.
"The outlook is subject to uncertainty and external risks, including those related to geopolitical tensions, global growth and financial conditions, and commodity price volatility. Uncertain impacts from climate change and the speed of global decarbonization efforts add to risks. However, the UAE's large public financial buffers help mitigate risks, while accelerated public and private investment and structural reforms, including to meet more ambitious climate goals and develop low-carbon and renewable energy and technology, could spur growth more than expected.
"Against this background, policies should remain focused on delivering sustainable and diversified growth and ensuring financial and monetary stability, while remaining agile to respond to economic and geopolitical uncertainties. In this connection, we welcome efforts to continue building fiscal space and complete the implementation of the Dirham Monetary Framework, strengthening the resilience of UAE's financial system. Staff welcomes the creation of the Financial Stability Council and encourages its implementation.
"Banks have considerable capital and liquidity buffers overall, and general asset quality has improved, while credit growth is resilient despite higher domestic interest rates. The central bank intends to restore the reserve requirements to the historical level of 14 percent for demand deposits. We welcome the use of the Dirham Monetary Framework to rein in domestic liquidity and encourage further efforts, as well as continued coordination with the Ministry of Finance on domestic capital market development. Risks from activity in the real estate sector should continue to be closely monitored, with a view to tightening related macro-prudential policies, if needed. Similarly, further enhancing the monitoring of financial stability risks from climate change is warranted.
"The efforts to digitalize the financial system and payment landscape are welcome and should continue to follow a risk-conscious approach. Initiatives to develop and regulate the virtual asset industry should be informed by a careful assessment of macroeconomic and financial stability risks.
"We welcome the major efforts under the National AML/CFT Strategy and Action plan that resulted in the recent removal of the UAE from enhanced monitoring under the Financial Action Task Force and encourage continued progress.
"Efforts to maintain fiscal prudence should be supported by gradual fiscal consolidation and further fiscal structural reforms to ensure medium-term sustainability. The economic benefits of the corporate income tax will be gradual. Improvements in tax collection and administration, including through digital means and AI, are welcome and should be supported by further progress in enforcing compliance and building capacity. Enhancement and careful coordination of emirate-specific and federal fiscal rules and objectives in their medium-term fiscal frameworks would ensure a well-defined national fiscal stance. Similarly, the development of a sovereign asset-liability management framework would ensure efficient management of public investments and enhance fiscal policy making and risk monitoring.
"The UAE's ambitious structural reform agenda should continue to be supported by integrated government strategies, deliver strong governance frameworks, and promote private sector development and green growth. In this regard, coordinated efforts to further advance CEPAs, attract FDI and talent, and fully implement the AI, Digital Economy, and Green strategies will be key. These efforts should be complemented by measures to ensure a level playing field, enhance access to finance, leverage and advance progress of the Emiratization program, further close the gender gap, and continue to modernize social safety nets. Continued progress on enhancing data standards and transparency will support improved economic assessment and reform implementation.
"The IMF team would like to express its appreciation to the authorities and other stakeholders for the open and fruitful discussions."
