IMF has forecast a gradual recovery by the UAE economy in 2021, supported by the country’s early and strong health response, continued supportive macroeconomic policies, and rebound in tourism and domestic activity related to the delayed Expo 2020.
The Fund expects non-oil GDP growth to exceed 3 percent this year, and to improve further in the medium-term, while oil GDP will continue to grow with increased production. Higher oil prices will lift the fiscal and external balances.
“Nevertheless, uncertainty around the recovery remains globally and in the UAE, and the overall balance of risks is tilted towards the downside, with a resurgence of the pandemic the key source of risk to the outlook. However, the UAE’s strong reform momentum provides an upside risk to growth,” the Fund said in its assessment of the UAE economy after concluding the 2021 Article IV consultations with the government.
IMF noted that the UAE moved quickly to address the health and economic effects of the COVID-19 pandemic, and the economic recovery has begun to strengthen. Vaccinations cover nearly 95 percent of UAE nationals and other residents with at least one dose.
“As in other oil exporting economies, the twin shocks of COVID-19 and oil price declines resulted in a deep, but temporary, recession. GDP is estimated to have contracted by 6.1 percent in 2020, reflecting declines of 6 percent in oil GDP and 6.2 percent in non-oil GDP. Dampened global demand, lower oil prices, and reduced oil production under the OPEC+ agreement weighed on the fiscal and external balances compared to the previous year.
The Fund said that for the recovery to be sustained, protecting public health through continued strong vaccination and testing efforts for all nationals and residents remains the top priority. The current macroeconomic policy mix remains appropriate. Going forward, however, support measures should be increasingly targeted to viable sectors and firms and supporting people most in need. New fiscal stimulus and structural reforms, such as those to attract highly skilled professionals, support private sector employment, increase trade and foreign investment, and harness the benefits of technology should be prioritized and sequenced to ensure their efficiency and effectiveness, ensuring sustainable and inclusive growth outcomes.
It noted that the swift and substantial policy response and the clear and proactive communication by the Central Bank have been critical throughout the crisis. Liquidity and capital in the banking system remain strong. However, corporate credit growth remains subdued, though retail lending has picked-up, and banks’ asset quality has weakened somewhat. Further impact on banks’ balance sheets, including from the COVID-19 crisis, may still lie ahead. Ensuring financial stability through continued monitoring of risks will further enhance resilience of the financial system. Ongoing efforts to strengthen macroprudential and regulatory frameworks will further support these efforts.
Looking to the medium-term, the Fund stressed the need for reform efforts to ensure a smooth adjustment to an environmentally sustainable global economy and deliver sustainable fiscal outcomes and intergenerational equity. This requires a gradual, but marked, fiscal consolidation in the context of a credible medium-term fiscal framework. Given the UAE’s decentralized fiscal structure, emirate-specific fiscal anchors should first be enhanced and then carefully coordinated to ensure a unified national fiscal stance.
The Fund felt that the UAE’s ambitious 50-year reform agenda holds considerable promise to deliver higher levels of future diversified and inclusive economic growth. This comes at an important moment for the UAE as it celebrates its Golden Jubilee and looks to leverage its talent, knowledge base, and vision for sustainable and smarter future growth.
But achieving this outcome requires careful prioritization and sequencing of reforms, enhanced integration of strategies and policies at different levels of government and finding a productive approach to enhancing collaboration and cooperation across the individual emirates. Ensuring timely collection and dissemination of economic data will buttress these efforts, it pointed out.
