United Arab Emirates : Staff Report for the 2012 Article IV Consultation


Statement by Mr. Shaalan, Executive Director for the United Arab Emirates

International Monetary Fund
Published Date:
May 2012
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1. On behalf of the United Arab Emirates (UAE) authorities, I thank staff for their engagement and the constructive Article IV Consultation discussions. The authorities highly value the views of the Fund on the UAE’s economic and financial policies.


2. The UAE has weathered the global economic and financial crisis well, on account of strong fundamentals as well as timely policy responses. The economy has benefited from an increase in hydrocarbon prices and production. Moreover, the economic recovery in non-oil sectors continues to gain momentum, especially in trade and tourism which offset the slowdown in construction and real estate. The authorities remain committed to policies aimed at sustaining growth and diversifying the economy, while maintaining macroeconomic and financial stability.

Fiscal Consolidation

3. Fiscal policy is shifting from an expansionary phase to a consolidation phase, which will be implemented at a gradual pace in order not to undermine the economic recovery. This consolidation will further widen the fiscal space to support the economy in the event that downside risks—such as a decline in oil prices—were to materialize. The government of Abu Dhabi will start implementing its fiscal consolidation plan as of this year, having already completed a review of its development strategy. Plans are for Dubai to further cut public spending and balance its fiscal accounts by 2014.

4. The authorities remain committed to reducing the dependence of fiscal revenues on the hydrocarbon sector. They are considering several initiatives in this regard, including the introduction of a value-added tax in the context of a GCC-wide initiative and a corporate income tax.

5. Fiscal Policy Coordination - The authorities consider intergovernmental coordination to be key for an effective fiscal policy. The Fiscal Coordination Council (FCC) has been facilitating the exchange of information between the federal and emirate governments. The authorities plan to further extend the FCC’s role to coordinating fiscal policy among the different tiers of government and have requested Fund technical assistance in this regard.

6. Government Related Entities - The government is addressing the pending Government-Related Entities (GREs) issues. The Dubai World debt restructuring was completed and several other troubled GREs are in the process of restructuring. GRE risk management is being strengthened; data availability has improved with the Abu Dhabi authorities publishing the list of companies supported by it; and the government of Dubai has clarified that Dubai GREs are not backed by sovereign guarantees. The Department of Finance and the Supreme Fiscal Committee are playing a major role in Dubai GRE debt monitoring and in the approval of new borrowing.

Financial Sector Policies

7. The financial sector remains resilient to domestic and external shocks, thanks to the central bank’s strong regulation and macroprudential policies. The banking sector is highly capitalized and profitable. However, credit growth to the private sector is still sluggish, mainly due to the performance of the real estate sector.

8. The Central Bank of the UAE has actively pursued policies aimed at preserving the soundness of the financial sector. It has taken timely measures to support financial stability by providing liquidity, guaranteeing deposits, and encouraging bank capitalization. It will continue to closely monitor the capital adequacy and liquidity of banks, especially those that were found to be most vulnerable under severe stress test scenarios. The central bank is striving to develop domestic capital markets, and it has launched a repurchase facility for Islamic certificates of deposit. Banking regulations have been strengthened by tightened limits on large exposures, and by introducing caps on loans to local governments and their related entities.

9. Spillover effects - The authorities appreciate staff’s work on the global spillovers to the UAE’s financial system. They share staff’s view that financial vulnerabilities have decreased since the 2008 real estate problems. While stress tests show that the banking sector has adequate liquidity to withstand substantial shocks and is moderately exposed to Europe, staff points in their Selected Issues Paper to continued vulnerabilities to global financial conditions in a few banks, especially those with high exposure to the real estate sector. In this regard, it is worth mentioning that the central bank has been very active in this regard, and will continue to remain vigilant and monitor cross border and domestic interbank exposures. It stands ready to take additional remedial actions if needed to mitigate possible risks and strengthen the stability of the system. The authorities look forward to the forthcoming Financial Sector Stability Assessment which is expected to take place in the course of 2012.

Other Reforms

10. The federal government will further improve the business environment in order to keep attracting foreign investment. Tourism remains a priority as part of efforts to diversify the economy. Labor policy will continue to focus on increasing the employment of Emiratis in the private sector. Abu Dhabi’s capital spending plan on tourism, health, infrastructure, and renewable energy projects will also help to support the economic recovery and create jobs for UAE citizens.

11. The authorities are committed to continue their progress in improving the quality and coverage of economic statistics. They have established the National Bureau of Statistics and Debt Management Offices, and will continue to improve the compilation and dissemination of national, fiscal, and external accounts.