The UAE should continue to contain the public sector wage bill amid an expanding budget deficit, according to a top IMF official.
“Spending on public sector wages is not increasing substantially, and there is no substantial increase in the size of the civil service,” said Zeine Zeidane, the IMF chief to the UAE. “The UAE government should continue to control the wage bill, and not increase it.”
The IMF expects the budget deficit to reach 7.2 per cent if GDP this year. It is widening as the oil price looks set to average around $40 per barrel this year. Although Brent has recovered from its 12-year low in January, the average oil price for 2016 is set to be below the US$50 average in 2015, the IMF says.
The deficit will increase “even though authorities made significant efforts at fiscal consolidation in 2015 and 2016,” Mr Zeidane said. “The UAE will be close to balancing the budget by 2020.”
That has led the UAE to adopt spending cuts, announce plans to introduce new debt, and bring in new taxes, including fees on expat rentals and hotel stays, as well as VAT by 2018.
Mr Zeidane said that the UAE’s move to issue international debt would help the country to fund its deficit without withdrawing liquidity from the domestic banking sector “We are fully supportive of new debt issuance, and would advise the authorities to be careful on domestic market to avoid crowding out of private sector, and encourage them to tap international markets rather than drawing down on assets.”
Abu Dhabi sold $5 billion in international sovereign bonds last month, in an issue that was 3.4 times oversubscribed. Mubadala is also selling $500 million in new bonds, in its first international issue for two years, according to Reuters.
Mr Zeidane said that the UAE should not cut public investment spending in 2016 but instead “continue to phase out subsidies”.
The UAE still has further to go to diversify its economy away from oil, the IMF says. “There is still a lot to do in terms of economic diversification. There needs to be structural reforms – to improve the business environment, be more open to FDI, to trade, to skills from abroad, and to strengthen competitiveness. The authorities need to create conditions for healthy competition,” Mr Zeidane said.
Investment in port infrastructure has helped to offset the impact of low oil prices on the UAE, Mr Zeidane said. Even though “global trade is slowing down very sharply, according to our data, Dubai and Jebel Ali and transport sectors are doing better than many places in the world”, he said. “Without the boost the UAE is getting from building a strong logistics and transportation sector, the country would have a much bigger slowdown.”
Describing the decline in Dubai property prices as “a correction”, Mr Zeidane said that the market was “holding up very well in many places, particularly in the end user market. It’s good for investors because yields are still very comfortable”.
The decline in prices “is not worrisome for the stability of the banking sector”, he said.
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