Monetary Advice

How can the UAE find the right balance between holding back public spending and maintaining healthy economic activity?

The UAE faces a similar challenge as other states in the region: maintaining economic activity at a time when spending needs to be adjusted for reduced oil revenues. The UAE is in a better position than many other countries because it has a more diversified economy. The non-oil economy is driven by factors like trade, tourism, and finance. In Dubai there is more or less the same level of economic activity, with a little softening, but much less than other parts of the country. Dubai is also at the beginning of a process that will, over the next four years, lead to Expo 2020. This will also support activity. The UAE has to continue with the strategy of relying primarily on the private sector to drive growth at a time when the government has to scale back big construction and other projects. The UAE growth rate for 2016 is estimated to be 2.5%, which is above the GCC average. However, there is a distinction between the parts that are driven by oil and the parts that are not.

What steps should the UAE take towards tax revenues?

We have been of the view that the UAE, and GCC countries more generally, all need to begin to develop non-oil based revenue sources. Among the most important instruments is the introduction of a VAT, which could be put into place in a coordinated way throughout the GCC. This could generate about 1.5% of additional GDP, based on our experience in other countries. That would be a positive step. It would also be useful to explore whether some sort of low rate of corporate tax can be introduced. There are two things you need to consider in the GCC and the UAE: these countries have substantial buffers to draw on and do not have to make dramatic adjustments in terms of cutting back spending, raising taxes, or trying to reach a balanced budget overnight. It is a perfectly sensible approach for the UAE to run fiscal deficits as they try to adjust gradually to the new realities of oil prices. In doing so, they have to be careful about how they finance those deficits, because if you finance the deficit disproportionately from the domestic banking system, you could create liquidity shortages in the banking system, which may then have a knock-on impact on credit availability for the private sector at a time when you want the private sector to be more active. Instead it may make sense to draw on your assets and also borrow internationally. These various financing options need to be balanced. The other thing to do is to find ways of protecting the more vulnerable in society during the adjustment. For example, if you raise electricity tariffs and rates, you need to consider making that increase proportional to energy use and income levels.

What are your thoughts on the importance of the financial services sector as a crucial component in the growth and diversification plans of the UAE?

Financial services certainly are an important sector in the UAE’s diversification strategy. The banking system will face a more challenging environment moving forward because banks will not be able to rely as much on government deposits and will have to mobilize their own deposits. Liquidity will be tighter and borrowing costs will go up as risk appetite falls. US rates will also edge up. Banks are starting from a strong place in terms of capital and liquidity, and should be able to manage that. The UAE also has the Dubai International Financial Centre (DIFC), which is a very good example of how you can create a hub inside the UAE or any GCC country that serves as a magnet to attract financial companies and also other companies that seek to establish themselves in the UAE and have a regional presence as well.