IMF Estimates a 2.3% Fiscal Deficit for UAE in 2015

In contrast to private-sector predictions, the International Monetary Fund (IMF) forecasts the United Arab Emirates (UAE) will experience a 2.3% financial deficit.

The UAE’s Government budget deficit has been anticipated due to the decrease of oil prices. It is the first time since 2009 that the UAE will experience a shortfall in the Government Budget. During the previous year, oil cost approximately $100 per barrel whereas this year, oil has slumped to approximately $60 per barrel.

The IMF predicts that the UAE’s Gross Domestic Product (GDP) will drop by 2.3% in comparison to the 5% surplus it experienced in 2014. The IMF also forecasted that the UAE’s non-oil based sector economic growth rate will increase by 3.4% while inflation rate is also expected to rise by 3.8% due to increased rents regardless of the fact residential prices have stabilised in Dubai. A complete IMF report will be released during the following month which will include all of its forecasts.

Additionally, according to IMF the UAE’s economic growth rate will increase by 3% during 2015 marking a drop of 1.6% in comparison to the previous year’s growth rate which was recorded at 4.6%. On a bright note, the IMF commended the UAE government on continuing to invest on infrastructure as well as implementing innovative policies which eased the negative impact of decreased oil prices. 

Numerous economic predictors within the private sector have forecasted that the UAE will experience a higher shortfall than the 2.3% predicted by the IMF. Even though the IMF has made its predictions based on the UAE’s expenditure plans, it does not mean that its predictions are more precise than those of the private-sector due to the fact the IMF does not take into consideration future oil prices.

Abu Dhabi Commercial Bank predicts the UAE will experience a 4% fiscal deficit during this year. The forecasted deficit is viewed as modest in comparison to the country’s large financial reserves. According to the bank, due to the government’s policies and reforms implemented during the past few years the UAE’s non-oil GDP rate will remain healthy.

Additionally, the government’s focus on housing, transportation, tourism, healthcare as well as education and energy projects in Abu Dhabi and Dubai will support and sustain the UAE’s economy

Although the IMF commended the UAE government for its innovative policies and budget spending it has made some suggestions so as to help regulate the deficit. According to the IMF, the UAE government must sustain investment spending, ease off on subsidies, regulate the public wage bill, increase non-oil profits and minimise transfers towards state-linked entities.

Most of the aforementioned measures are currently being endorsed. The IMF also calls that the financial community of the UAE and the government to be more transparent especially concerning state-linked entities as well as state debts.

According to an Abu Dhabi-based investment company, the National Investor, the UAE’s spending patterns and reforms rely on whether the price of oil will even out or fluctuate. In the past, the UAE government was practical and sensible as it restricted government spending at times when oil prices dropped. In contrast, the UAE government has not followed the same tactic this time and carries on spending. The reason remains unclear as to whether it is due t the fact the state believes oil prices will pick up or whether due to the fact it has implemented new reform policies.

Currently, the UAE government has large amounts of reserves to manage the drop of oil prices as well as to deal with the small shortfall in its budget. However, if oil prices remain low, the government will have to make long-term plans and introduce new policies as a precaution.

The IMF reflects the same views and will include details concerning the UAE’s spending in its report in the following month.

Foreign Labor Influence on the UAE Economy

The United Arab Emirate (UAE) dependency on foreign workers is a subject that dominates any discussion concerning the UAE’s economy. This fact implies that in the occasion that foreign workers depart from the UAE, its economy would be influenced negatively. Some do not realize that an economy is influenced by a variety of important features, not only the labor force.

This article will outline the relation between the economy and foreign labor and to what extent the latter influences the UAEeconomy and its economic growth. The economic cycle of 2002-2012 was quite eventful. The UAE’s economy started to thrive in 2003 where it reached its peak in 2006. After 2006, the UAE’s economy went into a crisis until it finally returned to normal by the end of 2012.

Population Growth

During 2002-2012, the population rate of the UAE seems to follow its economic growth rate, whereby population reached its peak in 2007 and then dropped rapidly to just above 0%. This reveals that the percentage of labor relies on the economy, which is more logical since an economy draws foreign workers as it develops and expands. At times when the economy experiences downfalls, foreign workers decrease.

Emiratis and UAE Residents

A country’s Gross Domestic Product (GDP) per capita is more during times whereby the economy expands and thrives. In reference to the UAE’s GDP, statistics show that following the international financial crisis, the country’s GDP dropped by 40% only to jump up again in 2004.

The above trend reveals that as the UAE expands, foreign labor supports the growth by being employed in positions. Confined labor policies smother the UAE’s economic growth since these restrict the supply of employees. This is especially the case in the UAE’s knowledge-based segments.

On the other hand, during times where economic growth declines or even is in crisis, the workforce adjusts automatically and evens out the GDP. Due to the fact that foreign workers are able to save large proportions of their income during the time where the economy expands as well as the fact workers are not subject to Income Tax means that they have enough saved to use in times when economic growth declines. Overall, foreign workers are interested in working in the UAE until its GDP becomes stable. 

On the other side, during recessions all public services experience budget cuts. This does not necessarily mean the public services sectors do not offer high quality because during recessions, there are less people to cater to so the quality of the services remains the same.

The same supply and demand trend applies in the private sector of the economy. There is less supply which matches with consumers’ decreased demand. Imagine there are 10 opticians throughout the country and people cannot afford to spend money on examining their eyes and purchasing glasses. Thereby, 5 of these opticians leave the country, which means the 5 remaining opticians sustain their business activity and quality of services. In basic terms, the workforce adjusts automatically to the demand and supply of the economy. 

Dubai’s economy growth increased in 2014

Dubai’seconomy grew by 3.8% in 2014 according to Dubai Statistics Centre (DSC). Dubai’s real Gross Domestic Product (GDP) marked AED338 billion by the end of 2014. Dubai’s government officials commend and congratulate the city’s excellent economic performance. According to Dubai’s government, the city’s economic growth is attributed to its diversified economy.

According to the DSC’s report, all Dubai’s economic sectors developed in the previous year leading to increased growth rates, which consequently led to an increased GDP. Government officials assert that Dubai’s increased economic growth reveals that the emirate’s non-oil based sectors are also marking continuous growth. T according to the statistics, the emirate’s non-oil based economy contribution increased by 98.7% during 2014. In fact, Dubai’s oil-based sector contributed an amount of AED4.4billion whereas its non-oil sector’s contribution amounted to AED333.5billion.

These statistics confirm that Dubai’s overall economic diversification, whereby the city focuses on both service and industrial activities, is paying off.  The statistics also showed that 34% of Dubai’s GDP is attributed to the emirate’s communication, storage and transport sector that developed greatly from 2013 to 2014, marking an increase in growth rate of 8.6%.