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IMF Concludes Article IV Consultation With UAE

by Lorys Charalambous, for, Cyprus

11 October 2007

The International Monetary Fund on Tuesday published the details of its Article IV Consultation with the United Arab Emirates, concluded on September 21.

According to the IMF's findings, the UAE's economic performance remains very strong, with real GDP growth in excess of 9% in 2006, oil production rising by 8%, and non-oil sectors growing at double-digit growth rates. The rapid expansion is supported by an outward-oriented development strategy, a favorable business climate, and sustained high oil prices, it observed.

The medium-term outlook is very positive, the IMF went on to suggest, with real GDP growth projected to remain strong in 2007, and slightly decelerate thereafter, due to temporary capacity constraints.

The IMF also suggested that the financial system is sound, and has not been affected by the correction of the UAE stock markets in 2005-06. The growth of private sector credit remains high and banks' exposure to the real estate sector has increased recently. Reforms are underway to strengthen the prudential and regulatory oversight of the banking system and the capital markets; open the banking sector to greater competition; and strengthen the legal framework for the financial sector.

In a statement, the IMF Executive Board announced that:

"Executive Directors commended the UAE's impressive growth performance over the past few years, stemming from the authorities' successful outward-oriented development strategy, the use of oil resources to achieve economic diversification, and the pursuit of prudent macroeconomic policies. The medium-term prospects look bright, supported by a continued favorable outlook for energy prices given sustained global demand, a strong investment momentum, and an improved domestic business climate. Directors agreed that the key challenges will be to ensure sustained noninflationary growth and further diversification of the economy."

"Directors observed that although the assessment of inflation is complicated by data weaknesses, the rate of price increases, driven mainly by strong demand for housing, is too high. They acknowledged, however, that the anticipated reduction of capacity constraints--especially in the housing market--is likely to reduce inflation pressures over the medium term. Directors considered that fiscal policy could play a greater role in regulating domestic demand. In particular, expenditure increases-including by public and quasi-public entities-should be consistent with the country's absorptive capacity. This, together with efforts to alleviate capacity constraints, would help subdue inflation and support a continued economic expansion with macroeconomic stability."

The IMF officials continued:

"Directors supported the authorities' prudent fiscal policy, with the non-oil deficit declining substantially as a proportion of non-oil GDP, and the overall fiscal position expected to remain in surplus over the medium term. They commended the authorities' fiscal reforms, which are aimed at modernizing the fiscal system and improving efficiency. They welcomed the preparations to introduce a Value Added Tax system at the federal level. Directors called for greater fiscal coordination between the emirates and the federal government. They therefore welcomed the authorities' intention to establish a macro-fiscal unit at the federal government level. The phasing and monitoring of large investment projects carried out by government and quasi-public entities outside the budget should also be intensified."

"Directors agreed that the current peg of the dirham to the US dollar has served the UAE well. They considered that the exchange rate of the dirham is in line with fundamentals, and noted that further structural reforms would help to sustain the UAE's competitiveness. Directors noted the authorities' commitment to work closely with other GCC member countries to reach consensus on the appropriate future exchange rate regime to be adopted as part of the GCC currency union. Looking forward, a few Directors saw value in some flexibility."

"Directors noted the strength and resiliency of the UAE financial system, as evidenced by the high capitalization and profitability of financial institutions. They encouraged the authorities to further strengthen prudential regulations and bank supervision, especially in the context of the current rapid credit growth and buoyant real estate market. Directors welcomed the authorities' intention to establish a federal credit bureau to help improve the reporting and monitoring of credit data. At the same time, they called for a strengthening of the supervision of financial services groups comprising banks, insurance companies, and securities firms."

The statement concluded:

"Directors welcomed steps to enhance the supervision of capital markets and efforts to update the banking law and the company law, consistent with the recent Financial Sector Assessment Program update proposals. These steps would, inter alia, remove barriers to foreign participation in U.A.E. markets and help protect shareholder rights. Directors called on the authorities to move ahead to enact the draft securities law, encourage the listing on the equity market of large quasi-public enterprises, and promote an increased role for institutional investors in the markets. Such measures would strengthen investor confidence, reduce market volatility, and deepen the UAE's capital markets."

"Directors welcomed the important steps taken to improve the UAE's statistical systems in the next few years. They looked forward to the establishment of a National Bureau of Statistics, and the launching of several statistical surveys currently under preparation. They encouraged the authorities to follow up on the Fund's technical assistance recommendations to improve the quality and timeliness of consumer price data, and fiscal data at the federal and emirates levels. Directors welcomed the authorities' intention to expedite the UAE's participation in the Fund's General Data Dissemination Standard."

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