The UAE authority's efforts to consolidate the fiscal position is appropriate and would reduce fiscal vulnerability and ensure intergenerational equity, the IMF said in its staff report on the UAE.
The UAE has introduced a number of measures from the beginning of this year to reduce government expenditures through energy subsidy reforms. Last month the government removed fuel subsidies in the country which is expected to save about US$7 billion (Dh25.7 billion). Total subsidies and transfers cost the UAE government US$17 billion in 2014 (12 per cent of total government spending).Starting January this year, Abu Dhabi took steps towards reducing domestic power subsidies. Prior to the reforms, electricity subsidies for residential buildings ranged from 55-90 per cent and water subsidies from 79-100 per cent. A new tariff system, effective 1 January 2015, is based on usage. Water tariffs will be increased by up to 170 per cent and electricity tariffs by up to 40 per cent for expatriates and UAE nationals will have to start paying for water and pay higher electricity tariffs, depending on consumption.
Subsidy reforms are seen as a progressive step in fiscal reforms in the context of falling oil prices and a decline in government revenues by 22.5 per cent this year as estimated by the UAE Central Bank. Lauding the fiscal reform efforts, the IMF said the macroeconomic policy mix should focus on gradual fiscal consolidation, while maintaining the peg and easing liquidity management if needed. Fiscal consolidation will also help bring the external position closer to the level consistent with medium-term fundamentals. However, its pace should take into account the available fiscal buffers and the impact on the broad economy,” Zeine Zeidane, Advisor, Middle East and Central Asia Department.
While fiscal consolidation requires spending cuts, the IMF has warned that the quality of spending cuts is crucial to avoid damaging the country's competitiveness and long-term growth prospects. Government investments should be preserved relative to non-hydrocarbon GDP to support infrastructure, while the implementation of megaprojects by government related entities (GREs) should be gradual, in line with the expected demand. Public sector wage bill growth should be controlled while energy subsidies and capital and other transfers should be reduced.
The IMF also recommends taxation an effective fiscal policy option to raise more non-hydrocarbon revenues. Fiscal policy implementation requires further strengthening annual budget processes, including strong Public Finance Management Systems. Close oversight and continued strengthening of debt management frameworks are crucial.
On the monetary policy front the IMF recommended maintaining of the dirham's peg to the dollar and strengthening liquidity management and deepening money markets. In an adverse scenario with a decline in deposits, liquidity management could be eased to support credit growth.
Along with fiscal and monetary policy adjustments to deal with the current economic conditions, the IMF has recommended effective structural reforms to deal with long term challenges. "Implementation of structural reforms should be pursued to strengthen competitiveness and accelerate private sector-led job creation for nationals. These could focus on further opening up foreign direct investment, improving selected areas of the business environment, and easing access to finance for start-ups and small and medium enterprises (SMEs),” the IMF report said.
Source: Gulf News