Standing Firm

Due to protracted commodity price declines, the UAE has been reducing overspending. How can the UAE find the right balance between holding back public spending and maintaining healthy economic activity?

The UAE is facing a similar challenge as other states in the region: maintaining economic activity at a time when spending needs to be adjusted to reduced oil revenues. That being said, the UAE is in a better position than many other countries because here you already have a more diversified economy. The non-oil economy is driven by factors like trade, tourism, and finance. The UAE has to continue with the strategy of relying primarily on the private sector to drive growth at a time when the government is going to have 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 within that between the parts that are driven by oil and the parts that are not.

Higher government revenue would create much needed room for fiscal maneuvering. What steps should the UAE take to increase 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 in place in a coordinated way throughout the GCC. This could generate about 1.5% of additional GDP based on our experience in other countries. So 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 UAE; these countries have substantial buffers they can 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. That’s why we think it is a perfectly sensible approach for the UAE to run fiscal deficits as it tries to adjust only gradually to the new realities of oil prices. In doing so, the authorities 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. So instead it may make sense to draw on your assets and also borrow internationally. These various financing options need to be balanced.

According to the WTO, the UAE has maintained its position as one of the top trade economies worldwide, reaching a trade volume of AED1.5 trillion in 2015. How can the UAE help counter the weakening of worldwide trade?

It can help counteract the slowdown in global trade by being at the cutting edge of efficiency, speed, and cost. It is going to be a tougher market for trade, because world trade is not growing at the same pace. The UAE has a good geographical location as a point for transit trade, but there will also be competitors. The UAE has to stay at the forefront and keep its edge, which has been the formula for its success so far. It has to keep ahead of the curve, keep moving forward, and keep innovating. There is no space for complacency, because margins will be pushed as competitors grow and become more efficient. The UAE’s diversification plans are indeed already quite advanced and the economy well diversified. The key for the UAE, but also for other oil exporters in the region, is to keep thinking outside of the box and in terms of finding ways to foster diversification and to develop the non-oil economy over time.