An International Monetary Fund (IMF) mission, led by Mr. Zeine Zeidane, visited the United Arab Emirates (UAE) from May 24 to June 4, 2015 for the annual Article IV discussions. The consultation will conclude with the preparation of a report that, subject to management approval, will be discussed by the IMF Executive Board tentatively scheduled for July 2015.

At the end of the mission Mr. Zeidane issued the following statement:

“The outlook for economic activity is expected to moderate with non-hydrocarbon growth projected at 3.4 percent in 2015 amid lower oil prices and an appreciation of the real effective exchange rate. Sales prices in the real estate market have stabilized, but increases in rents more than offset the dampening effect of U.S. dollar appreciation on imported prices, pushing up inflation, which is expected to reach 3.8 percent on average in 2015.

“The UAE has benefitted from building up large external and fiscal buffers over the years thanks to its hydrocarbon wealth. However, with the decline in oil prices, the fiscal balance this year is projected to turn negative for the first time since 2009 to record a deficit of 2.3 percent of GDP, and fiscal expansion over the last few years has increased vulnerability to oil prices and moved the fiscal position away from the level consistent with inter-generational equity. The current account surplus is also projected to decline substantially, to 4.1 percent of GDP.

“Against this backdrop, the macroeconomic policy mix should focus on fiscal consolidation, while maintaining the peg and supporting conditions for credit growth. With large buffers, fiscal consolidation should be gradual and designed in a way to minimize its growth impact. It should preserve investment spending, control the public wage bill, phase out subsidies while strengthening safety nets, reduce transfers to Government Related Entities (GREs), and mobilize more non-hydrocarbon revenues. The authorities could also build on their success in fiscal policy coordination to develop a consolidated medium-term fiscal framework and strengthen the budgeting process.

“The banking sector is resilient and has enough capital and liquidity buffers to withstand an adverse shock. It is also well prepared for the ongoing transition toward Basel III capital and liquidity requirements, which need to be timely implemented along with strengthening risk-based supervision and enforcing existing concentration limits. Sectoral macroprudential measures helped address real estate market risks, and illustrate the importance of establishing a full-fledged macroprudential policy framework. Continued repair of GREs balance sheets is also important to contain systemic risks, and further deepening of the domestic debt market could help reduce GREs’ reliance on external funding and bank lending.

“The UAE is one of the most diversified economies of the region and ranks favorably on competitiveness indicators. Structural reforms should aim at further diversifying the economy and accelerating private sector-led job creation for nationals. These could include: further opening up foreign direct investment, improving selected areas of business environment, transitioning toward a knowledge-based economy, easing access to finance for startups and SMEs, and creating the right incentives for entrepreneurship and job creation.

“The team met with H.E. Minister of State for Financial Affairs Obaid Humaid Al Tayer, H.E. Governor of the Central Bank Mubarak Al Mansoori, the heads of economy and finance departments of the emirates, as well as other senior officials and representatives from the business and financial community.

“The IMF team expresses appreciation for the authorities’ cooperation and candid discussions.”