Press Release No. 23/234

IMF Executive Board Concludes 2022 Article IV Consultation with United Arab Emirates

June 26, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation [1] with the United Arab Emirates.

UAE economic growth strengthened in 2022, benefitting from a rapid and effective COVID response, supportive fiscal measures, and the benefits of earlier social and business-friendly reforms. Overall growth is expected to reach 6.9 percent in 2022, with non-hydrocarbon GDP growth of 5.3 percent and hydrocarbon GDP is expected to grow by 11.1 percent in 2022, following the OPEC+ agreement.

Inflation has risen with global trends but is expected to ease to 3.4 percent in 2023. Fiscal and external surpluses are expected to remain high on the back of elevated oil prices. Banks are adequately capitalized and liquid overall, but nonperforming loans remain elevated, albeit down from recent peaks, and real estate prices have risen sharply in some segments. Major efforts have been advanced under the National AML/CFT Strategy and Action Plan to further strengthen the regulatory regime to ensure its effectiveness, in line with the enhanced monitoring under the Financial Action Task Force recommendations.

The economic outlook remains positive, supported by strong domestic activity. Overall GDP is projected to grow at 3.6 percent in 2023, with non-hydrocarbon growth of 3.8 percent driven by continued tourism activity and increased capital expenditure. Nevertheless, the outlook is subject to significant global uncertainties, including weaker growth, tighter financial conditions, and geopolitical developments. The implementation of enhanced UAE reform efforts poses upside risks to medium-term growth.

Strong reform efforts continue under the UAE 2050 strategies. Advancement on Comprehensive Economic Partnership Agreements (CEPAs) will boost trade and integration in global value chains and further attract Foreign Direct Investment (FDI). In addition, the benefits of artificial intelligence and digitalization and investments in enabling infrastructure will further support economic diversification, foster a smooth energy transition, and help address vulnerabilities from global decarbonization efforts. Long-term vulnerabilities from global decarbonization efforts are being addressed through commitments to climate initiatives and a balanced approach to energy transition.

Executive Board Assessment[2]

Executive Directors commended the authorities’ effective COVID response, timely policy actions, and structural reform implementation, leading to strong growth, further supported by high oil prices. However, in the context of significant global uncertainties and risks, Directors encouraged the authorities to further solidify the fiscal position and further strengthen the financial sector, diversify the economy, and continue implementing reforms necessary to achieve the UAE’s ambitious green transition goals.

Directors encouraged maintaining a prudent fiscal stance in the near term, while ensuring targeted support to those most in need and considering a well-communicated withdrawal of remaining crisis-related macro-financial support. They noted that additional fiscal reforms would broaden and diversify the revenue base and support a smooth adjustment to a lower carbon future. In this regard, Directors welcomed progress to enhance non-hydrocarbon revenue, including through the corporate income tax, and called for continued improvements to expenditure efficiency. They underscored the importance of embedding fiscal reforms in a credible medium-term fiscal framework, underpinned by stronger coordination of emirate-specific fiscal frameworks, including to support modest growth-friendly annual consolidation. Directors also stressed the importance of continuing efforts to improve fiscal transparency and strengthen governance and accountability by publishing general government, emirate- and federal-level fiscal data.

Directors stressed that ensuring financial system health is critical to guard against risks and foster medium-term growth. Although overall bank balance sheets remain healthy, continued close monitoring of financial stability risks and further strengthening of macroprudential frameworks is warranted, including given the high level of nonperforming loans, tightening financial conditions, and banks’ exposures to the real estate sector. Directors welcomed the major efforts under the National AML/CFT Strategy and Action Plan and encouraged continued actions to further strengthen the regulatory regime in line with the enhanced monitoring under the Financial Action Task Force. To further assess the resilience of the financial sector, they encouraged the authorities to request a Financial Sector Assessment Program update.

Directors welcomed the UAE’s ambitious structural reform agenda, including significant investment in digital and green initiatives to further advance diversification and support a smooth energy transition to a lower carbon future. These efforts could be further enhanced with additional measures to improve the business environment and modernize the labor market, including by continuing to encourage greater female participation. Directors welcomed the ongoing development of trade and economic partnerships, which are expected to boost the UAE’s productivity and competitiveness over time. They encouraged continued improvements in the collection and timely dissemination of economic data to buttress the authorities’ reform efforts.