The economy of the United Arab Emirates will grow at a lower rate this year due to the continuation of lower oil prices, a top official in the International Monetary Fund (IMF) said in Dubai on Tuesday, estimating oil prices to average $53 per barrel in the coming two-to-three years.
The economies of the six Gulf Cooperation Council (GCC) countries that include Saudi Arabia and the UAE, the Middle East’s two biggest economies, have been badly impacted by the steep decline in oil prices which began in 2014.
The prices of the important commodity almost halved between June and December 2014, but have been on a slow recovery path since the start of last year.
“For the UAE in general, growth in 2017 is expected to be at 1.3 percent and next year 3.4 and… last year it was 3.0,” Jihad Azour, the IMF’s director for the Middle East and Central Asia told reporters at a press conference in Dubai on Tuesday.
He said the UAE’s slowdown in growth this year was mainly due to the country’s decision to cut oil exports as part of an agreement late last year by members of the Organisation of the Petroleum Exporting Countries (OPEC) and other, major oil-producing states. The OPEC states include Saudi Arabia, Qatar and the UAE.
Abu Dhabi’s economy is expected to grow by only 0.3 percent this year, down from a growth rate of 2.8 percent in 2016, according to Azour, which is mainly due to the fact that its oil-based GDP is predicted to contract by 2.7 percent this year. However, he said the emirate’s economy is forecasted to grow by 3.2 percent in 2018.
“The non-oil sector in Abu Dhabi and Dubai is almost growing at the same speed, around 3 percent. Abu Dhabi, because of the size of the oil sector and the oil sector because of the OPEC-led agreement to reduce production and exports, went down this year. But it will recover next year,” Azour said.
The UAE’s Energy Minister Suhail al-Mazroui said on Monday that the UAE is committed to maintaining the existing oil production cuts, according to Reuters. The cuts were first agreed in November 2016, but have been extended to March next year.
Azour said the IMF predicts that oil prices will remain largely unchanged in the coming two-to-three years. “Our projections are showing that the oil price in the medium term in the next two-to-three years will remain around the same level of 50, 55, 60 dollars (per barrel), this is the range with an average that will stay around $53 (per barrel).”
VAT in Qatar and Kuwait
All six GCC countries agreed last year to introduce a new value-added tax (VAT) to diversify their economic income. But so far, only Saudi Arabia and the UAE have announced the details and the timeline for the new tax.
When asked about the position of Qatar with regards to the GCC’s VAT agreement and if the state will still be committed to introducing the levy even after its recent political rift with other GCC states, Azour said: “VAT is a domestic type of tax… therefore it is not depended on the rift that exist (s) diplomatically today between Qatar and other countries. I don’t see the link.”
Egypt, Saudi Arabia, Bahrain and the UAE severed political and transport ties with Qatar on June 4, accusing it of supporting terrorism – a charge Doha denies.
“The Qataris have already introduced certain numbers of fiscal measures to reduce their deficit. They have also beefed up their tax administration in order to be ready to implement the value added tax. I have no other information that go in the other direction,” he added.
As for Kuwait’s VAT position after Prime Minister Sheikh Jaber Mubarak al-Sabah tendered his resignation on Monday, Azour said he has not spoken with the Kuwaiti officials since the resignation news.
“Our discussions with the Kuwaitis were before the recent developments and during these discussions with the authorities, their commitment and the preparation to implement the VAT were ongoing. This is the only thing that I can say about this,” Azour said.
“I think we need to wait until the government is formed, the government (comes) up with its economic programme to see if the VAT is still in their plan,” he added.
The IMF has urged in its most recent economic outlook report released on Tuesday the oil exporting states to push ahead with more fiscal diversification polices to boost their economic growth and decrease their deficits.
Saudi Arabia, the world top exporter of oil posted a budget deficit of $98 billion in 2015, one year after the start of the sharp fall of oil prices. The deficit dropped to $79 billion in 2016.
“GCC countries, in fact all of them, are still committed to the Value Added Tax and they are preparing for its implementation,” Azour said.
The UAE and Saudi Arabia have also already implemented an excise tax on a number of products this year.
“Those types of tax reforms… are the way to have the right mix of fiscal policies and allow gradually the GCC countries to be less depended on oil,” he added.
The IMF estimated a real GDP growth rate for GCC states of 0.5 percent this year, increasing to 2.2 percent in 2018. It said growth in the region stood at 2.2 percent in 2016.
Azour said that the current growth rates need to increase to create more jobs in the region.
“Oil exporters need to translate some of their ambitious strategies and visions that were designed to allow them to diversify their economy outside oil into implementation, specifically to have well-sequenced plans,” Azour said.
“The level of unemployment in the GCC, as well as also in some specific countries, remain very high, especially (among) nationals,” he added.
According to Azour, the way forward for growth in the GCC lies in the region’s ability to accelerate structural reforms, improve the small and medium-sized enterprises’ access to finance and increase the engagement of the private sector in key projects, such as infrastructure projects.
International Monetary Fund figures and forecasts for real GDP growth, 2016-18
2016 2017 2018
Dubai 2.9 3.3 3.5
Abu Dhabi 2.8 0.3 3.2
OIL 3.5 -2.7 3.1
NON-OIL 2.8 3.2 3.3
UAE 3.0 1.3 3.4