UAE economic recovery gains momentum on swift action and policies, IMF says

The Washington-based lender expects growth to accelerate to 3.5% in 2022, with the non-oil economy expanding 3.4%

The recovery of the UAE's economy has gathered momentum on the back of a rebound in tourism, Expo 2020 Dubai and supportive macroeconomic policies. AFP

The UAE's economic recovery is gathering momentum due to the country's swift response to the Covid-19 pandemic and several macroeconomic policies that are hastening the rebound in tourism and domestic activity related to Expo 2020 Dubai, the International Monetary Fund said.

“The UAE moved quickly to address the health and economic effects of the pandemic. Widespread testing and containment measures helped limit the initial spread of the virus, while early vaccination efforts have resulted in vaccination rates among the highest globally,” the Washington-based lender said after the conclusion of its executive board's consultation with the Emirates.

“Fiscal and macro-financial support have provided relief to hard-hit sectors, SMEs [small and medium enterprises], those in need, and the financial system over the past year and half, and some measures have been extended.”

High oil prices have helped fiscal and external balances of the Arab world's second largest economy to improve, the fund said.

Crude prices are at their highest since 2014 and have been edging close to the $100 a barrel mark in recent weeks, due to tighter supply, growing demand, production constraints and geopolitical tension related to Ukraine.

The UAE introduced economic stimulus measures worth Dh388 billion ($105.65bn) to offset the impact of the pandemic. The stimulus included the UAE Central Bank's Dh50bn Targeted Economic Support Scheme to boost liquidity in the financial and banking sector.

Last month, the banking regulator announced it was extending by support measures aimed at helping lenders to mitigate the effects of the pandemic and back the country's continued economic recovery.

Relief measures related to banks' capital buffers, liquidity and stable funding requirements were extended up to June 30 for all lenders operating in the UAE.

The IMF estimates that the UAE's economy grew 2.2 per cent in 2021, driven by a 3.2 per cent expansion in the non-oil sector.

The fund expects growth to accelerate to 3.5 per cent in 2022, with the non-oil economy expanding 3.4 per cent. The Central Bank estimates the economy will grow 4.2 per cent in 2022, higher than a previous forecast of 3.8 per cent.

The UAE’s economy is expected to grow 4.9 per cent in 2022, according to Japan's Largest lender MUFG, while Emirates NBD forecasts an expansion of 5.7 per cent and Abu Dhabi Commercial Bank estimates 5 per cent, supported by strong oil sector growth. Emirates NBD estimates the non-oil economy growing 4 per cent, while ADCB forecasts 3.5 per cent growth.

Inflation is forecast to rise to 2.2 per cent this year from 0.6 per cent in 2021, according to the fund's estimates.

The UAE’s debt levels remain relatively low at under 40 per cent of gross domestic product and the fund expects a slight fiscal deficit of 0.2 per cent of GDP this year, after the gap narrowed to an estimated 0.7 per cent of GDP in 2021. The UAE is expected to record a small surplus by 2024.

“These improvements reflect revenue gains from current and expected higher oil prices and stronger economic growth alongside modest fiscal reform efforts,” the fund said.

“Higher oil prices will also benefit the current account balance, which is projected to increase to 10 per cent of GDP in 2021, in line with pre-crisis levels, and remain positive at around 8.5 per cent of GDP in the medium-term.”

Banks remain adequately capitalised and growth is expected to accelerate on the back of structural reform efforts, increased foreign investment and rising oil production, the fund said.

UAE lenders, including First Abu Dhabi Bank, Emirates NBD and Dubai Islamic Bank, among others, have all reported higher 2021 profits as the country’s economy recovers from the pandemic.

They also stand to benefit from an expected gradual rise in interest rates this year, according to S&P Global, which expects the US Federal Reserve to raise rates six times in 2022 starting in March, and five more times in total in 2023 and 2024.

“Recent reforms to promote private sector growth and development are important to strengthen non-oil growth, boost productivity and attract foreign investment,” the fund said.

Going forward, the fund said careful prioritisation and sequencing of reforms is central to ensuring higher levels of future-diversified, sustainable and inclusive economic growth.