UAE inflation expected to fall this year, Central Bank says

The Arab world's second-largest economy was among the fastest growing in the world in 2022, enjoying strong GDP growth and moderate inflation

Industrial development is a key plank of economic policy in the UAE. Photo: Emirates Steel

Inflationary pressure in the UAE, which bucked the global trend last year, is expected to decline further in 2023 as the Arab world's second-largest economy maintains its robust growth momentum, the UAE Central Bank has said.

“Inflation in the UAE remained significantly below the 8.8 per cent international average [last year],” the Central Bank said.

This was partly due to its decision to align with the US Federal Reserve's strategy and raise its policy interest rate to 4.4 per cent, as well as the dirham's appreciation, said Sheikh Mansour bin Zayed, Vice President, Deputy Prime Minister and Minister of the Presidential Court, in the annual report.

Sheikh Mansour is also chairman of the Central Bank board.

The UAE was also one of the world’s fastest-growing economies in 2022, enjoying strong gross domestic product growth and moderate inflation, the regulator said.

Helping to achieve this were rising energy prices and a dynamic non-oil related economy, including a surge in property investment and tourism, the Central Bank said.

“My assessment is that 2022 demonstrated the CBUAE’s vigilance to unprecedented macroeconomic challenges and emerging risks whilst its proactive responses supported economic stability and the dynamism of the economy,” Sheikh Mansour said.

Central banks around the world have raised interest rates since last year to control fight rapidly rising inflation.

Earlier this month, the Fed bumped up the policy rate for a third consecutive time this year by 25 basis points amid a tight labour market.

The US regulator has continued to try to bring inflation down to its target range of 2 per cent after prices hit a four-decade last year.

This is the 10th rate increase since it started tightening monetary policy in March 2022, pushing rates in the world's biggest economy to their highest since 2007, shortly before the start of the 2008 global financial crisis.

Most central banks in the six-member GCC bloc follow the Fed's policy rate moves due to their currencies being pegged to the US dollar, except for Kuwait which links its dinar to a basket of currencies.

Overall, the UAE’s real GDP surged by an estimated 7.6 per cent last year, about double the increase recorded in 2021.

It is expected to grow by 3.9 per cent this year and accelerate further to 4.3 per cent in 2024.

In contrast, global GDP growth nearly halved to 3.4 per cent in 2022, from 6.2 per cent in 2021.

Strong economic activity in the UAE last year was underpinned by a rise in oil production, as well as a significant improvement in the non-oil sector as the economy returned to its pre-coronavirus pace of growth, bolstered by proactive reform measures, the Central Bank said.

While the oil sector is estimated to have made a strong rebound of 10.1 per cent in 2022, from almost zero growth in 2021, it is expected to grow by 3 per cent to 3.5 per cent this year and the next, respectively.

Non-oil GDP growth, which accelerated to 6.6 per cent in 2022, from 5.8 per cent in 2021, is projected at 4.2 per cent this year and 4.6 per cent in 2024, the Central Bank said.

The UAE private sector continued to show resilience in 2022 as domestic consumption remained strong, supported by the significant rise in the labour force, it said.

However, real output growth is set to slow to 3.9 per cent in 2023, reflecting a decline in oil production, which will be partially offset by the robust performance of the non-oil sector, the Central Bank said.

In 2024, the regulator expects “upside risks” due to the “likely implementation of multiple structural reforms and strategies” to transform the UAE in to a well-diversified knowledge-based economy.

The country's high-value-added sectors and foreign direct investment will also support growth next year, it said.

The UAE had a fiscal surplus of Dh169.6 billion in the first nine months of 2022, up from Dh64 billion in 2021.

Government revenue increased by 35.6 per cent to Dh453.7 billion in the nine months to the end of September, while spending rose by 6.3 per cent annually to Dh273.1 billion.

The property, manufacturing and tourism sectors that drove non-oil growth last year will continue to underpin economic expansion this year, the Central Bank said.

Initiatives such as the Central Bank Digital Currency (CBDC) will remain a priority for the regulator as they empower financial inclusion, as well as support cross-border payments and the growth of the financial sector.

In 2022, the UAE Central Bank became one of the first regulators in the Mena region to host a real-value pilot use of wholesale CBDCs.

The pilot was conducted in conjunction with the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand and the Digital Currency Institute of the People’s Bank of China.

CBDCs are issued by states and considered as legal tender as they provide the same functions as conventional cash.

The Central Bank said it aims to provide secure cross-border CBDC payments through the controlled launch of mBridge by early 2024.

The launch will be held together with partnering central banks and the BIS Innovation Hub.