The broader impact of the Iran war could weigh more heavily on the UAE's economy than a traditional oil shock, International Monetary Fund regional director Jihad Azour has said.
“The war … was sudden, severe, [and] very disruptive,” he said in an interview.
The IMF last week lowered its 2026 growth forecast for the UAE from 5 per cent to 3.1 per cent before rebounding to 5.3 per cent in 2027. Officials said that the true economic impact will be determined by the duration and scale of the conflict.
Those forecasts were part of a broader regional downgrade, where the effective closure of the Strait of Hormuz and Iranian attacks on infrastructure are expected to have an uneven impact on the economy of the Middle East.
The damage to energy infrastructure and the effective closure of the Strait of Hormuz have partly cut off the UAE's stream of income. Oil production in the UAE, an Opec member, fell 35 per cent to 2.37 million bpd in March, according to the exporter group's latest monthly market report.
Speaking to reporters on Friday, Saudi Finance Minister Mohammed Al Jadaan said it would take time for Gulf exporters to increase production because of the damage to infrastructure because of the war.
“I don't think the challenge today is how much production can be ramped up. It's really the logistics and the assurances that the market would need, that the waters are clear and there are no interruptions,” he said during a news conference.
The International Energy Agency has also said it could take up to two months for Gulf exporters to re-establish steady exports after the Strait of Hormuz was reopened.
Non-oil economic impact
The UAE has faced a barrage of Iranian attacks since the US and Israel launched co-ordinated strikes against Tehran on February 28.
Reem Al Hashimy, Minister of State for International Co-operation, told ABC's This Week on Sunday that Iran launched more than 2,800 missiles and drones since the war began, with more than 90 per cent of those targeting civilian infrastructure.
Mr Azour said attacks on UAE airports have also affected trade and tourism, while other non-oil activities, such as financial services, were also affected.
“A large part of the financing of trade with Africa and the [Gulf Co-operation Council], or Africa and the [Middle East and North Africa], is brokered through the financial institutions in the UAE.
“Therefore, it was a complex and very disruptive war,” he said.
S&P Global's most recent Purchasing Managers' Index showed the customer demand and new business growth slowed in March, while overall sales growth in the UAE remained positive.
Downside scenario
Mr Azour said the UAE's downside scenario is twofold: First is the duration of the war and whether or not a ceasefire provides stability. Secondly, the degree to which sectors within the economy have been scarred.
IMF regional director
“This would require some time in order to assess to which extent certain number of activities were affected and how the recovery will take shape,” he said
The Central Bank of the UAE this month injected about $8 billion into the banking system to help counter the effects of the Iran war, Bloomberg reported, quoting a note from Jefferies Financial Group. The central bank in March also introduced a resilience package backed by its foreign exchange reserves that would allow lenders access to liquidity.
Pointing to the coronavirus pandemic, Mr Azour said the UAE banking sector was “very well prepared” for a scenario in which it needs to respond quickly to provide liquidity lines and ensure the economic cycle remains functional in times of crisis.
“The governor of the central bank was sharing with us the other day that banks did not even need to use all the liquidity that the central bank provided them,” Mr Azour said.
He said the best way to address uncertainties is to have strong fiscal buffers backed by policies to help reduce the risks of scarring while also strengthening institutions, pointing to recent measures taken by the central bank.
“Those are important features that always help you reduce the downside of the shock and recover fast,” he said.
