The UAE, the Arab world's second-largest economy, has the capacity to slow down the pace of fiscal consolidation to offset a potential deceleration of the economy because of low oil prices, according to the Institute of International Finance.
The UAE economy, the most diversified in the Arabian Gulf region, is forecast to slow to 1.4 per cent in 2017 from 3 per cent last year, but expand at 2.8 per cent in 2018, the Washington-based institute said.
Non-oil growth is also expected to pick up this year to reach 3 per cent and 3.5 per cent in 2018, thanks to an increase in investments and non-oil exports of goods and services.
The UAE economy will slow down this year due to the lower oil production as being a member of Opec, it is obliged to adhere to an output cut that has been extended until March next year. The agreement between Opec and a group of oil producing countries led by Russia is trimming 1.8 million barrels of oil a day to prop up prices in an oversupplied market.
Brent gained 2.39 per cent on Friday to close at US$62 a barrel, its highest level in more than two years on optimism that the global oil deal will be extended beyond March.
On the fiscal consolidation front, "the UAE with a large financial buffer can afford more gradual pace", adjustment to reduce the impact of weaker crude prices on the economic growth, according to the institute.
“The adjustment this year and in 2018 focuses more on mobilisation of non-oil revenues (including fees, excise taxes, and introduction of VAT).”
The UAE introduced in October excise tax on energy drinks, tobacco and sugary drinks and plans to levy a 5 per cent value-added tax on January 1 to help shore up dwindling government revenue .
The institute is projecting the consolidated fiscal deficit of the UAE will shrink to 3 per cent of the GDP in 2017 from 4.4 per cent last year.
The increase in non-oil revenues will help reduce the UAE’s fiscal breakeven oil price to $58 a barrel in 2018 from $60 a barrel this year, offsetting any adverse impact from a potential increase in consolidated spending, the institute said.
The projections from the institute on economic growth next year echo with those of the IMF, which said the UAE's overall growth will slow to 1.3 per cent this year, but accelerate in 2018 to reach 3.4 per cent.
The economic growth of Abu Dhabi, which accounts for about 6 per cent of the world’s proven oil reserves, will catch up with Dubai next year, as government-led infrastructure projects provide a boost to the capital’s non-oil economy, according to Jihad Azour, the director of the IMF’s Middle East and Central Asia department.
The IMF is projecting growth of 3.3 per cent for Dubai's economy this year, while Abu Dhabi is forecast to expand by 0.3 per cent because of its heavy reliance on oil.
Dubai's economy, which recorded 2.9 per cent growth last year, is forecast to expand 3.5 per cent in 2018, while Abu Dhabi is estimated to grow at a pace of 3.2 per cent compared with 2.8 per cent last year.
The World Bank is forecasting growth of 1.4 per cent for the UAE this year, but a pickup of 3.1 per cent next year.