Federal budget to sustain economy

According to analysts, the national budget should sustain important infrastructure developments and help the economy.

On Tuesday, the Federal National Council approved a Government budget for this year of Dh42.2 billion ($11.5bn), which was 21 per cent higher than last year's allotment.

A 21 per cent increase in Federal Government spending this year is expected to sustain infrastructure development across the nation in the face of slowing economic growth and the slump in oil prices. Fears that rising government spending would stoke inflation have subsided now that the effects of the global economic slowdown are being felt in the Emirates, and governments across the world are introducing extra spending packages to revive growth. On Tuesday, the Federal National Council approved a budget for this year of Dh42.2 billion (US$11.48bn). Although federal spending comprises only about one fifth of total government spending in the country, with emirate-level governments accounting for the rest, the increase shows that the economy is able to maintain growth in spending on infrastructure and education, even during tough economic times. "It means that important infrastructure projects will be sustained," according to Said Wafai, the head of strategic corporate affairs at Ajman Bank. "It will have a positive impact on the economy and will help us get through the short-term difficulties from low oil prices." Some details of the federal budget are not reported, such as exactly how the funds will be spent, and their sources. Abu Dhabi, the wealthiest emirate, contributes the largest share of the federal budget, about Dh17bn. However, according to Moody's Investors Service, the emirate also contributes an additional undisclosed amount to the Federal Government for defence and security spending, which increased markedly last year. The only other emirate to contribute directly to the federal budget is Dubai, which is expected to give about Dh1bn. The rest of the federal funds come from various sources, including returns on investments in local companies such as Etisalat, which contributes 50 per cent of its profit to the Federal Government annually. Etisalat's estimated profit for last year was Dh9.46bn. The bulk of the federal budget spending goes to the five emirates excluding Abu Dhabi and Dubai, since they have fewer sources of income. Historically, only Abu Dhabi and Dubai have contributed to the budget, although there were calls on Tuesday for other emirates to begin doing so. Overall, Abu Dhabi's local budget is about twice the size of its contribution to the federal budget, according to Moody's estimates. However, assessing the size of the emirate's public finances is difficult, given that it does not disclose the income it earns on its financial assets, or the entire sum of its profits from the Abu Dhabi National Oil Company, which are paid directly to the Government's funds management arms without going through the budget. Rapid increases in government spending have been a source of growth during the past few years, but have also been criticised as a cause of inflation. However, with inflation expected to slow this year in the UAE for the first time in at least four years, there have been fewer calls for more restrained government spending. From 2005 to 2007, total consolidated government expenditures grew by about 16 per cent a year, according to the International Monetary Fund. Spending is expected to have risen at an even greater rate last year, due to especially large increases in Abu Dhabi's local budget. With oil prices falling below $40 a barrel in recent weeks, some have voiced concerns that regional governments may find it more difficult to increase spending this year, even as doing so becomes more necessary for sustaining economic growth. According to Jassim al Mannai, the director general of the Arab Monetary Fund, such a cutback could hit large contractors particularly hard, since many of them rely on government infrastructure projects for income. "The governments are the real financiers of most of the [construction] companies. A reduction in government income will impact the governments' ability to spend in the same way," Mr al Mannai said last week. However, according to Moody's, even if oil stays below $30 a barrel for a sustained period, Abu Dhabi has saved enough of its windfall oil revenues to continue to spend at current rates for several years without having to borrow. Because Abu Dhabi is responsible for the largest share of UAE government spending, this makes the whole country better positioned than most of its neighbours to weather a period of sustained low oil prices. Oman also approved its 2009 budget yesterday, totalling 6.42bn rials (Dh61.28bn). If oil prices average $45.59 a barrel this year, the country should run a deficit of about 810 million rials, according to the Oman News Agency. [e-mail]