Q&A: Sultan Al Mansouri, the UAE Minister of Economy, and his views on VAT, infrastructure spending and the investment law

Sultan Al Mansouri, the Minister of Economy, talks about the outlook for growth, his views on VAT, infrastructure spending and the long-anticipated investment law.

Sultan Al Mansouri, the Minister of Economy, said that the VAT is expected to yield Dh12 billion in the first year of its implementation and up to Dh20bn during the second year. Victor Besa for The National
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Sultan Al Mansouri, the Minister of Economy, talks about the outlook for growth, which will be driven by investments in key sectors such as infrastructure. He also outlines the projected revenue the government expects to generate from the levy of value-added tax (VAT) in 2018 and discusses various laws the ministry is working on, such as the much anticipated investment law.

What is the outlook for growth in 2017?

The growth outlook for the UAE economy remains positive, thanks mainly to its all-encompassing economic diversification policy and national sustainability plan with far-reaching benefits. We are confident that the country’s economy will remain resilient as a result of key economic gains of the previous years – further reinforcing its ability to overcome challenges, optimise opportunities, influence various global economic variables and achieve competitiveness. A rising number of investors and businesses worldwide are increasingly taking notice of the UAE for all its potentials on all fronts and exceptional business-friendly climate. We expect to see the same level of confidence, if not higher, this year. In line with UAE Vision 2021, key government programmes and initiatives, as well as our leadership’s vision of an economy based on knowledge, innovation and strong human resources, will further bring in more growth. Moreover, the UAE’s expansion and revitalised sectors will be influenced mainly by modern infrastructure development, which will stimulate investment and business growth; improved legislative framework; enhanced administrative and economic environment in accordance with globally recognised standards; and strategic development projects.

We have already laid the foundation to ensure a wider role for knowledge, innovation, advanced technology and scientific research in the development process. Additionally, we have supported and encouraged efforts to build human capital potential; worked towards reinforcing national experiences; strengthened the value added to non-oil sectors to increase productivity; and formed important economic, trade and investment relations with regional and international countries. Our increased trade relations with key Asian and African economies, particularly in the field of re-export, are expected to contribute to the UAE’s overall healthy economic performance.

Which sectors will fuel growth in 2017?

Investment spending on strategic projects will further grow this economy in 2017, including those related to the Higher Policy for Science, Technology and Innovation. The 100 initiatives in health, education, energy, transport, water and technology sectors are part of these programmes and an estimated Dh300 billion has been allocated specifically for them. Additionally, spending on scientific research initiatives will increase three-fold until 2021. Vital sectors that are considered engines of economic diversification and knowledge economy will also fuel development. These include the physical, social and electronic infrastructure, metro networks and [Etihad] rail, and expansion of land, sea and air transport sectors. Additionally, we have our robust and growing trade, free zones, logistics services, financial services, aviation, tourism and industry, aluminium, petrochemicals, mining industries, steel, real estate and construction, to name a few. The flourishing Islamic economy, as well as huge investments being made in relation to Dubai’s hosting of the World Expo 2020, will continuously drive growth in 2017.

How is the UAE coping with the low-oil price environment?

The UAE has demonstrated its strong ability to withstand the effects of oil price fluctuations thanks to its macroeconomic policies. In fact, from 2015 to 2016, the UAE still spent on development projects and plans against the background of decreasing oil revenue. With its economic and financial policies pursued during the past two years, the UAE hurdled challenges to achieve financial and monetary stability and sustainable growth. Reducing dependence on oil revenue, finding other sources of income, rationalising current spending and enhancing investments in strategic sectors and projects are predicted to bring further growth for the non-oil sectors, which are forecast to reach 4.6 per cent by 2020.

The IMF has said austerity is impacting growth. What are the minister’s views on maintaining growth in an era of austerity?

A recent study shows that austerity policies can do more harm than good. The consensus among economists across the globe is that austerity policies increase instability and undermine growth. These economists rejected the notion that austerity could be good for growth by boosting the confidence of the private sector and investors. There is extensive economic literature illustrating how public capital formation can make a large positive contribution to growth. The economic logic is that public capital – such as highways, airports, and other infrastructure – has a multiplier effect that raises the productivity of private capital. Additionally, public capital can contribute to a higher standard of living and improved quality of life by saving individuals' time. This positive growth effect means deficit-financed public investment can create a "virtuous circle". The logic of the circle is as follows: deficit-financed public investment raises demand and private sector productivity. That raises growth, which generates higher income and tax revenue. That in turn creates fiscal space, helping resolve the long-term budget concerns. In contrast, a fiscal austerity agenda could transform that pattern into a vicious circle. Thus, fiscal austerity would lower public investment, thereby lowering growth, reducing fiscal space and compelling more fiscal austerity. Following this logic, about 21 per cent of the 2017 UAE Cabinet-approved budget of Dh48.7 billion, or Dh10.2bn, has been earmarked for the education sector; 8.6 per cent, or Dh4.2bn, to health care; 6.5 per cent, or Dh3.2bn, to social development; and 3.2 per cent, or Dh1.6bn, to housing. This shows that the Cabinet is determined to continuously carry out its ambitious development projects in vital sectors such as health care, social development, economic development, environment protection, culture and infrastructure in line with the UAE Vision 2021. It also reflects the UAE's flexible and successful policies to diversify its economy in a bid to decrease its reliance on oil revenues. Moreover, we are now in the last stages of signing the value added tax (VAT)-related agreements with other GCC countries, which we plan to implement by 2018. VAT is expected to yield Dh12bn in the first year of its implementation and up to Dh20bn during the second year. VAT also constitutes an additional meaningful source of financing for policies that seek to foster economic growth in the next development phase. As per the advice of the IMF, the UAE has removed subsidies on petrol and diesel after previously reducing subsidies on electricity and water. The ultimate goal is to maintain a strong fiscal consolidation without altering the implementation of policies aimed at consolidating the growth of our economy. It must be recalled that the latest IMF report shows that although the economic activity was expected to moderate in 2016, over the medium term, non-hydrocarbon growth is forecast to increase to above 4 per cent as the dampening effect of fiscal consolidation will be offset by improvements in economic sentiment and financial conditions. As oil prices rise, we expect to witness a pickup in private investment in the run up to Expo 2020 and on the back of stronger external demand. In the next development phase, the Cabinet will give priority to growth-orientated policies that focus on upgrading the quality of education, promoting innovation and entrepreneurship and facilitating small and medium enterprises' (SMEs) and start-ups' access to finance, notably through the approval of the bankruptcy law and further broadening [Al Etihad] credit bureau's coverage.

What are the estimates for a boost in investments after the ratification of the investment law?

The new foreign investment law paves the way for a 100 per cent foreign ownership in specific sectors approved by the government. This perpetuates an open-door policy adopted by the UAE to attract foreign investors as part of the government’s efforts to make it easier for regional and international businesses to enter the local market. It is expected that this law will help create significant investment opportunities in the coming years, especially in the industrial sector. The industrial sector is considered one of the main engines of a post-oil economy, in addition to contributing to the local business community’s development and competitiveness.

What other laws is the Ministry working on and why are they important?

Currently, we working on upgrading a number of key legislations, especially with regard to the development of the country’s economic infrastructure and investment environment. These include federal laws on commercial fraud, arbitration and anti-dumping, preventive and countervailing measures, as well as the federal laws amending Federal Law No. (17) of 2002 on regulating and protection of industrial property patents and industrial designs and amending certain provisions of Federal Law No. (1) of 1979 on regulating the industry.

What is the outlook for inflation in 2017 vs 2016?

According to the Federal Authority for Competitiveness and Statistics report, the actual inflation rate in the UAE stood at 4.1 per cent in 2015 and was expected to fall back to 3.2 per cent in 2016. Expectations indicate further decline in inflation rates in 2017 to reach 2.7 per cent given the stability of the local currency.

How will the new changes to the SME law impact the sector?

Many steps were taken in 2016 to develop the SME sector, especially in terms of organising, supporting and encouraging growth in this sector. Other steps include increasing incentives, facilities and benefits offered to SMEs owners and local entrepreneurs. Perhaps the most prominent of these steps is the Cabinet’s decision to establish one common definition for local SMEs to provide appropriate facilities and incentives in coordination with all federal and local authorities and the private sector. Another is the approval of the executive regulations to the federal law on SME projects. The law defines the mechanisms of providing incentives and facilities to local entrepreneurs, as well as the progress made in institutionalising the work within the sector and enhancing cooperation between SMEs and the Emirates Development Bank, which focuses on funding SMEs. In addition, the law focuses on the challenges facing the sector, particularly in finance and credit facilities as well as licences and exemption from guarantees and fees. Also, the Ministry of Economy is working on collaborating with various countries to extend privileges to domestic SMEs, enhance their access to foreign markets, open up new markets for their products, services and technologies and increase their competitiveness and sustainable growth. All these efforts, which emphasise innovation, technology and knowledge, are expected to drive industry growth this 2017. Per estimates, SMEs contribution to GDP is more than 60 per cent, in which the target set by the indices of the National Agenda is 70 per cent by year 2021. However, there are no statistics that will accurately represent the sector’s real contributions to the country’s GDP due to the absence of a tax system in the country. The Ministry of Economy is making intensive efforts in cooperation with all concerned federal entities and local authorities to bridge this gap.

Which sectors are to benefit from the UAE’s industrial policies?

In the context of the federal government’s vision of establishing a competitive, diversified and knowledge-driven economy led by qualified UAE nationals, the government’s industrial policies aim to enhance competitiveness and diversity of national industries through the promotion of knowledge and innovation. The government is working towards creating an industrial environment that can lead to advanced and value-added industries based on knowledge, innovation, modern technology, scientific research and development, and can empower sustainability-enablers via policies accelerating industrial growth. Each emirate has a set of industrial strategies according to its specific and unique components and needs. Some of the key factors included in these strategies are urban planning to enhance the stocks of land, infrastructure, logistics and energy supply, as well as various industrial resources and raw materials. The Ministry of Economy, in cooperation with its partners from the [other] federal, local and government entities and in collaboration with the private sector, is working to support the local industrial strategies to ensure their success within the framework of integration and unity at the federal level. Ultimately, however, the main player in this equation is the investor, who decides which industry and field to focus on.


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