(EnergyAsia, March 17 2011, Thursday) — The UAE economy is expected to grow by 3.25% this year while inflation will remain “moderate” at 4% due to declining rents, said the International Monetary Fund (IMF).

The agency made this assessment following an Article IV consultation mission led by Taline Koranchelian to the UAE from February 27 to March 7. The delegation met with Minister of State for Financial Affairs Obaid Humaid Al Tayer, Minister of Economy Sultan Bin Saeed Al Mansoori, Governor of the UAE Central Bank Sultan Bin Nasser Al Suwaidi, other senior government officials as well as representatives from the business and financial community amid growing political unrest in the Middle East.

An IMF statement noted that the UAE economic recovery was gaining strength, supported by a favourable global environment but was subject to increased regional uncertainty.

It said that non-oil GDP growth is projected to accelerate from 2% in 2010 to 3.25% percent in 2011, reflecting strong tourism, logistics, and trade in Dubai and large public investment spending in Abu Dhabi, including through government-related enterprises (GREs).

It said: “Despite higher international food prices, CPI inflation is expected to remain moderate at 4% as rents continue to decline. Higher oil prices are contributing to a marked improvement in the fiscal position and balance of payments.

“Risks to the recovery remain, including from possible economic spillovers of regional events. For example, the current re-pricing of political and sovereign risks in the region could lead to more challenging market conditions, which may put pressure on the corporate sector, including the GREs. The excess supply of property in Dubai and the uncertainty regarding its size will continue to weigh on growth.

“Against this background, macroeconomic policies in 2011 should be geared towards supporting the recovery, and adjusting to economic spillovers from the unfolding events in the region. To this end, the government should avoid contracting the fiscal stance to ease economic recovery, while the central bank’s monetary stance should remain accommodative.

“The government’s plan to upgrade the infrastructure in the northern Emirates is a step towards more inclusive economic development. Replacing the current subsidies on water and electricity with explicit cash transfers to lower-income households should also be considered.

“The government intends to launch active labor-market policies to create jobs for nationals. Given the concentration of unemployment in the northern Emirates, launching these programs in these regions, while also relocating some of the government agencies in the north, would be important.

“The ongoing work to complete the restructuring of GREs will help lower borrowing costs. Throughout the process, due regard should be accorded to ensuring the viability of these entities through writing-off impaired assets. Debt rollover needs will remain substantial throughout the medium term and thus need to be monitored carefully. Clarifying and communicating information on GRE liabilities and their financing strategy would improve investor confidence.

“The banking sector remains resilient to shocks, thanks to high capital —including from the government— and strong earnings, although nonperforming loans have doubled since the crisis.

“The central bank has made important progress in strengthening its financial stability analysis, revamping the regulatory framework, and developing macro prudential policies. It should continue to ensure that banks provision adequately, particularly in light of increasing provisioning needs on Dubai GREs.

“It also needs to monitor the performance of restructured loans and encourage banks to retain more earnings to handle potential risks in the medium term.

“As the recovery firms up, policies should shift to strengthening the economy’s resilience to future shocks. Dubai’s debt restructuring experience and increased borrowings of GREs in other emirates call for monitoring the risks posed by these entities more closely.

“The high dependency on volatile hydrocarbon revenues underscores the need for strong demand management over the economic cycle. In the context of a pegged exchange rate regime, this requires mutually-supportive countercyclical fiscal and macro-prudential policies together with close coordination between various governments in the UAE.

“Progress has been made in establishing macroeconomic statistics. However, further efforts are needed for the timely compilation and dissemination of key statistics, including on national accounts, balance of payments, and fiscal accounts. This will also require harmonisation of methodologies across emirates.”