IMF forecasts slower growth for UAE in ’07

"Although growth is projected to decelerate somewhat in 2007, it is likely to remain high at about 8 percent," the Washington-based organisation said in its Regional Economic Outlook for the region.

"The projected deceleration reflects possible delays in construction and real estate projects owing to supply bottlenecks and rising costs. Over the medium term, however, the non-oil sector is expected to continue to grow at a relatively high rate of about nine per cent."

The report said the UAE should accelerate the pace of structural reforms to maintain its robust growth. "Earlier this year, the government announced plans for major strategic reforms aiming to further strengthen the economy's global competitiveness. Key reforms include the modernisation of the laws and regulations governing financial markets, foreign investment, market competition, and labour markets. It also seeks to enhance government efficiency and improve coordination between the federal and emirate governments. These reforms, together with efforts to bring down inflation, would help sustain the current high growth with macroeconomic and financial stability."

The report said the UAE has firmly established itself as a regional hub for international business and trade in the Middle East.

"Owing to market-friendly policies and an outward-oriented development strategy, the country has become the second largest economy in the Arab world after Saudi Arabia, and is increasingly playing an important positive regional role through foreign direct investment, expatriate labour, and financial services."

It observed that since 2003, the UAE has been growing at an impressive rate underpinned by rising oil revenues and a rapidly expanding non-oil sector. Its economy grew by 9.4 per cent in 2006, with oil production rising by about eight per cent and most private sector activities growing at double-digit rates.

"The driving force behind the growth of non-oil sector has been the substantial investments undertaken by private and quasi-government companies, which are expected to reach around $300 billion over the next 5-10 years."

The IMF report said the country's external position remained favourable, with the 2006 current account surplus reaching $36 billion, or 22 per cent of GDP, supported by high oil prices and strong performance of non-oil exports.

"The fiscal position has continued to strengthen, with the overall fiscal surplus increasing by about nine percentage points to around 29 per cent of GDP in 2006, which allowed for further buildup of government investment assets abroad."

The report said the fast pace of economic expansion and the large inflow of expatriate workers have put strains on existing resources, leading to housing shortages that have fuelled inflation (9.3 per cent in 2006) through sharp increases in rents.

"However, the increased supply of housing in 200708, together with the caps on rents introduced in Dubai and Abu Dhabi, is expected to dampen the pressure on consumer prices. Should inflation fail to decline as expected, further fiscal restraint would need to be considered to bring domestic demand growth in line with the economy's absorptive capacity. The success of these measures would require a higher degree of fiscal coordination between the emirates."