The Federal National Council has passed a new public debt law on Tuesday, marking a key step toward the issuance of the Gulf Arab state's first sovereign bond.
The legislation, which needs presidential approval to become law, limits government debt to 25 per cent of the country's gross domestic product, or Dh200 billion ($54.45 billion).
An earlier version of the legislation discussed last year had said public debt should not exceed 45 per cent of GDP, or Dh300 billion.
The bill provides a legal framework for creating a government bond market in the UAE with public debt instruments traded on one or more of the country's three financial markets.
"The bottom line is that the country needed the law not just to plan for a sovereign bond issue but also to revive the local currency debt market," said Abdul Kadir Hussain, chief executive of Mashreq Capital.
"As such, it is a positive start and hopefully it will help develop a local bond market in the region."
The UAE has said it will consider a federal bond after the passage of the debt law and the creation of a debt management office.
Under the new law, the UAE will create a public debt bureau to advise the government on debt issuance and work with the central bank on issuing and selling government bonds and other financial instruments.
"What's the use of the public debt bureau if it doesn't monitor all government guarantees and any government debt?" said Obaid Humaid Al Tayer, minister of state for finance.
The law also stipulates that debt issued for infrastructure projects should not exceed 15 per cent of public debt.
The country will look at a range of options, including using existing reserves or returns from government investments to finance a budget deficit of around Dh3 billion ($816.8 million) for 2011, Al Tayer said.
"We will study the budget's revenues," Al Tayer said. "The council has approved the public debt law, but I don't say that we will do this thing or that before we discuss the options in the cabinet."
The minister said returns from the Emirates Investment Authority (EIA), a sovereign wealth fund that manages the federal government's stakes in a number of key corporations including the Gulf's second biggest telecoms firm Etisalat, could be also used to cover the deficit.
When asked if the UAE would issue bonds to finance the deficit, Al Tayer said, "only if necessary, it has not been discussed up to now".