UAE inflation to drop this year: IMF

Inflation in the UAE is set to drop this year compared to last year while GDP growth is likely to accelerate over the medium term due to expected recovery in crude prices, according to International Monetary Fund.

“The growth outlook is expected to moderate in 2016 amid low oil prices, with non-hydrocarbon growth projected at 2.4 per cent due to sizeable fiscal consolidation, softer economic sentiment, and somewhat tighter monetary and financial conditions,” Zeine Zeidane, who led an IMF mission to visit the UAE and region, said in a note on Monday.

“With expected improvements in oil prices, growth is projected to pick up over the medium-term, also supported by increased investment ahead of the World Expo2020 hosted in Dubai, and more favourable external conditions. Average inflation is expected to decline to 3.2 per cent in 2016 from 4.1 per cent in 2015,” he added.

Zeidane believes that the UAE’s banking sector is strong enough to withstand severe shocks – thanks to strong liquidity and capital buffers.

“The banking sector remains resilient and has enough liquidity and capital buffers to withstand severe shocks. The central bank actions to ensure adequate provisioning, phase in Basel III liquidity and capital requirements, and strengthen corporate governance are steps in the right direction and should be pursued,” Zeidane said in the note.

The IMF team praised UAE authorities’ vision to diversify economy away from oil.

“The authorities’ vision to further diversify the economy away from oil is commendable. Diversification requires stepping up structural reforms aimed at further developing the private sector, transitioning towards a knowledge-driven economy, and promoting export sectors.

“These could include: improving selected areas of business environment; developing adequate public-private partnerships frameworks; relaxing restrictions to foreign ownership; fostering competition, promoting innovation, including through appropriate financing tools as planned by the authorities, easing access to finance for start-ups and small and medium enterprises (SMEs), and creating the right incentives for entrepreneurship and job creation, notably for women.”

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