The UAE is not suffering from a real deficit in its federal budget as revenue not normally does not include return from the country’s massive overseas assets and surplus oil income diverted by Adnoc to those funds, analysts say.
Since more than 80 per cent of the federal budget is financed by Abu Dhabi, the country’s main hydrocarbon producer, the federal budget could run only a nominal shortfall which could be easily covered by additional contributions.
“When they talk about a deficit in the UAE’s federal budget, they clearly mean a theoretical or, in other words, a nominal deficit,” a Saudi-based economist said. “This means there is no need to borrow to finance this deficit…as was the case in the past, the UAE had funded the gap in the federal expenditure through additional contributions from the emirates, namely Abu Dhabi.”
The UAE had issued its federal budget with a deficit in most years before it started to release a balanced one after 2005. But experts said the deficit in previous years was deliberately projected to discourage government offices from largely overshooting planned spending as part of a budget rationalisation policy.
Unlike other Gulf oil exporters, the UAE has not resorted to issuing bonds to support the fiscal shortfall as it had been financed through extra funds contributed by Abu Dhabi. Even the deficit in the greater UAE budget, the consolidated financial account (CFA), had also been funded from return on the country’s assets abroad, controlled mainly by the Abu Dhabi Investment Authority (ADIA), believed to be the world’s largest sovereign wealth fund.
Speaking to reporters this week, a the director general of the finance ministry said the 2011 deficit is not a concern to the UAE, adding that it is considering alternatives to cover the shortfall."It's a very minor deficit," Younis Al Khouri said. He said the 2011 budget projects spending of Dh41 billion compared with revenue of Dh38.05bn.
"We will be definitely looking at alternatives throughout the year, we are thinking of alternatives, he said without elaborating on those measures.
Experts said the federal deficit remains minimal as it accounts for only around 0.3 per cent of the projected GDP in 2011.
“You should not worry about a deficit in the UAE federal budget, which does not reflect the real financial situation of the country,” an Abu Dhabi banker said.
“The consolidated financial account represents the real picture…this budget had run massive deficits in the past but it was easily covered by external assets…this is because this budget does not calculate return from those assets and any surplus earnings channeled by Adnoc to those assets….another factor is that the UAE’s oil income is expected to be higher in 2011 due to strong oil prices.”
High oil prices over the past years have tempted the UAE to boost spending in both its federal budget and CFA and the trend gained pace after the 2008 global fiscal crisis, which jolted the economy of the UAE and other Gulf nations.
Over the past 10 years, the UAE’s federal expenditure has grown by around seven per cent annually and the bulk of the increase was after 2005, when oil prices began their rapid rise, according to government data.
Revenues recorded slightly higher growth of around eight per cent and the federal budget has ended without deficit in the past five years in line with plans to issue balanced revenue and spending, the Ministry of Finance’s figures showed.
From Dh22.91bn in fiscal year 1999, federal spending leaped to nearly Dh42.2bn during 2009, an annual growth rate of seven per cent. The report showed the 2009 budget recorded an increase of about 20.9 per cent, rising to Dh42.2bn from Dh34.9bn in the previous year.
The ministry gave no data for 2010 but the federal budget approved by the cabinet a few months ago showed there was a sharp slowdown in spending growth, as it edged up by only 3.3 per cent to Dh43.6bn.
As for CFA, spending hit an all time high of Dh289bn in 2009 as part of the country’s counter-crisis fiscal expansion measures despite lower oil prices.
The 2009 expenditure was way above the 2008 spending of Dh254bn although oil prices in 2008 were nearly 58 per cent higher than in 2009.
In a report on the CFA, which comprises the federal budget and spending by each emirate, the Abu Dhabi-based Arab Monetary Fund (AMF) cited official UAE government figures as showing revenue in 2009 plunged to around Dh292.6bn from a record high of Dh450.3bn in 2008.
It said the decline was a result of a sharp fall in hydrocarbon export earnings to nearly Dh217.5bn last year from a peak of Dh362.1bn in 2008.
“Despite the sharp fall, the UAE consolidated finance account recorded a surplus of around Dh3.5bn in 2009…this is compared with a record budget surplus of nearly Dh197bn in 2008,” the report said.
The UAE has not yet released budget details for 2008 and 2009 but official data for its CFA in the past four years showed it has recorded massive surpluses. The surplus stood at around Dh75bn and Dh69bn in 2006 and 2007 respectively and was achieved despite a steady rise in actual spending.