The UAE is set to post its first fiscal deficit since 2009 because of lower oil revenues, but it can avoid any serious economic slowdown, the International Monetary Fund said after annual consultations with UAE authorities.
The UAE’s consolidated fiscal balance is expected to swing to a deficit of 2.3% of gross domestic product in 2015 from a 5% surplus last year, the IMF said on Thursday.
Zeine Zeidane, who led the IMF mission, told Reuters the deficit posed no threat to the economy. He estimated that at today’s oil prices, the UAE could keep spending at current levels for at least 30-40 years, drawing on its ample financial reserves. Brent crude is currently around $63 a barrel.
But he said UAE authorities were considering ways to consolidate spending as a matter of prudence. The IMF predicts a 2.2% fiscal surplus next year.
“It would be a very gradual fiscal consolidation, with no significant impact on economic growth,” Zeidane said.
The IMF is urging the UAE to consider slowing growth in current spending — expenditure in areas such as wages and raw materials — while expanding its revenue base with new taxes.
One option would be to introduce a value-added tax, which Gulf nations have been discussing. Zeidane said it would probably have to be adopted region-wide to avoid smuggling and distortions to individual countries’ economies.
He also said the Fund had suggested to the UAE that it consider introducing excise taxes and a uniform corporate tax for both local and foreign companies. At present there is little corporate taxation outside the oil sector, apart from a 20% levy on foreign banks in Dubai.
A UAE corporate tax could be introduced at a lower rate, initially to accustom the government to running a national tax system, Zeidane suggested. He declined to say how likely the government was to impose such a tax.
The IMF predicts GDP growth will slip to 3.0 percent this year from 4.6% in 2014, but edge up to 3.1% next year.
Source: Trade Arabia