The International Monetary Fund (IMF) has projected that the public sector spending and lending in the UAE will drop by AED20.57bn ($5.6 billion) this year as both the government of Abu Dhabi and Dubai scale back their budget.
“Both Abu Dhabi and Dubai plan to balance their fiscal budgets accounts in the medium term,” wrote the IMF in a statement concluding a visit to the country in March.
“With the increase in development spending more than offset by other savings, Abu Dhabi’s planned gradual fiscal consolidation appears appropriate.”
Government spending is one of the key pillars of economic growth and helps spur demand within the economy. The IMF forecasted that economic growth will drop to 2.3% this year from 4.9% last year.
The public spending spree has come under tremendous pressure during recent years due to volatility in oil prices and Dubai’s persistent debt woes. The IMF estimated that the break-even oil price for the Government, at which it can balance its budget, has increased from $23 in 2008 to $84 this year, underlining the risks the UAE faces in the wake of fluctuating oil prices.
The Abu Dhabi Executive Council approved several multibillion-dollar infrastructure projects in January including Abu Dhabi International Airport’s Midfield Terminal project, 14 new healthcare facilities and several art houses including The Louvre. It also announced hiking the salaries of federal government employees effective from January which added an additional cost of AED3.4bn ($930million) to the federal budget.
Abu Dhabi plans a continued fiscal consolidation through 2017, while, on the other hand, Dubai planned to bring its fiscal accounts close to balance by 2014, the IMF said.
“Dubai’s continued fiscal consolidation is crucial for its medium-term sustainability given fiscal risks posed by contingent liabilities related to GREs (government-related entities),” the report noted.