IMF boosts economic growth forecast for the UAE

The Washington-based organisation said that while overall growth is expected to remain unchanged in 2011 at 3.25%, non-oil GDP growth is projected to accelerate from 2% in 2010 to 3.25% in 2011, reflecting 'strong tourism, logistics, and trade in Dubai; and large public investment spending in Abu Dhabi'.

The IMF noted that although international food prices have risen, CPI inflation in the UAE is expected to remain moderate at four percent, as rents continue to decline. At the same time, 'higher oil prices are contributing to a marked improvement in the fiscal position and balance of payments', it added.

"The economic recovery is gaining strength and this is supported by a favourable global environment with high oil prices..." the report said. However, 'risks to recovery remain', the IMF warned, noting that the oversupply of property in Dubai and the uncertainty regarding its size will continue to weigh on growth.

Political unrest may curb economic growth

The report also indicated that economic spillovers from regional events could weigh on the UAE's growth. Political unrest has swept across the Middle East and North Africa in the past few months at varying degrees in Egypt, Libya, Tunisia, Yemen, Bahrain, and Oman. Fears of oil supply disruptions caused by the unrest have pushed crude prices to 30-month highs.

The IMF also warned that the current repricing of political and sovereign debt risk in the region could result in "more challenging market conditions" which could impact private and state-owned firms. State-controlled companies played a key role in the property crash in Dubai, which needed a $20bn bailout from neighbouring emirate Abu Dhabi to meet debt obligations.

Against this backdrop, the IMF urges the UAE to develop macroeconomic policies that support the recovery and strengthen the economy's resilience to future shocks. 'To this end, the government should avoid contracting the fiscal stance to ease economic recovery, while the central bank's monetary stance should remain accommodative,' the report said.

The IMF also said the UAE should support its government-backed firms through write-offs of bad assets and improved financial transparency. It also calls for monitoring the risks posed by these entities more closely. 'The authorities have already taken some steps towards better debt management practices, and these should be built upon,' the IMF suggested.

Meanwhile, although the UAE's banking sector remains resilient to financial shocks thanks to capital support from the government and higher earnings, non-performing loans have doubled since the onset of the financial crisis, the IMF noted. The central bank "should continue to ensure that banks provision adequately, particularly in light of increasing provisioning needs on Dubai GREs," it said.

The UAE also needs to monitor the performance of non-performing loans and encourage banks to retain more earnings to handle potential risks in the medium term, the report added.