UAE government revenues projected to fall by 22.4% this year

Tuesday, Jul 28, 2015

Dubai: The consolidated government revenue of the UAE is expected to fall by 22.4 per cent this year, on account of the sharp decline in oil prices and a reduction in the revenues of local governments, according to the latest quarterly economic bulletin on the Central Bank of UAE.

In addition to falling oil prices, other revenue streams such as taxes, mostly fees paid by hotels and restaurants, fees on foreign banks’ profits, and royalties on oil and natural gas, are expected to fall by Dh92 billion or 33.4 per cent this year.

In response to the decline in revenues, the central bank is projecting a decline of 4.2 per cent in the consolidated UAE government spending from Dh480.8 billion in 2014 to Dh460.6 billion this year.

The central bank report said following an expansionary fiscal stance in 2014 when public expenditure increased by 11.3 per cent, first steps in a gradual fiscal consolidation is expected to start in 2015, with a decrease in public spending of local governments by Dh21.4 billion or 5.5 per cent, reflecting a decrease in subsidies and grants totalling Dh17.4 billion, due to the partial removal of subsidies of water and electricity in Abu Dhabi, with the aim of taming waste and reinforcing fiscal consolidation.

According to central bank estimates, the UAE’s consolidated budget is projected to turn into deficit in 2015 reaching Dh30.6 billion or 2.4 per cent of Gross Domestic Product (GDP) and 8.6 per cent of Non-oil GDP in 2015. While the federal budget is expected to remain balanced in 2015, the underlying deficit of the consolidated budget is expected to come from local government’s budgets. Moving ahead with the fiscal consolidation and deficit control, further reduction in subsidies and grants, particularly by local governments are expected this year. According to the central bank report, subsidies are projected to decline by 34.3 per cent from 19.8 billion in 2014 to 13 billion this year, local government grants are seen declining by 50.4 per cent from Dh21 billion to Dh10.4 billion.

Multilateral agencies such as the International Monetary Fund and the World Bank have been urging the UAE and other GCC oil exporters to diversify their revenue sources and reduce subsidies to deal with oil market volatility.

A recent IMF staff mission to the UAE observed in their Article IV consultation paper that fiscal expansion over the last few years has increased vulnerability to oil prices. “The outlook for economic activity is expected to moderate with non-hydrocarbon growth projected at 3.4 per cent in 2015 amid lower oil prices and an appreciation of the real effective exchange rate,” said Zeine Zeidane, the IMF Mission chief.

With the decline in oil prices, the fiscal balance this year is projected to turn negative for the first time since 2009 to record a revised deficit of 2.3 per cent of GDP.

The UAE’s recent decision to deregulate the fuel prices is seen as a move that will speed up the process of spending cut. Given the large surpluses the government and some of the sovereign wealth funds control, economists say the UAE has ample room to introduce fiscal reforms in a gradual manner without impacting cost of living and competitiveness of the country.

However, with progressive cuts in fuel and energy subsidies and a potential introduction of a value-added taxes, the UAE is seen speeding up the process of revenue diversification and fiscal retrenchment ahead of its GCC peers.

By Babu Das Augustine Banking Editor