|09 February, 2019

IMF chief commends UAE for strengthening fiscal framework

She said that oil exporters have not fully recovered from the dramatic oil price shock of 2014.

International Monetary Fund (IMF) Managing Director Christine Lagarde attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 24, 2019.

International Monetary Fund (IMF) Managing Director Christine Lagarde attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 24, 2019.

REUTERS/Arnd Wiegmann

The UAE is launching a fiscal risk management project with the IMF's help and will produce its first fiscal stress test this year, according to Christine Lagarde, Managing Director and Chairwoman of the International Monetary Fund (IMF).

Speaking at the main session of the Fourth Annual Arab Fiscal Forum organized by the IMF, Arab Monetary Fund and the UAE Ministry of Finance on February 9 at the World Government Summit 2019, Lagarde commended the UAE and other countries in the region for strengthening their fiscal frameworks

She said that the UAE as well as Saudi Arabia, Kuwait, Sudan, Qatar, and Lebanon have set up macro-fiscal units, a useful first step in strengthening the fiscal framework while Algeria has recently adopted a new budget law with a strong medium-term orientation. Bahrain has introduced a fiscal program designed to achieve balance over the medium term while Mauritania, Morocco, Jordan, and Lebanon are making great progress with medium-term public investment planning and execution. Egypt now publishes a fiscal risk statement with its budget and produces an internal in-year budget risk assessment.

Speaking on the importance of fiscal policy, the head of the IMF said it plays a vital role in creating and nurturing the vision of sustainable and inclusive growth, especially as encapsulated in the Sustainable Development Goals. "This is because we need fiscal space for spending on health, education, social protection, and public investment-all key priorities in this region." She noted that without a stable foundation, even the best policies can flounder.

Dubai, the city of tomorrow

Earlier in her speech, Lagarde expressed her happiness at being in Dubai which she called the "city of tomorrow" where "it's economic leaders-are dedicated to realizing the vision of a better tomorrow."

"This vision is predicated on prosperity that is shared by all, benefiting the poor and the middle class, citizens and immigrants alike; and opportunities that are open to all, including women. It is a vision of fairness over cronyism and partiality, and of trust that government policy is oriented toward the common good."

"This is a big vision. But as His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, once said "The bigger your vision, the bigger your achievement will be.we cannot let fear keep us small. We have to be brave to be big."

Speaking about the economic environment in the Arab region, Lagarde said it has not yet fully recovered from the global financial crisis and other big economic dislocations over the past decade. "Among oil importers, growth has picked up, but it is still below pre-crisis levels. Fiscal deficits remain high, and public debt has risen rapidly-from 64 percent of GDP in 2008 to 85 per cent of GDP a decade later. Public debt now exceeds 90 per cent of GDP in nearly half of these countries."

She said that oil exporters have not fully recovered from the dramatic oil price shock of 2014. "Modest growth continues, but the outlook is highly uncertain-reflecting in part the need for countries to shift rapidly toward renewable energy over the new few decades, in line with the Paris Agreement. With revenues down, fiscal deficits are only slowly declining-despite significant reforms on both the spending and revenue sides, including the introduction of VAT and excise taxes. This has led to a sharp increase in public debt-from 13 percent of GDP in 2013 to 33 per cent in 2018," she added.

Broader economic context

Lagarde also drew attention to the broader economic context bearing on fiscal policy in the region. "We now think that the global economy will grow by 3.5 per cent this year, 0.2 percentage points below what we expected in October. And risks are up, given escalating trade tensions and tightening financial conditions. Unsurprisingly, a weaker global environment has knock-on effects on the region through a variety of channels-trade, remittances, capital flows, commodity prices, and financing conditions."

She said the bottom line of all this is that "the economic path ahead for the region is challenging. This makes the task of fiscal policy that much harder, which in turn makes it even more important to build strong foundations to anchor fiscal policy."

Obaid Al Tayer, UAE Minister of State for Financial Affairs, opened the main session giving a brief overview of global economic and financial conditions. He noted that the past few months have seen signs of slowing global growth, accompanied by increasing volatility in financial markets and oil prices. Trade tensions between the United States and China, the confusion over a no-deal Brexit and the tightening of fiscal and geopolitical factors in the region have contributed to global economic uncertainty.

He stressed that Arab countries are close trade partners of both China and the US and are keen not to be affected by the trade tensions between the two countries. China's growing energy needs have contributed to closer ties between the Middle East and China, especially with the Belt and Road Initiative, which includes the creation of industrial parks, ports, new economic zones and digital economy initiatives.

Al Tayer warned that some countries will continue to adopt a protectionist policy, which will put pressure on global trade flows that may ultimately affect the countries adopting protectionist approaches.

The Minister explained that Brexit may offer fresh investment opportunities for Arab countries. He stressed on the importance of avoiding undesirable effects on British investments in the Arab region and tourist inflows.

Importance of strengthening the private sector

Obaid Humaid Al Tayer stressed the role of a strong private sector in enhancing productivity, competitiveness and entrepreneurship, as well as investments in raising education and skill levels. He pointed to the importance of partnering with the private sector to strengthen the economy, and improve legal, institutional and economic frameworks, and the human capacity needed to ensure the efficient use of these resources.

Al Tayer also called for developing legislation on the entry of global e-commerce platforms to the region's markets and the development of local and regional electronic platforms to enhance competition and break monopolies.

Pillars of good fiscal management

Speaking further on the importance of strong fiscal policy, Lagarde said the two key pillars of good fiscal management are robust fiscal frameworks, and good governance and transparency. "There is scope to improve fiscal frameworks in this region. Some of the weaknesses are short-termism and insufficient credibility," she said.

"Corruption is the great disruptor of fiscal policy. Without trust in the fairness of the tax system, it becomes harder to raise the revenue needed for critical spending on health, education, and social protection. Governments might be tempted to favor white elephant projects instead of investments in people and productive potential. Add this up, and we have a recipe for unsustainable fiscal policy combined with social discord," she said.

Lagarde concluded by saying that good fiscal policy requires good institutional foundations. "Solid foundations in areas such as fiscal frameworks and governance give citizens confidence that fiscal policy serves the good of all, not just the wealthy or the well-connected," she said.

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