WASHINGTON, 11 October 2007 — Medium-term economic prospects in the United Arab Emirates (UAE) look bright, with the pace of growth likely to remain strong in 2007 but slowing from next year, the International Monetary Fund (IMF) said on Tuesday, warning that high inflation needed to be contained.
“The medium-term prospects look bright, supported by a continued favorable outlook for energy prices given sustained global demand, a strong investment momentum, and an improved domestic business climate,” the IMF said in its 2007 annual economic consultations with the Gulf Arab country.
“(IMF) directors agreed that the key challenges will be to ensure sustained non-inflationary growth and further diversification of the economy” less reliant on oil, it added.
Strong domestic demand and housing shortages in the UAE have led to sharp increases in rents and added to upward pressure on other prices. As a result, the consumer price index inflation exceeded 9 percent in 2006, pushing inflation to a 19-year high.The IMF said that although assessing inflation was complicated by the UAE’s weak data, the rate of price increases was too high.
“They acknowledged, however, that the anticipated reduction of capacity constraints — especially in the housing market — is likely to reduce inflation pressures over the medium term,” the IMF said, adding that fiscal policy could play a bigger role in regulating domestic demand.
“In particular, expenditure increases — including by public and quasi-public entities — should be consistent with the country’s absorptive capacity,” it said, adding, “This, together with efforts to alleviate capacity constraints, would help subdue inflation and support a continued economic expansion with macroeconomic stability.”
The Washington-based institution said that the current peg of the dirham currency to the dollar “has served the UAE well” and that the exchange rate of the dirham was in line with fundamentals.
Except for Kuwait, which in May dropped the dollar peg in favor of a basket of currencies to ward off inflation, the remaining five states of the six-nation Gulf Cooperation Council (GCC) have kept their currencies linked to the dollar.
“(IMF) directors noted the authorities’ commitment to work closely with other GCC member countries to reach consensus on the appropriate future exchange rate regime to be adopted as part of the GCC currency union,” the IMF said.
“Looking forward, a few IMF directors saw value in some flexibility,” the fund added.
The IMF said UAE authorities should strengthen business regulations and bank supervision, given the rapid credit growth and buoyant real estate market.
It also called for closer scrutiny of financial services companies such as banks, insurance companies and securities firms.
Meanwhile, government-owned Dubai property company Limitless said yesterday it plans to build a 75 km (46.60 mile) canal in Dubai that will cost $11 billion.
The waterway, to be completed in three years, will run through a real estate development that will cost $50 billion, Limitless said in a statement.
Japanese companies including Kajima Corp. , Shimizu Corp. and Taisei Corp. have expressed interest in the project, the London-based Middle East Economic Digest said in June.
Dubai is building three palm-tree shaped islands, Disneyland style theme parks and an archipelago resembling the map of the world to boost its tourism industry.
