United Arab Emirates: Selected Issues

IMFCountryReportNo.23/224 June2023 UNITEDARABEMIRATES SELECTEDISSUES ThisSelectedIssuespaperonUnitedArabEmirateswaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary10,2023. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund January10,2023 UNITEDARABEMIRATES SELECTEDISSUES PreparedbyYevgeniyaKorniyenko,NadiaMounir,DorothyNampewo,andCharlotteSandoz ApprovedBy MiddleEastandCentralAsiaDepartment UAEREFORMSFORMOREPRODUCTIVEANDGREENERGROWTH3 ExecutiveSummary3 I.QUANTIFYINGGAINSFROMTRADELIBERALIZATION5 A.Introduction5 B.PotentiallyLargeEconomicGainsfromTradeOpenness7 C.Methodology9 D.Results11 E.Conclusion12References14 TABLES 1.FDIInflowsasaShareofGlobalFDIFlows6 2.ScoringMethodologyofOECD’sFDIRestrictivenessIndex10 II.ASSESSINGTHEIMPACTOFICTINVESTMENTSONGROWTH15 A.Introduction15 B.DevelopmentsintheUAE’sDigitalEconomy16 C.DigitalInfrastructure16 D.DigitalCapacityDevelopment17 E.DigitalRegulation18 F.DigitalInnovationandLocalProduction18 G.EmpiricalEvidenceoftheImpactofDigitalizationonUAEEconomy19 H.Results21 I.Conclusion22References23 UNITEDARABEMIRATES FIGURES 1.ShareofDigitalEconomyContributiontoGDP(%),201716 2.SelectedDigitalInfrastructureIndicators,2020173a.IndividualswithICTSkills,2020173b.LocalProductionandInnovationPillar173c.ShareofAppsPublishedbyCountry183d.CountrieswiththeFastestGrowthinApps184a.MultipliersonGDP214b.MultipliersonNon-OilGDP214c.MultipliersonOilGDP21 ANNEXES I.ListofVariablesintheInformationSet25 II.ImpulseResponseFunctions26 III.GROWINGGREENANDSUSTAINABLE27 A.Introduction27 B.ModellingofGreenandSustainablePolicies:LiteratureOverview32 C.GrowthImpactsofGreenandSustainablePoliciesinUAE:ScenarioAnalysis33 D.FiscalImplicationsofClimatePoliciesinUAE36 E.DevelopingandFacilitatingGreenandSustainableFinanceinUAEtoSupportEnergyTransition38 F.ConclusionsandOtherPolicyConsiderations40References42 BOX 1.AlternativePoliciestoMitigateClimateChangeChallengesinUAE29 FIGURES 1.EnergyTransitionExposureandResilience31 2.GreenInvestments,Reforms,andImpactonNon-HydrocarbonGDP35 3.FinancialWealthandCapitalStock37 4.PublicFinanceandEnergyTransition37 2INTERNATIONALMONETARYFUND UAEREFORMSFORMOREPRODUCTIVEANDGREENERGROWTH ExecutiveSummary SincetheGFC,themarginalproductivityofinvestmentintheUAEhasdeclinedalongwithtotalfactorproductivity(TFP)andemploymentgrowth.TheimpactsfromtheCOVID-19crisishavereinforcedthesetrends.1 Toreversethispath,theUAEgovernmenthasembarkedonanambitiousreformstrategyundertheumbrellaofUAE2050StrategyandClimateNeutralityGoalby2050.ReformeffortshavebeenundertakentoboosttradeandFDI,furthermodernizelabormarkets,andincreasedigitalizationandinvestmentsintogreenandsustainableinitiativestofacilitategrowth,energytransition,anddiversificationoftheUAEnon-oilsector.TheseeffortsandongoingclimateinitiativesarecommendableandshouldbesustainedtoensuretheUAE’sresiliencetolong-termvulnerabilitiesfromglobalrisksanddecarbonizationefforts.However,itiscrucialtounderstandthepotentialgainsandcomplementarybenefitsfromvariousreformsandinvestmentstoensuretheirefficientsequencingandprioritization. Thispaperaimstoquantifythepotentiallong-termgrowthandproductivitygainsfromongoingstructuralreformefforts.TheworkisbasedontheIMF’sFlexibleSystemofGlobalModels(FSGM),FactorAugmentedVectorAutoregressive(FAVAR),DIGNAR-19model,andscenarioanalysis.Themainconclusionisthatongoingreformefforts,asdetailedintheIMFArticleIVReportsin2021-22,couldboostlong-termnon-hydrocarbongrowthbyaround4percentabovetheprojectedbaselinewhileallowingtheUAEtoachieveitsNetZero,digitalization,andsustainabilityobjectives. Importantly,thisresultdependsonfullyharnessingthepotentialproductivityandgrowthgainsfromevolvingeconomicpartnerships,achievingplannedICTinvestmentoutcomes,andfullyimplementingplannedgreeninvestments.Facilitatinggreenandsustainableprivatefinancewouldreducethedirectfiscalburdensofinvestmentneedsandhelppromoteasmoothtransitiontoalowercarbonfuture.Thepaperisorganizedintothreechapters: Chapter1.Quantifyinggainsfromtradeliberalization.TheUAEhasrecentlysignedorstartednegotiationsforComprehensiveEconomicPartnershipAgreements(CEPAs)withelevencountries.DependingontheUAE’sabilitytofurtherattractFDI,thereductionoftariffs,especiallyonintermediateinputs,cansignificantlyliftlong-termgrowththroughstrongercompetition,accesstoahighernumberofvarietiesandqualityofinputs,andtransferoftechnology.Resultsindicatesignificantmedium-termgainsfromongoingCEPAs,rangingfrom0.25to2.0percentfortotalfactorproductivityand0.3to2.1percentforthelevelofrealGDP,withtherangedependingontheattractivenessoftheUAE’sFDIenvironment.GiventheFDIrestrictivenessindexestimatedforthe 1FordetailsseeU