Given the stubbornly low oil prices of 2015, with no sign of a significant recovery in the short term, the run-up to the publication of the UAE’s current federal budget saw much speculation as to how the government might pare back state spending. For some, the reduction of subsidies earlier in 2015 set a new tone with regard to budgetary rationalisation: the dropping of the government’s support of fuel was a bold unilateral step in a region accustomed to multilateral moves in sensitive areas such as subsidies and tax.
When details of the new budget were released in October 2015 it seemed that the UAE authorities remained in cost-cutting mood, though the adjustment was modest. The federal budget for 2016 was set at Dh48.56bn ($13.2bn), with a zero deficit: a slight reduction from the Dh49bn ($13.3bn) budget of 2015. The reduction’s effect on economic growth will be limited: the federal budget usually accounts for around 14% of fiscal spending in the country, with emirate-level spending accounting for the rest. Yet the move towards consolidation was clear, and this gains added significance in light of the fact that – combining the 2015 budgets of the individual emirates and the federal government – the UAE is expected to post its first budget deficit since 2009.
State Spending
The 2016 budget maintains or increases spending in social development segments, with more than 50% of spending earmarked for education, social services and health. The more complex question is how to mitigate the effects of cuts in areas such as infrastructure, which is expected to see a 10% cut in federal spending over 2016.
The Abu Dhabi Department of Economic Development (ADDED) – in close collaboration with the Abu Dhabi Chamber of Commerce and Industry (ADCCI) and other government entities and commercial banks – has been designing a regulatory framework for establishing a public-private partnership (PPP) unit either at the Ministry of Finance or at ADDED. Four high-level workshops have been completed, with recommendations to the Executive Council to establish the unit as soon as possible.
In this context, the recent inauguration of the Emirates Development Bank (EDB) might be seen as timely. Officially launched in 2015 with capital of Dh10bn ($2.7bn), the bank has a mandate to provide more housing and jobs for cities, as well as support smart industries. In practical terms, this means the financing of home ownership programmes, vital industrial segments, and small and medium-sized enterprises: the stratum of businesses most vulnerable to any slowdown in projects arising from infrastructure spending cuts. “Emiratis are heavily dependent on the government in terms of employment, while the private sector could become a key industry for the UAE’s national development plan,” Khalifa bin Salem Al Mansouri, undersecretary at ADDED, told OBG.
Progress
The bank has already made progress towards its objectives. In March 2015 it struck a deal with the Abu Dhabi Technology Development Committee (TDC) to establish a long-term partnership supporting UAE inventors. The TDC already has a sound track record in this area through its Takamul programme, which facilitates the creation, protection and commercialisation of new patents. The same month saw the EDB reach an agreement with the Sheikh Zayed Housing Programme, which will see the EDB provide banking and financing services to customers of the programme, as well as developers and construction businesses involved in residential housing. These are in addition to the housing loans which the EDB is empowered to offer in its own right. The EDB has at its disposal $1.4bn for use in developing, housing and industrial projects in the UAE, a significant sum in the context of the UAE’s federal budget of $13.2bn. As the UAE enters a phase of federal and emirate-level budget consolidation, the work of institutions such as the EDB becomes all the more vital.
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