Impact Of Vat On Economic Growth in Dubai (update)

A recent survey conducted by the Khaleej Times of the top UAE executives shows that most of the CEOs are confident about the health of the country’s economy. The survey reports that the chief executives of major enterprises in the country believe that the economy will continue to grow thanks to the release of VAT system, and a stable political and business infrastructure across the zone.

After away the rest of the GCC in the VAT on economic growth in 2017, the UAE is set to almost double its expansion rate in 2018, the latest report by a panel of economists reveals.

UAE’s Economic Growth to Get Boost in 2018

Experts from the UAE economy by Institute of International Finance (IIF), a global association of banks and financial institutions have said that the economic performance of UAE’s will likely to be improved with the firming oiling prices, an improvement in global trade and the expected easing pace of fiscal adjustment.

Garbis Iradian, the Chief Economist at the Mena of the IIF has said” We expect non-hydrocarbon real GDP growth to pick up from 2 percent in 2017 to 2.7 per cent in 2018.

The introduction of the VAT [value-added tax] at 5 per cent in January 2018 and the modest increase in import prices could raise average CPI inflation from 2 per cent in 2017 to 3.6 percent in 2018”. More likely, the IIF being positive with the growth of UAE, also projected a relatively conservative GDP growth as compared to the IMP 3.4 projective growth in 2018.

Under the extended Opec (Organisation of the Petroleum Exporting Countries) agreement and fiscal consolidation in Abu Dhabi, the country experienced a declaration in overall growth (0.8 per cent) like its GCC (Gulf Cooperation Council) peers in 2017 due to its oil production cuts.

Due to a significant decline in rents, the country has also experienced subdued CPI inflation in 2017, which has more than higher import prices. The Property prices are also estimated to have declined in Abu Dhabi and Dubai by 15-20 per cent from their peaks in 2014.

Analysts of IIF said, the UAE, especially Abu Dhabi, can afford a more gradual pace of fiscal adjustment to reduce the impact of lower oil prices on economic growth. While Iradian said that, “We expect the fiscal consolidation in Abu Dhabi to ease this year, while Dubai’s fiscal stance remains expansionary”.

As the partial recovery in oil prices and the additional non-hydrocarbon revenues-largely related to the VAT, will be more than the offset increase in public spending, the consolidated fiscal account including the investment income of the UAE is expected to shift to a small surplus of 0.4 per cent of GDP.

Financial sector to be healthy

The UAE Central Bank Data on credit growth released in December showed weak credit demand in 2017. The annual growth of the country is just 1.7 per cent, as the gross loan fell 0.9 per cent month-on-month in December. Although, in December the annual growth in deposits remains stronger with 4.1 per cent.

The latest credit sentiment survey by UAE’s Central Bank, which shows the slightest rise in business loans, mainly attributable to the strengthening demand in Dubai. Whereas the demand for personal loans was none, as many respondents reporting no change.

While in the terms of outlook, only on the modest scale, the demands for both personal and business lending expected to be increased. Lower loan growth combined with lower loan demand is expected to keep the banking sector highly liquid. The loans to deposit ratio are declined from 99.6 per cent in December 2016 as compared to 97.1 per cent in December 2017.

While according to the IIF, the liquid assets ratio has increased from 16.2 per cent in 2016 to 18.2 per cent in 2017. Whereas, Banks remain adequately capitalized with 17.4 per cent Tier 1 ratio at end-2017, nonperforming loans to total loans have declined in recent years to 5.2 per cent. As the loans reset at higher rates and funding costs improved, the liquidity conditions have been eased and the net interest margin also got improved since the beginning of this year.

Positive attitude for GCC

For the GCC as a whole, the IIF expects overall real GDP (gross domestic product) to shift from a contraction of 0.2 per cent in 2017 to a growth of 2 per cent in 2018, supported by the partial recovery in oil prices and government stimulus, particularly in Saudi Arabia.

To improve the private sector, the domestic demands should be strengthened.The fiscal situations in Saudi Arabia and the UAE are seen on firmer footing.

UAE Growth Parameters

About 70 percent of the UAE-based CEOs are confident in the country’s ability to continue providing a strong business environment to the local and foreign companies.

Economic growth on VAT is estimated up to a high level it is possible of the report of giving by the GCC.The joint report giving by the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics says that the UAE will record an accelerated growth in 2018 to 3.6 percent from 1.7 percent in 2017. The momentum will further gain pace in 2019 to post 3.6 percent growth.

“Oil exporters should continue pursuing deficit-reduction plans to maintain fiscal sustainability, and where relevant, to support exchange rate pegs,” the IMF said.

The increase in business owing to the upcoming 2020 Dubai Expo is also a sign of the strong economic status. Around 25 percent of the remaining CEOs are also confident in the stability of the economy but not too much in the growth scenarios. The remaining respondents believe that the UAE’s economy might fall in the coming period.

UAE growth parameters
Image source: khaleejtimes.com

For many years, the UAE has been a trading hub for re-exports because of its transparent and well-developed business infrastructure and ample investment opportunities, which will be further fueled by the launch of the value-added tax (VAT). Many country CEOs even believe that the friendly policies of Dubai’s government will be a major factor behind this growth.

Many global financial institutions are also projecting an increase in growth for the UAE economy in the coming year as compared to this year. Euromonitor International predicts a jump of 4.4 percent, while Moody’s Analytics suggested that the economy might see a growth of around 3.8 percent in 2018.

Both the Emirates NBD and IMF have forecasted a growth scenario of 3.4 percent, while Citigroup and the World Bank have projected 3.3 and 2.5 percent increase respectively.

The Expo 2020 is also expected to have a positive effect on the country’s economy resulting in improved global equity markets, an increase in the number of tourists to Dubai and other places in UAE, and so on.

One of the reasons for the recent decline in growth was the hike in crude oil prices, which is now recovering back, resulting in an improved confidence among retail investors. The increase in construction activities and consumer spending and growth of the economy in no-oil sectors are other factors responsible for increasing investors’ confidence in the UAE economy.

The Role of Vat On Economic Growth in Dubai, UAE

The UAE government is all set to launch the VAT system with 5% tax rate on a number of consumer goods and services. A few items have been kept out of the VAT coverage.

The survey reveals one or two things about the impacts of VAT on this projected growth scenario. Most businesspersons are confident that the implementation of VAT will bring positiveness to the existing system by diversifying government’s revenue sources.

It is also being believed that the consumption rate might see a hike in the pre-VAT months while it may temporarily decrease after the implementation of the new tax system.

About 75 percent of the UAE companies are planning to fully pass on VAT liability to consumers while the remaining firms may do it partially as and how suited. The survey also indicated that around 24 percent of the UAE businesses are already prepared for the new tax system while the remaining 76 percent are still working on it.

VAT is expected to give the UAE economy a U-turn in terms of growth and new opportunities. The new source of revenue will allow the government to deal with the inflation and other related problems.

The highest impact will be on businesses that have been exempted from VAT as they will now have to bear the complete tax liability passed on to them by their suppliers and have no option to claim a refund. However, they can further pass some or whole of the increased cost (due to tax) to their customers.

Growth sectors in UAE

The following UAE business sectors may also report a growth (or decline) in the coming period.

More jobs

According to the report, 86 percent UAE companies are planning to hire in the last quarter of 2017 while the other 14 percent will not be hiring any more personnel this year.

Recovery of oil price

Many businesspeople are also expecting a recovery of oil prices. About 37 percent of professionals believe that oil prices may drop to $50 or lower over the coming months. Around 16 percent expect oil to cost around $40 or lower while around 26 percent expect the oil cost to be around $60 per barrel.

Recovery of oil price
Image Source: khaleejtimes.com

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