IDEAS home Printed from https://ideas.repec.org/p/erg/wpaper/1151.html

Fiscal Consolidation and UAE Vision 2021: A Small Scale Macroeconomic Model Approach

Author

Listed:
  • Magda Kandil

    (Central Bank of the UAE)

  • Assil El Mahmah

Abstract

Given the persistence of low oil prices, which has become the new norm, and the continued shrinking of government revenues, the United Arab Emirates (UAE) is facing a new challenge for the upcoming years. The government should strike the balance between the need to adjust their spending policies to accommodate declining oil revenues and secure fiscal sustainability, versus adhering to the growth objectives as outlined in the 2021 Vision. The UAE aims to achieve sustainable growth in the non-energy sector (targeted at 5% in 2021), by prioritizing spending and preserving growth-conducive government expenditure on infrastructure and development projects. In order to understand the future implications of oil price volatility and the impact of fiscal consolidation on the UAE economy, we build a small-scale macroeconomic model for the UAE that takes into consideration all different channels through which main macroeconomic drivers can affect the economic activity. The results show that the oil price fluctuation has a significant impact on banks’ liquidity, domestic credit and foreign direct investment, but a negligible effect on non-oil GDP growth, assuming that the government keeps the same level of spending, i.e., no fiscal consolidation pro-cyclical stance with the decline in oil price. However, the budget deficit and the need for financing would grow significantly. Moreover, using different scenarios for the pace of fiscal consolidation going forward, the model suggests that government expenditure is quite effective in raising aggregate demand and supporting non-oil real growth, in line with the UAE’s vision 2021. This necessitates a countercyclical stance, where public spending increases with the decline in the oil price to preserve targeted growth in the non-energy sector. Hence is the challenge to reduce the pace of fiscal consolidation in response to continued fluctuations in the oil price, without compromising the need to support non-energy growth to attain further diversification of the economy.

Suggested Citation

  • Magda Kandil & Assil El Mahmah, 2017. "Fiscal Consolidation and UAE Vision 2021: A Small Scale Macroeconomic Model Approach," Working Papers 1151, Economic Research Forum, revised 11 Jan 2003.
    • Handle: RePEc:erg:wpaper:1151
    as

    Download full text from publisher

    File URL: http://erf.org.eg/wp-content/uploads/2017/11/1151.pdf
    Download Restriction: no
    File URL: http://bit.ly/2lCSyyV
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nijkamp, Peter & Poot, Jacques, 2004. "Meta-analysis of the effect of fiscal policies on long-run growth," European Journal of Political Economy, Elsevier, vol. 20(1), pages 91-124, March.
    2. Ms. Sena Eken, 1997. "Fiscal Policy and Growth in the Middle East and North Africa Region," IMF Working Papers 1997/101, International Monetary Fund.
    3. Mr. Saad A. Alshahrani & Mr. Ali J Al-Sadiq, 2014. "Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation," IMF Working Papers 2014/003, International Monetary Fund.
    4. Khalifa H. Ghali & Fatima Al - Shamsi, 1997. "Fiscal Policy and Economic Growth: A Study Relating to the United Arab Emirates," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 50(4), pages 519-533.
    5. Haouas, Ilham & Heshmati, Almas, 2014. "Can the UAE Avoid the Oil Curse by Economic Diversification?," IZA Discussion Papers 8003, Institute of Labor Economics (IZA).
    6. Tim Callen & Reda Cherif & Fuad Hasanov & Amgad Hegazy & Padamja Khandelwal, 2014. "Economic Diversification in the GCC; Past, Present, and Future," IMF Staff Discussion Notes 14/12, International Monetary Fund.
    7. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    8. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alptekin, Aynur & Levine, Paul, 2012. "Military expenditure and economic growth: A meta-analysis," European Journal of Political Economy, Elsevier, vol. 28(4), pages 636-650.
    2. Facchini, François & Melki, Mickaël, 2013. "Efficient government size: France in the 20th century," European Journal of Political Economy, Elsevier, vol. 31(C), pages 1-14.
    3. Pedro R.D. Bom & Jenny E. Ligthart, 2014. "What Have We Learned From Three Decades Of Research On The Productivity Of Public Capital?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 889-916, December.
    4. Uche Boniface Ugwuanyi & Okelue David Ugwunta, 2017. "Fiscal Policy and Economic Growth: An Examination of Selected Countries in Sub-Saharan Africa," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 7(1), pages 117-130, January.
    5. Ibrar Hussain & Zahoor Khan & Muhmmad Rafiq, 2017. "Compositional Changes in Public Expenditure and Economic Growth: Time Series Evidence from Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(1), pages 1-20, March.
    6. Ashraf Galal Eid, 2015. "Budgetary Institutions, Fiscal Policy, and Economic Growth: the Case of Saudi Arabia," Working Papers 967, Economic Research Forum, revised Nov 2015.
    7. Bashir Olayinka Kolawole, 2016. "Government Spending and Inclusive-Growth Relationship in Nigeria: An Empirical Investigation," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 19(2), pages 33-56, November.
    8. Felice, Giulia, 2016. "Size and composition of public investment, sectoral composition and growth," European Journal of Political Economy, Elsevier, vol. 44(C), pages 136-158.
    9. Hans Pitlik & Margit Schratzenstaller-Altzinger, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers 404, WIFO.
    10. Ibrahim Carole, 2019. "Government Spending and Non-Oil Economic Growth in the UAE," Economics and Business, Sciendo, vol. 33(1), pages 82-93, January.
    11. Idowu, Ayodele & Collins, Tomisin, 2021. "Modelling Disaggregated Government Expenditure and Manufacturing Sector Performance Nexus and their Influence on Economic Performance," MPRA Paper 109245, University Library of Munich, Germany.
    12. Mr. Qing Wang & Mr. Ugo Fasano-Filho, 2001. "Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries," IMF Working Papers 2001/195, International Monetary Fund.
    13. Omoshoro-Jones, Oyeyinka Sunday, 2016. "A Cointegration and Causality Test on Government Expenditure –Economic Growth Nexus: Empirical Evidence from a South African Province," MPRA Paper 102085, University Library of Munich, Germany, revised 17 Oct 2017.
    14. David Owyong & Shandre Thangavelu, 2001. "An empirical study on public capital spillovers from the USA to Canada," Applied Economics, Taylor & Francis Journals, vol. 33(11), pages 1493-1499.
    15. Ingrid Ott & Susanne Soretz, 2006. "Governmental activity, integration, and agglomeration," Working Paper Series in Economics 57, University of Lüneburg, Institute of Economics.
    16. Schreiner, Lena & Madlener, Reinhard, 2022. "Investing in power grid infrastructure as a flexibility option: A DSGE assessment for Germany," Energy Economics, Elsevier, vol. 107(C).
    17. Alejandro Castañeda Sabido, 2002. "Electricity, Highways and Manufacturing Growth: A Cost Based Estimate," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(1), pages 59-77, January-J.
    18. Andrés Rodríguez-Pose & Yannis Psycharis & Vassilis Tselios, 2012. "Public investment and regional growth and convergence: Evidence from Greece," Papers in Regional Science, Wiley Blackwell, vol. 91(3), pages 543-568, August.
    19. Combes, Jean-Louis & Minea, Alexandru & Sawadogo, Pegdéwendé Nestor, 2021. "Does the composition of government spending matter for government bond spreads?," Economic Modelling, Elsevier, vol. 96(C), pages 409-420.
    20. Ghate Chetan, 2003. "The Politics of Endogenous Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-18, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erg:wpaper:1151. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Namees Nabeel (email available below). General contact details of provider: https://edirc.repec.org/data/erfaceg.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.