UAE working on laws to boost non-oil sector contribution to 80%

The Ministry of Economy is working on a number of laws to help increase productivity of the economy and boost the contribution of the non-oil sector to 80 per cent by 2021 from around 70 per cent now, Sultan Al Mansouri, the Minister of Economy told "The National" in an exclusive interview.

The draft investment law, which includes foreign direct investment, has been completed and has been submitted to legislative bodies for approval, Mr Al Mansouri said.

Other laws that the ministry is working on include industry regulation law, regulation and protection of industrial property patents and industrial designs law, commercial transactions law and arbitration law, the minister added.

All these laws are part of efforts to further diversify the country’s economy, improve the investment climate and boost business competitiveness, the minister said. Diversification of income is gaining pace, with the UAE spending Dh300 billion on about 100 initiatives covering health and education, energy, transport, water and technology to help prepare the UAE for the post-oil phase of the economy.

Excerpts: Q1: What are expectations for GDP growth in the UAE for 2017? The UAE’s economy is the second largest in the Arab World. Data on real GDP value from 2010 to 2016 (based on constant prices for 2010) show that the country managed to maintain positive growth during the period. It exceeded the global growth rate, with average real GDP growth from 2011 to 2016 topping 4.6 per cent – driven mainly by the non-oil sectors, which accounted for 69 per cent of the GDP. As for the non-oil sector’s real GDP contribution, the average growth from 2011 to 2016 stood at 4.6 per cent.

The Central Bank of the UAE has revised the Real GDP growth and its components for 2017 and 2018. In fact, Non-oil GDP growth has grown by 2.7 per cent in 2016, while oil GDP growth has increased by 3.8 per cent. The combined effect is growth of Real GDP at 3 per cent in 2016. The economy is projected to rebound with non-oil GDP growing at 3.1 per cent in 2017 and 3.7 per cent in 2018, driven mainly by slower pace of fiscal consolidation, and a pickup in the UAE trading partners’ growth.

The indexes and expectations of major international organisations, including UNCTAD, rank the UAE 12th in the world among the list of promising investment economies from 2017 to 2019. This is in line with the large projects being implemented, including the UAE’s hosting of Expo 2020. This is in addition to acquisitions and mergers and positive wholesale and retail trade indexes as well as non-oil foreign trade inclusive of free zone trade.

Q2: How will the introduction of VAT and excise tax impact the economy? The UAE intends to apply the VAT system to all production and service sectors starting from January 2018 at a rate of 5 per cent, with the education and health sectors and a list of 100 food commodities to be exempted. The expected economic and social impacts of VAT in the UAE include the following: 1 - Implications of VAT on individuals The cost of living is expected to rise slightly, but will vary depending on the individual’s lifestyle and spending behaviour. If their expenditures are focused primarily on goods excluded from VAT, for example, there will be little increase in the cost of living.

2 - Social Implications of VAT Imposing VAT will help increase revenue sources in isolation from oil revenues, which will increase the state’s ability to continue to provide educational, health and public utility services and to finance public spending on these services to ensure they are of the highest international standards and specifications.

Q3: How is the UAE coping with the low oil price environment? Despite the relative recovery in oil prices in late 2016 and early 2017, one of the most prominent economic challenges expected is the difficulty of accurately predicting the extent of change in oil prices and returning to the rates that existed in early 2014 and earlier due to the circumstances and external variables surrounding it.

The fiscal and economic policies adopted by the UAE in 2015 and 2016 strengthened the ability of the national economy to withstand pressures, maintain financial and monetary stability, and sustain growth. They concentrated on reducing the dependence on oil revenues and finding other non-oil sources of income, which are reliable in achieving high added value and constitute the cornerstones and bases for growth.

Multi-pronged initiatives aimed at raising productivity and diversifying the economy would improve medium-term economic prospects. The UAE Government has set clear goals for fostering diversified, knowledge-based growth. Achieving them requires focused policy measures that could encourage synergies in investment between emirates, promote foreign investment outside free zones and foster competition.

New growth segments, which include health, education, social welfare, infrastructure, trade, transport, logistics, finance, alternative and renewable energy, telecommunications, information technology, tourism, aluminum, petrochemicals, metallurgy, iron & steel and aviation, will play a key role in the move to increase the levels of economic diversification, while also helping in the overall move to create a knowledge-based economy backed by creativity and innovation.

The growing emphasis on the abovementioned sectors falls within the framework of the objectives of UAE Vision 2021 as well. They are vital to establishing a knowledge economy based on research and innovation, and preparing for a post-oil phase through the "activation of the high policy of science and technology and innovation" which includes 100 initiatives covering health and education, energy, transport, water and technology. Investments worth about Dh300 billion will be directed towards these areas, with spending on scientific research to triple until the year 2021 – depending on the financial reserves accumulated by the UAE.

Q4: What is the latest regarding the investment law? The draft of the law has been completed and submitted to the legislative bodies for approval.

Q5: What are the estimates for a boost in investments after the ratification of the investment law? The Foreign Investment Law aims to promote and develop the investment environment and attract foreign capital in line with the country’s development policies, especially with regards to establishing the state as a major destination for regional and global investment. It will help expand and diversify the production base, transfer and attract technology, and facilitate more knowledge and training.

In addition, the law focuses on improving the country’s least developed areas, the growth of UAE nationals, the creation of job opportunities, the achievement of the best returns on available resources, and the attainment of high added value in the state’s economy.

In terms of benefits, the law will allow investors to gain from incentives and exemptions available for economic activities at the federal level, as well as increase the percentage of foreign ownership of projects in specific sectors and activities as determined by law The law is expected to enhance the growth rates of the national economy and achieve the goals of UAE Vision 2021 and its accompanying National Agenda, which aims to boost the GDP share of foreign direct investments to around 5 per cent. This will enable the achievement of a high position on the ease of doing business index.

Furthermore, the law will facilitate an investment environment supported by legislation and advanced laws to reduce routine obstacles to foreign investors and enhance the global competitiveness of the UAE economy.

Q6: What other laws is the Ministry working on and why are they important? The Ministry of Economy in co-operation with its strategic partners is working on the issuance of several important laws aimed at streamlining the legislative structure and providing the appropriate climate to maximise the business sector’s role in development. This falls within the framework of our mandate to further advance economic diversification as pursued by the state and help in the establishment of a competitive knowledge economy based on creativity and innovation.

The ministry, along with its strategic partners, continues to prepare and update laws regulating the investment environment and the business climate, including some of the following: Foreign investment law/industry regulation lawRegulation and protection of industrial property patents and industrial designs law/commercial transactions law/arbitration law The ministry aims to further enhance the diversification policy, improve the investment climate and improve business competitiveness. It also intends to optimise the organiaation of economic activity and maintain balance within the local market.

Moving forward, we will adapt to local, regional and global developments and changes and sustain the rapid pace of economic growth with the goal of increasing the share of the country’s non-oil GDP to 80 per cent by 2021.

Q7: What is the outlook for inflation next year vs this year? The expectation of stable world commodity prices is tempered, and we expect a decline in housing prices and rents as supply levels rise with the entry of new units and demand slows due to rising inflation levels.

According to a report issued by the Federal Authority for Competitiveness and Statistics on the state’s Consumer Price Index for 2016 with respect to the prices of the most expensive and important groups in the consumer basket, housing, water, electricity and gas rose by 3.57 per cent over 2015 due mainly to the rise in the prices of maintenance materials, accommodation, rent and water.