IMF Country Report No.

23/224

UNITED ARAB EMIRATES

SELECTED ISSUES
June 2023
This Selected Issues paper on United Arab Emirates was prepared by a staff team of the
International Monetary Fund as background documentation for the periodic consultation
with the member country. It is based on the information available at the time it was
completed on January 10, 2023.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
E-mail: [email protected] Web: http://www.imf.org
Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2023 International Monetary Fund

 UNITED ARAB EMIRATES
SELECTED ISSUES
January 10, 2023
Approved By Prepared by Yevgeniya Korniyenko, Nadia Mounir, Dorothy
Middle East and Nampewo, and Charlotte Sandoz
Central Asia
Department

UAE REFORMS FOR MORE PRODUCTIVE AND GREENER GROWTH ______________ 3

Executive Summary ____________________________________________________________________ 3

I. QUANTIFYING GAINS FROM TRADE LIBERALIZATION __________________________ 5

A. Introduction ________________________________________________________________________ 5
B. Potentially Large Economic Gains from Trade Openness ____________________________7
C. Methodology _______________________________________________________________________ 9
D. Results ____________________________________________________________________________ 11
E. Conclusion ________________________________________________________________________ 12
References ___________________________________________________________________________ 14

TABLES
1. FDI Inflows as a Share of Global FDI Flows __________________________________________ 6
2. Scoring Methodology of OECD’s FDI Restrictiveness Index________________________ 10

II. ASSESSING THE IMPACT OF ICT INVESTMENTS ON GROWTH _______________ 15

A. Introduction ______________________________________________________________________ 15
B. Developments in the UAE’s Digital Economy ______________________________________ 16
C. Digital Infrastructure ______________________________________________________________ 16
D. Digital Capacity Development ____________________________________________________ 17
E. Digital Regulation _________________________________________________________________ 18
F. Digital Innovation and Local Production __________________________________________ 18
G. Empirical Evidence of the Impact of Digitalization on UAE Economy______________ 19
H. Results ____________________________________________________________________________ 21
I. Conclusion _________________________________________________________________________ 22
References ___________________________________________________________________________ 23
UNITED ARAB EMIRATES

FIGURES
1. Share of Digital Economy Contribution to GDP (%), 2017 __________________________________ 16
2. Selected Digital Infrastructure Indicators, 2020 _____________________________________________ 17
3a. Individuals with ICT Skills, 2020 ___________________________________________________________ 17
3b. Local Production and Innovation Pillar ____________________________________________________ 17
3c. Share of Apps Published by Country ______________________________________________________ 18
3d. Countries with the Fastest Growth in Apps________________________________________________ 18
4a. Multipliers on GDP ________________________________________________________________________ 21
4b. Multipliers on Non-Oil GDP _______________________________________________________________ 21
4c. Multipliers on Oil GDP ____________________________________________________________________ 21

ANNEXES
I. List of Variables in the Information Set______________________________________________________ 25
II. Impulse Response Functions _______________________________________________________________ 26

III. GROWING GREEN AND SUSTAINABLE _________________________________________________ 27

A. Introduction________________________________________________________________________________ 27
B. Modelling of Green and Sustainable Policies: Literature Overview _________________________ 32
C. Growth Impacts of Green and Sustainable Policies in UAE: Scenario Analysis ______________ 33
D. Fiscal Implications of Climate Policies in UAE ______________________________________________ 36
E. Developing and Facilitating Green and Sustainable Finance in UAE to Support Energy
Transition __________________________________________________________________________________ 38
F. Conclusions and Other Policy Considerations ______________________________________________ 40
References __________________________________________________________________________________ 42

BOX
1. Alternative Policies to Mitigate Climate Change Challenges in UAE ________________________ 29

FIGURES
1. Energy Transition Exposure and Resilience _________________________________________________ 31
2. Green Investments, Reforms, and Impact on Non-Hydrocarbon GDP ______________________ 35
3. Financial Wealth and Capital Stock _________________________________________________________ 37
4. Public Finance and Energy Transition_______________________________________________________ 37

2 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

UAE REFORMS FOR MORE PRODUCTIVE AND

GREENER GROWTH
Executive Summary

Since the GFC, the marginal productivity of investment in the UAE has declined along with total
factor productivity (TFP) and employment growth. The impacts from the COVID-19 crisis have
reinforced these trends. 1

To reverse this path, the UAE government has embarked on an ambitious reform strategy under the
umbrella of UAE 2050 Strategy and Climate Neutrality Goal by 2050. Reform efforts have been
undertaken to boost trade and FDI, further modernize labor markets, and increase digitalization and
investments into green and sustainable initiatives to facilitate growth, energy transition, and
diversification of the UAE non-oil sector. These efforts and ongoing climate initiatives are
commendable and should be sustained to ensure the UAE’s resilience to long-term vulnerabilities
from global risks and decarbonization efforts. However, it is crucial to understand the potential gains
and complementary benefits from various reforms and investments to ensure their efficient
sequencing and prioritization.

This paper aims to quantify the potential long-term growth and productivity gains from ongoing
structural reform efforts. The work is based on the IMF’s Flexible System of Global Models (FSGM),
Factor Augmented Vector Autoregressive (FAVAR), DIGNAR-19 model, and scenario analysis. The
main conclusion is that ongoing reform efforts, as detailed in the IMF Article IV Reports in 2021-22,
could boost long-term non-hydrocarbon growth by around 4 percent above the projected baseline
while allowing the UAE to achieve its Net Zero, digitalization, and sustainability objectives.
Importantly, this result depends on fully harnessing the potential productivity and growth gains
from evolving economic partnerships, achieving planned ICT investment outcomes, and fully
implementing planned green investments. Facilitating green and sustainable private finance would
reduce the direct fiscal burdens of investment needs and help promote a smooth transition to a
lower carbon future. The paper is organized into three chapters:

Chapter 1. Quantifying gains from trade liberalization. The UAE has recently signed or started
negotiations for Comprehensive Economic Partnership Agreements (CEPAs) with eleven countries.
Depending on the UAE’s ability to further attract FDI, the reduction of tariffs, especially on
intermediate inputs, can significantly lift long-term growth through stronger competition, access to
a higher number of varieties and quality of inputs, and transfer of technology. Results indicate
significant medium-term gains from ongoing CEPAs, ranging from 0.25 to 2.0 percent for total
factor productivity and 0.3 to 2.1 percent for the level of real GDP, with the range depending on the
attractiveness of the UAE’s FDI environment. Given the FDI restrictiveness index estimated for the

1 For details see UAE 2021 Selected Issues Paper on “Fostering UAE Productivity Growth After COVID.”

INTERNATIONAL MONETARY FUND 3

UNITED ARAB EMIRATES

UAE, gains from the reduction of tariffs on intermediate inputs are assessed to be closer to the lower
end of these ranges.

Chapter 2. Assessing the impact of ICT investments on growth. Digitalization can have a
significant multiplier effect on economic growth. The UAE’s Digital Economy strategy aims to double
the contribution of the digital economy to non-oil GDP to 20 percent by 2031 by adopting
digitalization across both the public and private sectors. This should increase efficiency in factor
markets and ease the delivery of services in the public sector. Model results show a large multiplier
of 1.8 for ICT investments on non-oil GDP (about double the impact of non-ICT spending),
underscoring the potential for significant positive effects of ICT investments to support economic
diversification. Investment multipliers are negligible in the oil sector.

Chapter 3. Growing Green and Sustainable. As the global economy seeks to decarbonize, the UAE
faces twin challenges of reducing its reliance on hydrocarbon activity and adapting its economy and
policy frameworks to climate risks. In line with global decarbonization efforts, the UAE announced a
set of structural reforms and green investments to reduce its emissions and energy intensity, while
diversifying away from fossil fuels. Using the IMF’s DIGNAR model (Aligishiev, Melina, and Zanna,
2021) we show that the combination of green investments and the full implementation of reforms
under the 2050 Strategies could almost double potential long-term non-oil GDP growth. Despite the
UAE’s agile approach to the energy transition, the costs are large, and the implementation need is
urgent. Therefore, developing and scaling up private green and sustainable finance, as well as
creating an enabling environment for smooth energy transition, would reduce direct fiscal costs,
increase efficiency of green investments, and preserve public financial wealth while delivering on
growth and Net Zero ambitions.

4 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

QUANTIFYING GAINS FROM TRADE LIBERALIZATION 1

As part of the ambitious reform agenda of the “Projects of the 50’” to promote economic diversification
and sustainable growth, the UAE has recently signed or started negotiations for CEPAs with 11 key
partners. Depending on the UAE’s ability to further attract FDI, the reduction of tariffs especially on
intermediate inputs can significantly lift long-term GDP through stronger competition, access to higher
number of varieties and quality of inputs, and transfer of technology. Results indicate significant
medium-term gains, ranging from 0.25 to 2.0 percent for total factor productivity and 0.3 to
2.1 percent for the level of real GDP, with the range depending on the attractiveness of the UAE’s FDI
environment. Given the FDI restrictiveness index estimated for the UAE, we assess the gains to be
closer to the lower end of the range.

A. Introduction

1. The UAE is establishing various agreements in economic, trade, investment, and

technical fields with key economic partners as part of the ambitious reform agenda of the
“Projects of the 50’”. The overall objective is to boost the country’s integration in the global value
chains, expand employment of nationals in the private sector, and incentivize advanced technology
creation and adoption. Gains are potentially large, including from trade liberalization.

2. Over the past decades, the UAE has been open to trade, but less to foreign direct
investment (FDI), until recently. The share of non-
Exports Composition
oil exports in total exports has doubled over the past (Percent of Total)
20 years (Text Figure). The robust non-oil trade 100 100
90 90
expansion has been supported by relatively low tariffs 80 80

and non-tariff barriers on goods. The UAE is part of 70 70

60 60
three free trade zones cooperating with 19 50 50

countries. 2 In 2019, the aggregate tariffs weighted by 40 40

30 30
partner imports was 3.20 percent. While FDI inflows 20 20

remained constant around 0.6 percent of global 10 10

0 0
inflows before the COVID crisis, they have started to 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

pick up lately to reach about 1.5 percent of global Re-exports Nonoil Gas Hydrocarbon

inflows (about USD 21 billion, 5 percent of GDP) in Sources: Country authorities; IMF staff calculations.
2021, supported by recent policy measures taken to
ease restrictions on foreign ownership of businesses (Table 1).

1 Prepared by Nadia Mounir and Charlotte Sandoz.

2The UAE joint the EFTA with Liechtenstein, the Kingdom of Norway and the Swiss Confederation; the GCC with the
Kingdom of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait;
and the League of Arab States (GATFA) with Algeria, Bahrain, Egypt, Iraq, Kuwait, Lebanon, Libya, Morocco, Oman,
Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates and Yemen.

INTERNATIONAL MONETARY FUND 5

UNITED ARAB EMIRATES

Table 1. United Arab Emirates: FDI Inflows as a Share of Global FDI Flows

3. As part of the ongoing ambitious reform

Import Composition by Origin Country, 2019
agenda, the UAE has recently signed or started
India 12.4%

negotiations for CEPAs with 11 key partners. The Indonesia 0.7%

Philippines 0.2%

first agreement was signed with India in February Kenya 0.2%

Ukraine 0.2%

2022. It was the UAE’s first CEPA with any country

Turkey 1.5%
UK 4.0%

and India’s first Free Trade Agreement (FTA) in a Uzbekistan 0.2%

decade. 3 It means no tariffs on nearly 80 percent of ROW, 51.3%

China 14.6%

goods, easier access to markets for trade and

investment, new opportunities in sectors such as
aviation, environment, hospitality, logistics, building Germany 4.1%

and construction, financial services, and digital

Japan 3.5%

United States 7.1%

trade. The UAE also signed CEPAs with Indonesia

Sources: Comtrade; IMF staff calculations.
and Israel, and has initiated negotiation with
Australia, Georgia, Kenya, Philippines, South
Composition of Aggregate Ad Valorem Tariffs
Korea, Turkey, Ukraine, Uzbekistan. Those 11 (By type of goods, 2019; In percent)
CEPA-related countries represented about 15 3.50

percent of UAE total imports in 2019 (Text Figure). 3.00

If there are no tariffs after signing CEPA with those 2.50

11 countries, aggregate tariffs will be reduced by 2.00

0.5 ppt for intermediate inputs, 0.6 ppt for 1.50

consumption goods and 0.1 ppt for capital goods 1.00

(Text Figure). 0.50

4. Significant gains are expected from

2019 After all CEPAs
Intermediate 1.37 0.84

these free trade agreements but their

Consumption 1.26 0.64
Capital 0.58 0.48

materialization depends on the UAE’s ability to Sources: Comtrade, WITS-BEC classification.

attract complementary FDI. The UAE authorities
are expecting that the removal of tariffs between the UAE and India would increase bilateral non-oil

3While a traditional FTA focuses mainly on goods, a CEPA is more ambitious in terms of regulatory aspects and has a
holistic coverage of areas like services, investment, IPR, government procurement, disputes etc.

6 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

trade flows by 65 percent to reach USD100 billion over a 5-year period, based on the Global Trade
Analysis Project model developed by the UAE authorities. Similar gains are expected from other
CEPAs. Results from the IMF FSGM model suggests significant gains in terms of total factor
productivity (0.25 to 2.0 percent) and real GDP (0.3 to 2.1 percent), with the range depending on the
FDI environment as shown in empirical studies in trade literature (described in the next section).
Given the FDI restrictiveness index estimated for the UAE, we assess the gains to be closer to the
lower end of the range.

5. The UAE has substantially reduced restrictions on FDI in its latest set of reforms, but
continued efforts are needed to enhance competitiveness. In September 2021, the UAE took
further steps towards FDI liberalization by introducing a new commercial companies' law that
codified past changes to foreign investment and ownership requirements. 4 These were significantly
relaxed in the 2020 Commercial Companies Law, which removed a longstanding requirement for
onshore local companies to be 51 percent owned by UAE nationals. 5 The recent changes follow from
the 2018 “FDI Law” which represented an initial shift away from strict foreign ownership restrictions
by opening certain activities, as dictated by a “Positive List”, to 100 percent foreign ownership
through an approval process. 6 Following the OECD methodology, we estimate a FDI restrictiveness
index for the UAE. The results show significant enhancement of the FDI environment with the index
improving from around 0.7 in 2018 to around 0.12 in 2021. However, the UAE is still far from the
best practices compared to OECD countries and other emerging market economies. It remains
closer to the 70th percentile of the index distribution in terms of regulatory restrictions. Continued
efforts and additional incentives might be needed to keep the UAE in step with its peers and remain
comparatively attractive for FDI inflows.

B. Potentially Large Economic Gains from Trade Openness

6. CEPA agreements are expected to achieve economic benefits for the UAE through the
cancellation of customs tariffs leading to stronger competition, access to a higher number of
varieties and quality of inputs, and transfer of technology. Lower output tariffs can increase
productivity by inducing tougher competition in the domestic market, whereas cheaper imported
inputs can raise productivity via learning, variety, and quality effects. Amiti and Koning (2007) show

4 Federal Decree Law No. 32 of 2021 concerning Commercial Companies Law (CCL 2021) was issued on

September 20, 2021 and came into effect on January 2, 2022, repealing the Federal Decree Law No. 2 of 2015 and its
amendments (CCL 2020). Federal Decree Law No. 26 of 2020 was issued on September 27, 2020, introducing
significant amendments to the Federal Decree Law No. 2 of 2015 (CCL) and repealing Federal Law No. 19 pf 2018
(FDI Law). Published in the Official Gazette. https://dlp.dubai.gov.ae/en/Pages/OfficialGazette.aspx
5 Companies engaged in activities that are considered to have a “strategic impact" remain subject to a certain

licensing process and some ownership restrictions. Cabinet Decision No. 55/2021 Concerning the Determination of
the List of Strategic Impact Activities was issued on May 30, 2021.
6Limitations on foreign ownership were still imposed on certain economic sectors included in a “Negative List”. In

September 2018, the Cabinet issued the Federal Decree Law No 19 of 2018 regarding foreign direct investment ("FDI
Law"). Later in early 2020, the UAE Cabinet issued Resolution No. 16 of 2020 concerning the determination of the
Positive List of economic sectors and activities eligible for FDI and percentage of their ownership.
https://www.gccfintax.com/files/21363226_cabinet_resolution_no_16_of_2020.pdf

INTERNATIONAL MONETARY FUND 7

UNITED ARAB EMIRATES

for Indonesia that productivity gains from

ECI in UAE, CEPA-related Countries, US and China, 2020
reducing tariffs on intermediate goods are at (Less complex, lower ranking)
least twice as high as from reducing output
tariffs. Topalova and Khandelwal (2011) also
finds a larger effect of input tariffs on firm-
level productivity and observes
complementarities between trade
liberalization and additional industrial policy
reforms in India.

7. For instance, the economic

complexity index (ECI) of UAE is relatively Sources: Observatory of Economic Complexity (OEC).
weak compared to the 11 CEPA-related Aggregate TFP Trend Growth Rate
partner countries, and the UAE could (In percent)
benefit from their knowledge and know-
how to raise its aggregate productivity.
ECI measures the knowledge and
technological density of a particular
economy by studying the level of knowledge
concentration in exported products.
Countries that can sustain a diverse range of
productive know-how, including
sophisticated, unique know-how, are found
to be able to produce a wide diversity of
goods, including complex products that few
other countries can make. This means that
countries with better knowledge
accumulation and more diversified exports
enjoy greater levels of complexity. Despite the clear progress in economic diversification, UAE
exports continue to have weak technology content. Countries with CEPAs signed or under discussion
with the UAE have higher ECI (Text Figure), and potentially use more complex technologies.
Intensifying trade with those countries could lead to technology transfers and boost aggregate
productivity that has been on a declining trend over the past twenty years (Text Figure, Korniyenko,
2021).

8. However, productivity gains from trade liberalization can vary substantially depending
on the FDI attractiveness of a country, including investor friendly regulations. The extent that a
country benefits, in terms of increased FDI inflows and in turn productivity gains, from relaxing
barriers to foreign investments can vary with country-specific elements, but on average benefits
from FDI regulatory reforms can be significant. Based on a study of 60 advanced and emerging
countries over the period 1997-2016, Mistura and Roulet (2019) estimates an average increase of

8 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

2.1 percent in bilateral FDI inward stocks to every 10 percent reduction in FDI restrictiveness. 7 Using
panel data for a broad range of countries over two decades, Ahn et al. (2016) finds a dominant role
of tariff reduction on intermediate goods in fostering productivity gains and a strong
complementarity between trade and FDI liberalization. A similar finding was established in Halpern
et al. (2015) using firm-level data for Hungary which showed productivity gains from lower input
tariffs doubling with a higher foreign firms’ presence. These studies suggest that lower FDI barriers
could amplify the productivity gains from tariff liberalization.

C. Methodology

9. The macroeconomic gains from trade liberalization are evaluated using the Flexible
System of Global Models (FSGM) developed by the IMF Research Department. Flexible System
of Global Models (FSGM) is used to quantify potential gains from UAE trade liberalization from
signed as well as under discussion CEPAs. In this analysis, we use the MCDMOD module of FSGM
which contains individual blocks for the countries in the Middle East and Central Asia regions, and
additional regions to cover the remaining countries in the world. The model is presented in greater
detail in Andrle et al. (2015). MCDMOD is an annual, multi-region, forward-looking, model of the
global economy combining both micro-founded and reduced-form formulations of economic
sectors. Private consumption and investment have microeconomic foundations (OLG and LIQ
households; a Tobin’s Q model for firms’ investment). Trade is pinned down by reduced-form
equations. They are a function of a competitiveness indicator (relative prices) and domestic or
foreign demand. Supply is determined by an aggregate Cobb Douglas production function.
Equilibrium labor is determined by equilibrium rate of unemployment, given the labor force.
Consumer price and wage inflation are modeled by forward-looking Phillips’ curves. Monetary policy
is governed by an interest rate reaction function. Countries are largely distinguished from one
another in MCDMOD by their unique parameterizations to reflect policy regime, individual country
characteristics, and data availability.

10. The UAE’s FDI environment is assessed using an in-house proxy indicator of FDI
restrictiveness based on the OECD’s methodology proposed by Golub (2003) and last updated
in Kalinova, et al. (2010). The degree of FDI restrictiveness is evaluated in four areas: (i) foreign
equity restrictions, (ii) screening and prior approval requirements, (iii) restrictions on the
employment of foreigners as key personnel, and (iv) operational restrictions, including restrictions
on branching, on capital repatriation and on land ownership. The index ranges between 0 and 1
where the higher the score the more restrictive the FDI regulations. We have adopted the same
scoring methodology as in Kalinova, et al. (2010) to estimate the recent change in the UAE’s FDI
restrictiveness following the most recent changes to the Commercial Companies Law. 8

7 as measured by the OECD’s FDI restrictiveness index.

8 Officialnational publications and sources, including the respective laws and relevant ministries, were used to
identify restrictions on activities of non-residents. This coincides with the OECD’s methodology adopted for non-
member, non-adhering countries, to the Declaration on International Investment and Multinational Enterprises,
Enhanced Engagement, in constructing the FDI restrictiveness index.

INTERNATIONAL MONETARY FUND 9

UNITED ARAB EMIRATES

Table 2. United Arab Emirates: Scoring Methodology of OECD’s FDI Restrictiveness Index 1/

UAE's Proxy Indicator 2/

2018 Present

Measure I: Foreign Equity Restrictions Scores

Start-ups and acquisitions

No foreign equity allowed 1.0
Foreign equity < 50% of total equity 0.5 0.00 0.00
Foreign equity > 50% but < 100% of total equity 0.25
Acquisitions
No foreign equity allowed 0.5
Foreign equity < 50% of total equity 0.25
Foreign equity > 50% but < 100% of total equity 0.125

Measure II: Screening and Prior Approval Requirements 3/

Approval required for new FDI/acquisitions of < USD 100mn or if

corresponding to < 50% of total equity 0.2 0.00 0.00
Approval required for new FDI/acquisitions above USD100mn or if
corresponding to > 50% of total equity 0.1
Notification with discretionary element 0.025

Measure III: Rules for Key Personnel

Foreign key personnel not permitted 0.1 0.00 0.00

Economic needs test for employment of foreign key personnel 4/ 0.05
Time bound limit on employment of foreign key personnel 4/ 0.025
Nationality/residence requirements for board of directors
Majority must be nationals 0.075 0.075 0.00
At least one must be national 0.02

Other Restrictions on
Measure IV:
the Operation of Foreign Enterprises
Establishment of branches not allowed/local incorporation required 0.05 0.05 0.00
Reciprocity requirement 0.1
Restrictions on profit/capital repatriation 1 - 0.1
Access to local finance 0.05
Acquisition of land for business purposes 5/ 0.1
Land ownership not permitted but leases possible 0.05 - 0.01 0.010 0.010

TOTAL Up to 1 0.135 0.010

1/ Source: Kalinova et al (2010): OECD's FDI Restrictiveness Index: 2010 Update

2/ UAE's proxy indicator is based on IMF staff estimates following methdology outlined in Kalinova et al (2010)
3/ Excludes reviews of foreign investment based solely on national security grounds.
4/ If both restrictions apply, 0.05 is added to score.
5/ Score scaled by 1/3 when the measure applies only to border and coastal areas and by a factor of 5 for agriculture and forestry.

11. We estimate the current FDI restrictiveness index to be around 0.12 compared to 0.7 in
2018 (Table 2). This is a significant improvement but in reference to other countries the UAE
remains closer to the 70th percentile in terms of regulatory restrictions. In 2020, the OECD average
was 0.07 and the global average (based on 85 countries) was about 0.1 (Text Figure).

10 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

OECD’s FDI Regulatory Restrictiveness Index (2020) 9

0.8
UAE: 2018

0.6

0.4

0.2 UAE: 2021

0.0
DNK
LUX

JPN
ZAF

MAR

BRA

KOR
AUS

TUN

NZL
DEU
COL

TUR

USA
AUT
CHL

SGP

CHE

MEX

CHN

MYS
RUS
SVN

NLD

ALB

EGY

VNM

SAU
CZE

ESP

GRC

GBR

UKR

IDN
FRA

ARG
OECD

THA

PSE
ROM
FIN

PER

WLD

CAN

IND

LBY
PRT

HRV
BEL

ITA

POL

ISL

PHL
Sources: OECD, IMF staff estimates.

D. Results

Zero Tariffs on Imported Inputs Under CEPAs Only Zero Tariffs on All Imported Inputs
(Gains in terms of Real GDP, Percent) (Gains in terms of Real GDP, Percent)

Source: FSGM model, staff estimates.

Notes:
- FDI friendly environment is defined as FDI restrictiveness at the 25th percentile of its cross-country distribution based on
the OECD FDI restrictiveness index of 2020.
- Include signed agreements with India, Indonesia, and Israel and in-negotiations agreements with Australia, Georgia, Kenya,
Philippines, South Korea, Turkey, Ukraine, and Uzbekistan.

12. As intermediate goods represent a large share of UAE net imports, the 11 ongoing
CEPAs could lead to a 0.5 ppt reduction in aggregate tariffs. In 2019, intermediate inputs
represented 48 percent of net imports (after excluding imports for re-exports); 15 percent of which
were from India and other CEPA-related countries. Aggregate tariffs were at 3.2 percent. Assuming
no tariffs on intermediate goods after signing CEPA with 11 countries, the aggregate tariffs will be

9 OECD (2022), FDI restrictiveness (indicator). doi: 10.1787/c176b7fa-en (Accessed on 28 November 2022); UAE index
is based on IMF staff estimates

INTERNATIONAL MONETARY FUND 11

UNITED ARAB EMIRATES

reduced by about 0.5 ppt. If we expand our assumption to zero tariffs on all imported intermediate
goods, not just CEPA-related, the aggregate tariffs will be reduced by about 1.4 ppt.

13. The reduction of tariffs on intermediate inputs following CEPAs can lift medium-term
real GDP by 0.2 to 2 percent, depending on the UAE’s ability to attract FDI (Text Figure). Using
empirical evidence from Amiti and Koening (2007), Topalova and Khandelwal (2011) and Ahn et al.
(2016), a reduction of aggregate tariffs by 0.5ppt following the implementation of CEPAs would
increase TFP by a range of 0.25 to 2.0 percent – with the range depending on the FDI environment
as shown in Ahn et al. (2016). Using the IMF FSGM model, we find that the increase of TFP will lead
to a rise of real GDP by a range of 0.3 to 2.1 percent over 7 years. If all tariffs on intermediate inputs
are removed, TFP is estimated to increase by a range of 0.7 to 5.6 percent and real GDP by a range
of 0.7 to 5.9 percent over 7 years.

14. Following OEDC methodology to compute the FDI restrictiveness index, gains from
trade liberalization in the UAE are estimated to be closer to the lower end of the estimated
gains. We define FDI friendly environment as FDI restrictiveness at the 25th percentile of its cross-
country distribution based on the OECD FDI restrictiveness index of 2020. We use our proxy for the
UAE FDI restrictiveness to reduce the uncertainty around our estimates. For simplification, we
assume that gains vary linearly with the FDI environment. Given our assessment of the current FDI
environment in the UAE relative to other countries, we estimate the gains from the reduction of
tariffs on intermediate inputs to be closer to the lower end of the range (within the shaded area in
the graphs).

E. Conclusion

15. To promote economic integration and widen trade ties, the UAE has signed or started
negotiations on CEPAs with key partners which could significantly lift medium-term real GDP.
Ongoing CEPAs are expected to achieve significant economic benefits for the UAE and partner
countries through the cancellation of customs tariffs, facilitating access to markets and increased
competition. Based on empirical literature and the IMF’s FSGM model, results indicate significant
gains in terms of total factor productivity (0.25 to 2.0 percent) and medium-term real GDP (0.3 to 2.1
percent). Given the FDI restrictiveness index estimated for the UAE, we assess the gains to be closer
to the lower end of the range.

16. An evaluation of behind-the-border barriers to FDI could complement the results

highlighted in this note and narrow the uncertainty in assessing gains from trade and FDI
liberalization. The FDI index only evaluates regulatory restrictiveness but not the overall business
environment which will play a significant role in determining FDI levels that a country can attract.
These include the size of a country’s market, the extent of its integration with neighboring countries
or those it has trade agreements with, which can amplify market access and in turn provide a larger
investment opportunity for foreign investors. On the policy and institutional fronts, entry barriers
can also arise for several reasons, including the way the FDI regulations are implemented and state
ownership in key sectors.

12 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

17. Gains from trade and FDI liberalization would also need to be supported by other
reforms, including labor and product market reforms, to fully materialize. The UAE has one of
the most favorable business environments in the region and has undertaken substantial reforms to
support SME development. Recent reforms to promote private sector growth—including expanding
residency permits, supporting private sector employment of nationals, increasing scope for personal
choices, and encouraging growth of start-ups—should be fully implemented (Korniyenko, 2021).
Enhancing ongoing education system reforms is also needed to ensure more efficient and inclusive
investment in education and training in emerging fields to raise human capital and innovation.
Legislative initiatives to encourage business dynamism, together with well targeted assistance to the
most vulnerable, reforms of unemployment benefits and pension schemes and sufficient social
safety nets, including for expatriates, could help attract and retain skilled professionals, further
boosting productivity gains.

18. Gains might be underestimated because of the exclusion of other CEPA provisions and
trade in services. In addition to tariffs elimination on goods, the CEPA includes other key provisions
that will benefit exporters and importers of goods, as well as service providers. Some of these
benefits include further cooperation in relation to the agreement on technical barriers to trade,
promotion of trade opportunities for small and medium-sized enterprises, provisions to regulate
cross-border trade in services, and agreement on transparency and impartiality on government
procurement. Those additional benefits are not included in the analysis but could further lift trade
and real GDP, especially from services.

INTERNATIONAL MONETARY FUND 13

UNITED ARAB EMIRATES

References

Ahn J., C.-G. Park, and C. Park (2016), “Pass-Through of Imported Input Prices to Domestic Producer
Prices: Evidence from Sector-Level Data”, IMF Working Paper, 2016/023.

Amiti, M., and J. Konings (2007), "Trade Liberalization, Intermediate Inputs, and Productivity:
Evidence from Indonesia." American Economic Review, 97 (5): 1611-1638.

Andrle, M., P. Blagrave, P. Espaillat, K. Honjo, B. Hunt, M. Kortelainen, R. Lalonde, D. Laxton, E.

Mavroeidi, D. Muir, S. Mursula, and S. Snudden (2015), “The Flexible System of Global Models –
FSGM”, IMF Working Paper, WP/15/64.

Halpern, L., M. Koren, and A. Szeidl (2015), "Imported Inputs and Productivity." American Economic
Review, 105 (12): 3660-3703.

Golub, Stephen S. (2003), “Measures of Restrictions on Inward Foreign Direct Investment for OECD
Countries.” OECD Economic Studies, No. 36.

Kalinova, B., A. Palerm and S. Thomsen (2010), “OECD's FDI Restrictiveness Index: 2010 Update”,
OECD Working Papers on International Investment, 2010/03, OECD Publishing.

Korniyenko, Y. (2021), “Fostering UAE Productivity growth after COVID”, IMF Selected Issues Paper.

Koyama, T., and S. Golub (2006), “OECD’s FDI Regulatory Restrictiveness Index: Revision and
extension to more economies”, Working Paper on International Investment.

Mistura, F., and C. Roulet, (2019), "The determinants of Foreign Direct Investment: Do statutory
restrictions matter?" OECD Working Papers on International Investment 2019/01, OECD Publishing.

Topalova P., and A. Khandelwal (2011), “Trade Liberalization and Firm Productivity: The Case of
India”, The Review of Economics and Statistics, 93 (3): 995–1009.

14 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

ASSESSING THE IMPACT OF ICT INVESTMENTS ON

GROWTH1
The UAE’s Digital Economy strategy aims to double the contribution of the digital economy to non-oil
GDP to 20 percent by 2031. The UAE government is taking concrete steps to establish a strong digital
economy and has adopted digitalization across both the public and private sectors as a key growth
pillar, with the aim also of becoming the regional and global leader in digitalization. Through its
potential to increase efficiency in factor markets and easing of the delivery of services in the public
sector, digitalization can have significant multiplier effects on economic growth. Results indicate a
higher multiplier of ICT investments on non-oil GDP compared to non-ICT investments, indicating the
propagation effects of ICT investments in the non-oil sector with a potential to support diversification
of the economy.

A. Introduction

1. Digitalization has gained increased momentum and is changing societies globally. The
digitalization of economic activity can be broadly defined as the incorporation of data and the
internet into production processes. It also entails new forms of household and government
consumption, fixed-capital formation, cross-border flows, and finance (IMF, 2018). The rapid pace of
digitalization, which gained increased momentum since the early 2000s, has significant multiplier
effects on economic activity, productivity, employment, and other economic outcomes (World Bank,
2016). The digital economy was estimated to contribute 15.5 percent of global GDP by 2016, having
achieved growth rates that were more than twice the global GDP growth rate in the preceding
decade (Huawei & Oxford Economics, 2017).

2. The UAE is at the forefront of the digitalization revolution in the GCC (Gulf
Cooperation Council) region. With the aim of becoming the regional and global leader in
digitalization, the UAE government is taking concrete steps to establish a strong digital economy
and has adopted digitalization across both the public and private sectors as a key growth pillar. The
creation of a new ecosystem that encourages innovation, investment, and cybersecurity through
partnerships between the government and the private sector, together with continued government
participation, is expected to accelerate the achievement of these targets.

3. The UAE aims to increase the contribution of the digital economy, consistent with the
Digital Economy Strategy. The recently launched Digital Economy Strategy (DES) aims to anchor
the UAE’s digitalization agenda. With this strategy, the authorities aim to increase the contribution
of the digital economy from 9.8 percent of non-oil GDP in 2022 to around 20 percent by 2031. The
strategy focuses on six key areas including (i) digital infrastructure, (ii) unified digital platform, and
common digital enablers, (iii) integrated, easy, and fast digital services, (iv) digital capabilities and

1 Prepared by Dorothy Nampewo.

INTERNATIONAL MONETARY FUND 15

UNITED ARAB EMIRATES

skills, (v) legislation and (vi) raising efficiency of government work. The strategy also aims at defining
and measuring the size of the digital economy to track its growth and contribution to economic
growth. Prior to the publication of the DES, the frameworks for the development of the digital
economy were covered under two strategies: the Emirates Artificial Intelligence Strategy (2017), and
the “Abu Dhabi Economic Vision 2030” strategy (2007). These two strategies, respectively, aimed to
boost investment in artificial intelligence (AI) across different sectors of the economy, and to
increase internet penetration by ensuring enhancement of investment in the telecommunications
infrastructure. These, along with several other strategies are helping to fast track the growth of
UAE’s digital economy.

B. Developments in the UAE’s Digital Economy

4. The UAE’s digital economy is growing, but there is still significant scope for expansion.
The UAE’s digital economy contribution to overall GDP was estimated at 4.3 in 2018 (Ministry of
Economy, 2018) percent, lower than the estimate for the United States of America (8 percent) and
Europe (6.2 percent). It is also lower than Bahrain, Kuwait, and Egypt among GCC countries
(Figure 1). Consequently, the digital economy in the UAE has significant scope for growth consistent
with the recently launched Digital Economy Strategy. The UAE is expected to further reinforce its
position in the digital economy, supported by investments in eCommerce, information technology
infrastructure, capacity development, local production, increased coverage of internet services,
expansion of electronic payment systems, as well as significant government and private sector
collaboration to support digital transformation. Nevertheless, the UAE has made tremendous
progress in many areas of digital transformation as discussed below.

Figure 1. Share of Digital Economy Contribution to GDP (%), 2017

Source: The Economic Intelligence Unit Limited (2017), IMF staff calculations.

C. Digital Infrastructure

5. The UAE has invested strongly in the digital economy and remains at the forefront of
upgrading and developing its digital infrastructure. Investments in digital infrastructure aim to
expand digital connectivity and coverage, raise broadband service quality, and improve affordability.
By 2020, the UAE matched or even exceeded the OECD and the GCC in terms of some digital
infrastructure indicators, including the percentage of the population using the internet, ultra-
broadband home speed, international bandwidth, as well as fixed and mobile broadband. The UAE

16 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

was among the top countries with the fastest mobile broadband download speed in the world, at
118.42 Mbps in August 2022. In addition, the UAE has achieved 100 percent 4G coverage and
70 percent 5G coverage by 2020 (Figure 2).

Figure 2. Selected Digital Infrastructure Indicators, 2020

600
551

UAE
500

GCC
400
316 OECD
300

200
134 129
118 111
93 100 100 95 96
100 75 62 70
44 40 50 39

0
International Fixed broadband Mobile broadband Ultrabroadband 4G coverage of 5G coverage of
bandwidth, (000) download, (Mbps) download, (Mbps) homespassed (%) population (%) population (%)

Sources: International Telecommunications Union (ITU), IMF staff calculations.

Figure 3a. Individuals with ICT Skills, 2020

D. Digital Capacity Development
(By type of skills, in percent of internet users)
y yp p
6. The UAE is committed to enhancing 120
UAE
digital capacity development across the
100 100
100
85
labor force, particularly federal government
Target under the
80 70 69 Digital strategy

workers. The UAE Digital strategy targets 100 60 50

SDG Target

percent of the federal government workforce 40

trained in basic and intermediate digital skills 20

17
10
and at least 10 percent of the workforce
0
trained in advanced technologies such as ICT skills with bascic skills ICT skills with ICT skills with advanced
intermediate skills skills
blockchain, artificial intelligence, bot
Sources: International Telecommunications Union (ITU).
processing, among other technologies by
2025. This places skilling of the labor force Figure 3b. Local Production and Innovation
among the relevant indicators in digitalization Pillar
in UAE and is also a critical indicator used to (2020 Indices)
monitor SDG (Sustainable Development Goals) 90
83
Target 4.42. By 2020, the share of Internet 80 Local Production Pillar Index Innovation Pillar Index,

70
users with basic and intermediate skills was 60 53.5
62
55
58

high at 85 percent and 69 percent, compared 50 47

to SDG targets of 70 and 50 percent,

40 32.9
28.1
30

respectively. Although low at 17 percent, the 20 12.8 14.8

share of the internet users with standard skills 10

0
was well above the strategy’s target of 10 North America OECD EU GCC UAE

percent (Figure 3a). Sources: S&P Global, IMF staff calculations.

INTERNATIONAL MONETARY FUND 17

UNITED ARAB EMIRATES

E. Digital Regulation

7. The UAE is putting in place several regulations aimed at advancing efficiency in the
digital economy. In 2021, the authorities introduced a new data law designed to protect the privacy
of people and institutions and limit entities, such as private companies, from using personal data for
profit. The Information Assurance Regulation which calls for a broad range of best practices in
protection and management, including business continuity, disaster recovery, compliance,
certification, and accreditation was initiated as a key element of the UAE’s National Cybersecurity
Strategy (NCSS). These have been followed by other regulations including those targeted at digital
trade and blockchain, among others.

F. Digital Innovation and Local Figure 3c. Share of Apps Published by Country
Production (In world total %, 2018)
Kuwait 0
8. The UAE continues to invest in Qatar 0.1
Saudi Arabia
R&D to support digital innovation and
0.1
UAE 0.2

ranked above the GCC in 2020. The UAE Taiwan

Russia
2.3
2.6
continues to pursue ICT-led reforms in Germany 3.1
Uk 3.4
different sectors of the economy to India 3.7
France
enhance digitalization. This has partly
5.6
South Korea 6.2

supported the growth of locally produced

Japan 9.8
China 11.6
digital services compared to other countries US 23.3

in the GCC region, reflected in a higher

0 2 4 6 8 10 12 14 16 18 20 22 24 26

Sources: App Annie Data, IMF staff calculations.

local production index of 14.8 (El-Darwiche
et al. 2021) compared to 12.5 for the GCC Figure 3d. Countries with the Fastest Growth in
region (Figure 3b). Although the local Apps
production index remains below advanced (In percent, 2010-2018)
market levels, available data suggests that
45
local output in the UAE’s digital innovation
41
40 37
35
is increasing rapidly. Between 2010 and 35 31
28
30 26
2018, the UAE was among the top 10
25 24 24
25 22
20 20 19
20
countries with the fastest growth in 15

published Apps, although their share 10

5
remains low globally (Figures 3c and 3d). 0
Lithuania
Estonia
UAE

Uruguay
Indonesia

Phillipines

Vietnam

Pakistan
Qatar

Saudi Arabia

Chile

Lebanon

Serbia

Romania

This presents an opportunity to further

develop local skills and talent which would
Source: App Annie data
not only boost total factor productivity but
diversify the economy through enhanced Sources: App Annie Data, IMF staff calculations.
hi-tech exports.

18 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

9. Investment in the digital economy contributes significantly to economic growth.

Productivity gains from digital investments can lead to an increase in economic growth, with ICT
related investments having as much influence on growth as non-ICT investment (Seo et al., 2009).
The digital economy’s positive effect on economic growth acts through its impact on reducing
frictions in the factor markets and enabling government delivery of services through improved
connectivity and innovation (Dahlman, Mealy, and Wermelinger, 2016; Myovella, Karacuka, and
Haucap, 2020). Moreover, these contributions can be enhanced if digital technologies act to
complement rather than substitute other production factors (World Bank, 2016). At the same time,
countries with solid economic and digital infrastructure and open trade regimes experience more
active ICT investments.

G. Empirical Evidence of the Impact of Digitalization on UAE Economy

10. The paper aims to estimate the impact of UAE’s digital investment on economic growth.
Using a Factor Augmented Vector Autoregressive (FAVAR) model, the analysis aims to compute the
multipliers of digital investment on growth following the representation shown in equation (1)

𝑌𝑌𝑡𝑡 = ∅(𝐿𝐿)𝑌𝑌𝑡𝑡−1 + 𝜖𝜖𝑡𝑡 (1)

Where 𝑌𝑌𝑡𝑡 is a vector of endogenous variables, 𝐿𝐿 is the lag operator and is a vector of reduced form
residuals. To recover structural shocks from estimated residuals, we apply a Cholesky identification
scheme, assuming that investment spending impacts GDP with a lag, and that the latter reacts
contemporaneously to each spending variable shock. This implies that investment spending is
assumed to be more exogenous than GDP. This is likely to happen when investment is driven by a
multi-year strategy which may prevent investment from being influenced by swings in economic
cycles within the same year (IMF, 2021).

11. In the UAE, investment in the digital economy is driven by a multi-year Digital
Strategy, and thus, it is assumed not react to any changes in the economic cycle within the
same year. To overcome the limitation of non-fundamentalness which arises when current and past
values of the observables do not contain enough information to recover structural vector
autoregressive (SVAR) disturbances, we use the FAVAR approach which entails summing up the
information contained in a large dataset through a subset of latent, unobserved factors (see, e.g.,
IMF 2021; Forni et al., 2009; and Canova and Sahneh, 2018). Suppose𝑌𝑌𝑡𝑡 is a (M × 1) vector of
observable variables and 𝐹𝐹𝑡𝑡 is a (K × 1) is a vector of latent unobserved variables. The latent
unobserved vector, 𝐹𝐹𝑡𝑡 , is extracted from a large set of macroeconomic variables, denoted by the
(N × 1) vector 𝑋𝑋𝑡𝑡

𝑋𝑋𝑡𝑡 = Λ𝑓𝑓 𝐹𝐹𝑡𝑡 + Λ 𝑌𝑌 𝑌𝑌𝑡𝑡 + 𝜉𝜉𝑡𝑡 (2)

Where Λ𝑓𝑓 is a (N × K) matrix of factor loadings and Λ 𝑌𝑌 is an N × M matrix 𝜉𝜉𝑡𝑡 are idiosyncratic errors
assumed to be normal and uncorrelated or to display a small amount of cross-correlation,
depending on whether the estimation uses likelihood methods or principal components. The
principal component method assumes that the errors will vanish asymptotically with an appropriate
linear combination (Roulleau-Pasdeloup,2012). The co-movements of (𝐹𝐹𝑡𝑡 𝑎𝑎𝑎𝑎𝑎𝑎 𝑌𝑌𝑡𝑡 ) are summarized in
the transition equation 3:

INTERNATIONAL MONETARY FUND 19

UNITED ARAB EMIRATES

[𝐹𝐹𝑡𝑡 𝑌𝑌𝑡𝑡 ]′ = ∅(𝐿𝐿)[𝐹𝐹𝑡𝑡−1 𝑌𝑌𝑡𝑡−1 ]′ + 𝜀𝜀𝑡𝑡 (3)

Where∅(𝐿𝐿) is a conformable lag polynomial of finite order d, which may contain a priori restrictions
as in the structural VAR literature. The error term 𝜀𝜀𝑡𝑡 is assumed to be white noise with a mean of
zero and covariance matrix Σ. Transition equation 3 was expanded to include the relevant digital
investment spending variable, a real GDP variable, and a variable that captures the direct non-ICT
investment in the economy. We also include a 1×5 vector of common factors, to control for a wide
range of economic shocks that may affect GDP. The vector of endogenous variables is summarized
in equation 4.

𝑌𝑌𝑡𝑡 = �𝐼𝐼𝐼𝐼𝑇𝑇𝑡𝑡, 𝑁𝑁𝑁𝑁𝑁𝑁𝑇𝑇𝑡𝑡, 𝐺𝐺𝐺𝐺𝑃𝑃𝑡𝑡, 𝐹𝐹𝑡𝑡, � (4)

To overcome potential challenges arising from transforming the data into log transformations which
may lead to potential biases in computing the multipliers, we divide all endogenous variables by the
real potential GDP (IMF 2021). The real potential GDP was computed using the conventional HP
filter. The FAVAR approach allowed us to exploit valuable information from a large set of
macroeconomic variables that could potentially explain variations in GDP growth without concerns
on degrees of freedom, overfitting, or increasing parameter uncertainty in the estimations (Rahimov
et al. 2020). The common factors used consist of 12 macroeconomic variables (see details in Annex
I), using a two-step procedure following Bernanke et al. (2005). In the first step, we extracted the
common factors using the principal component analysis based on the Bai and Ng (2007) ICp2
information criterion. These factors explain 87.2 percent of the informational dataset variance. In the
second step, we added the factors to the vector of endogenous variables in equation 4 by ordering
the digital investment spending variable first through a standard Cholesky ordering procedure and
estimated the equation using an optimal lag length of 4 with a constant and no time trends. To
account for issues arising from potential shock foresight, we include the forecast of total
investments a year before as an exogenous variable, owing to the absence of forecasts for digital
investments.

12. We estimate equation 4 using quarterly data covering the period 1990Q1-2021Q4.
Owing to data limitations, available annual data was interpolated to generate the quarterly series.
Data on digital investment is not readily available. For this analysis, a proxy for digital investment
data was built as a share of OECD average ICT investments. This assumption may not be
unreasonable as the UAE ranks close to, and in some instances above, the OECD average on most
digital economic indicators (DEI). Since the UAE is an oil dependent economy, we conduct the
analysis on overall GDP, non-oil GDP and Oil GDP. We report 4-quarter average impulse responses
(see Annex II) based on local projections proposed by Jorda (2005). The choice of local projection
impulse responses over the conventional VAR impulse responses was because local projections are
more robust from the misspecification problems and tend to produce superior results compared
with conventional VAR impulse responses especially in small samples (Dime et al, 2021). The impact
multipliers were obtained by multiplying the impulse response function (IRF) values by the mean
value of the ratio of real GDP to the government spending indicator (IMF, 2018).

20 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

H. Results
Figure 4a. Multipliers on GDP
13. The FAVAR estimates suggest
that the point estimate for public
spending multiplier on overall GDP is
around 1.0 after the 4th quarter
(Figure 4a). This is consistent with other
estimates of the overall government
spending multipliers in the literature on
similar oil exporters, particularly those in
the MENA region (IMF, 2018). In addition, a
survey of the literature by IMF (2014) and
Ramey (2019) found that most estimates of
general government spending multipliers
range from 0.7 to 1.0 for high multipliers Source: IMF staff estimates.

(IMF 2014, Ramey 2019; Coenen et al.

2012). The multiplier of 1.0 for public investment in UAE could be attributable to a greater
proportion of the public sector, low debt, and a fixed exchange rate regime (IMF 2014 & IMF 2018).
The estimates further suggest that the ICT spending multiplier is about 1.5, higher than that of non-
ICT spending at 1.0. The available literature suggests that the economic impact of the digitalization
on OECD and non-OECD is 1.4 and 1.0 percent, respectively on overall GDP per capita (ITU, 2019).

14. The ICT spending multiplier on non-Oil GDP is around 1.8, higher than for non-ICT
spending multiplier at about 0.9. This implies that the effect of a dollar spent on ICT investments
almost doubles economic activity in the non-oil sector and investments in the ICT sector have
propagation effects through the economy leading a cumulative increase in non-oil GDP and
digitalization of the economy. With the UAE focusing on diversification of the non-oil economy,
further investment in the digital sector would seem to be a viable option to stimulate economic
activity.

Figure 4b. Multipliers on Non-Oil GDP Figure 4c. Multipliers on Oil GDP

Source: IMF staff estimates. Source: IMF staff estimates.

INTERNATIONAL MONETARY FUND 21

UNITED ARAB EMIRATES

15. The multipliers are negligible in the oil sector. This result is not surprising given that oil
production is an enclave extractive sector with limited direct linkages to the rest of the economy.
However, indirect linkages can be created through public consumption and private investment and
local entrepreneurial activity linked to the domestic oil sector value chain.

I. Conclusion

16. The recently launched UAE Digital Economy Strategy aims to double the contribution
of the digital economy to around 20 percent of GDP by 2031. Further investments in ICT can
generate more non- oil GDP than non-ICT investments. Continued investment in digital
infrastructure and advancement in research and development would help to boost the digital
sector’s contribution to economic growth. At the same time, continued development of local skills
and attraction of talent would not only boost total factor productivity but diversify the economy
through enhanced hi-tech exports. This, together with further investments in eCommerce, local
production, expansion of electronic payment systems, as well as significant government and private
sector collaboration, would enhance digital transformation.

22 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

References
Batini N., M. Di Serio, G. Melina, M. Fragetta, G. Melina, Waldron, A. 2021. Building Back Better: How
Big Are Green Spending Multipliers? IMF Working Paper No. 2021/087. International Monetary
Fund, Washington, DC

Batini, N., L. Eyraud, and A. Weber. 2014. A Simple Method to Compute Fiscal Multipliers. IMF
Working Paper No. 2014/093. International Monetary Fund, Washington, DC

Bernanke, B.S., J. Boivin, and P. Eliasz, P. 2005. Measuring The Effects of Monetary Policy: A Factor-
Augmented Vector Autoregressive (FAVAR) Approach. The Quarterly journal of economics, 120(1):
387-422.

Blaubach, T. 2021. The 5G divide in the Middle East: Further disparity between the Gulf and its
neighbors. Middle East Institute, Washington, DC. Accessed: September 15, 2022.
https://www.mei.edu/publications/5g-divide-middle-east-further-disparity-between-gulf-and-its-
neighbors

Canova, F. and M. H. Sahneh. 2018. Are small-scale SVARs useful for business cycle analysis?
Revisiting nonfundamentalness. Journal of the European Economic Association, 16(4), pp.1069-1093.

Coenen, G., C.J. Erceg, C. Freedman, D. Furceri, M Kumhof, R. Lalonde, D. Laxton, J. Lindé, A.
Mourougane, D. Muir, and S. Mursula. 2012. Effects of fiscal stimulus in structural models. American
Economic Journal: Macroeconomics, 4(1), pp.22-68.

Dahlman, C., S. Mealy and M. Wermelinger 2016. Harnessing the digital economy for developing
countries. OECD Development Centre Working Paper 334, OECD Publishing, Paris,
https://doiorg/10.1787/4adffb24-en.

Dime, R., E. Ginting, and J. Zhuang. 2021. Estimating fiscal multipliers in selected Asian economies.
ADB Economics Working Paper 638. Asian Development Bank, Manila

Elkhdari, M., M. Souissi, and M.A. Jewell. 2018. Empirical estimation of fiscal multipliers in MENA oil-
exporting countries with an application to Algeria. IMF Working Paper 18/124. International
Monetary Fund, Washington, DC.

El-Darwiche, B., El Zei, T., Sayess, D., Rizk, M., and R. Katz. 2021.Energizing the digital economy in the
Gulf countries: From digital adopters to digital disruptors. PriceWaterHouseCoopers, Dubai.
Accessed September 3, 2022. https://www.strategyand.pwc.com/m1/en/ideation-
center/research/2021/energizing-the-digital-economy-in-the-gulf-countries/energizing-the-digital-
economy-in-the-gulf-countries-spread.pdf

INTERNATIONAL MONETARY FUND 23

UNITED ARAB EMIRATES

Fogg, I. 2021. Benchmarking the Global 5G Experience — September 2021. Open Signal, London.
Accessed: September 23, 2022. https://www.opensignal.com/2021/09/09/benchmarking-the-global-
5g-experience-september-2021

Forni, L., L. Monteforte, and L. Sessa. 2009. The general equilibrium effects of fiscal policy: Estimates
for the euro area. Journal of Public economics, 93(3-4), pp.559-585.

Huawei & Oxford Economics. 2017. Digital Spillover. Measuring the true impact of the Digital
Economy. Retrieved from https://www.huawei.com/minisite/gci/en/digital-
spillover/files/gci_digital_spillover.pdf

IMF. 2018. Measuring the Digital Economy. IMF Staff Report. International Monetary Fund,
Washington, Dc. Accessed: September 15, 2022. https://doi.org/10.5089/9781498307369.007.
ITU. 2019. Economic contribution of broadband, digitization and ICT regulation: Econometric
modelling for Africa. International Telecommunications Union, Geneva, Switzerland. Accessed
September 3, 2022. https://www.itu.int/dms_pub/itu-d/opb/pref/D-PREF-EF.BDT_AFR-2019-PDF-
E.pdf
Jordà, Ò., 2005. Estimation and inference of impulse responses by local projections. American
economic review, 95(1), pp.161-182.

Ministry of Economy (2018). UAE Economy: Laying the Foundations of a Strong & Active Digital
Economy. Dubai. Accessed: 15 September 2022: https://u.ae/en/about-the-uae/economy/digital-
economy

Myovella, G., M. Karacuka, and J. Haucap, J. 2020. Digitalization and economic growth: A
comparative analysis of Sub-Saharan Africa and OECD economies. Telecommunications Policy, 44(2),
101856.

Plagborg‐Møller, M. and C.K. Wolf. 2021. Local projections and VARs estimate the same impulse
responses. Econometrica, 89(2), pp.955-980.

Rahimov, V., N. Guliyev, and V. Ahmadov. 2020. Modeling Azerbaijan's inflation and output using a
factor-augmented vector autoregressive (FAVAR) model (No. 01-2020). Graduate Institute of
International and Development Studies Working Paper.

Ramey, V.A. 2019. Ten years after the financial crisis: What have we learned from the renaissance in
fiscal research? Journal of Economic Perspectives, 33(2), pp.89-114.

Seo, H.J., Y.S. Lee, J.H. Oh. 2009. Does ICT investment widen the growth gap? Telecommunications
Policy, 33(8), pp.422-431.

World Bank. 2016. World Development Report 2016: Digital Dividends, World Bank, Washington, D.C

24 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

Annex I. List of Variables in the Information Set

Variable Source
Public Consumption IMF WEO Database
Total debt IMF WEO Database
Exports of goods and services IMF WEO Database
Imports of goods and services IMF WEO Database
Oil production Statista
Oil price FRED Database
Total government revenues IMF WEO Database
Real Broad Effective Exchange Rate FRED Database

Inflation IMF WEO Database

Broad Money IMF WEO Database
Gross international reserves IMF WEO Database
Employment IMF WEO Database

INTERNATIONAL MONETARY FUND 25

 UNITED ARAB EMIRATES

Annex II. Impulse Response Functions

Response of GDP to Total Public Investment Response of GDP to ICT Investment Response of GDP to Non-ICT
Investment

1.6 2.0 1.6

1.2 1.6 1.2

0.8 1.2
0.8
0.8
0.4
0.4
0.4
0.0
0.0
0.0
-0.4
-0.4 -0.4
0 1 2 3 4 5 6 7 8 9 10 11
-0.8
0 1 2 3 4 5 6 7 8 9 10 11 -0.8
0 1 2 3 4 5 6 7 8 9 10 11

Response of Non-Oil GDP to Public Response of Non-Oil GDP to ICT Response of Non-Oil GDP to Non-ICT
Investment Investment Investment

2.5 2.5 2.0

2.0 2.0 1.6

1.5 1.5 1.2

1.0 1.0 0.8

0.5 0.4
0.5
0.0 0.0
0.0
-0.5 -0.4
-0.5
-1.0 -0.8
0 1 2 3 4 5 6 7 8 9 10 11 -1.0 0 1 2 3 4 5 6 7 8 9 10 11
0 1 2 3 4 5 6 7 8 9 10 11

Response of Oil GDP to Public Investment Response of Oil GDP to ICT Response of Oil GDP to Non-ICT
Investment Investment

.8 .25 .4
.6
.20 .2
.4
.15 .0
.2
.10 -.2
.0

-.2 .05 -.4

-.4 .00
-.6
-.6
0 1 2 3 4 5 6 7 8 9 10 11 -.05
0 1 2 3 4 5 6 7 8 9 10 11 -.8
0 1 2 3 4 5 6 7 8 9 10 11

26 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

GROWING GREEN AND SUSTAINABLE 1

The UAE remains heavily reliant on hydrocarbon activity as a source of income and economic growth.
As the global economy decarbonizes, the UAE faces twin challenges of reducing its reliance on
hydrocarbon activity and adapting its economy and policy frameworks, including fiscal frameworks, to
climate risks. The UAE announced a set of structural reforms and green investments to reduce
emissions and energy intensity of the economy while diversifying it away from fossil fuels. Using the
IMF’s DIGNAR model 2 we show that green investments and reforms undertaken under the 2050
Strategies could almost double potential non-hydrocarbon GDP growth. Despite the UAE’s agile
approach to the energy transition, the costs are large, and the implementation need is urgent.
Developing and scaling up private green and sustainable finance as well as creating an enabling
environment for smooth energy transition would reduce direct fiscal costs, increase efficiency of green
investments, and preserve public financial wealth while delivering on growth and Net Zero ambitions.

A. Introduction

1. The UAE economy is exposed to climate

Hydrocarbon Revenue and Oil Exports
risks, which pose challenges for long-term (Percent of fiscal revenue and total exports)
growth. As a major oil exporter, the UAE is heavily 90 50

reliant on hydrocarbon activity as a source of 80 45

70 40

income and economic growth. Hydrocarbon 60

35

revenues amount to around 60 percent of total

30
50
25
fiscal revenues, while oil exports are over 15.9 40
20
30
percent of total exports of goods and services 20
15
10
(Text Figure). Moreover, indirect economic effects
Hydrocarbon Fiscal Revenue (lhs)
10 5
Oil exports % of total export
from hydrocarbon activities have a significant 0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
contribution to overall growth. As the global Sources: Country Authorities; IMF staff estimates
economy decarbonizes and demand for fossil
fuels declines, the UAE faces twin challenges of Precipitation and Mean Temperature
(mm,lhs ; °C )
reducing its reliance on hydrocarbon activity and
180 30
adapting its economy and policy frameworks, 160
Annual Precipitation (mm, lhs)
29.5
Annual Mean Temperature (°C)
including fiscal frameworks, to climate risks. 140 29
28.5
120
28
100
2. Additionally, the UAE is vulnerable to 80
27.5
27
the physical impacts of climate change. With 60
26.5
growing heat stress and rising temperatures (Text 40 26

Figure), the climate risks could have significant

20 25.5
0 25
impacts on the UAE non-oil economy and 1961 1971 1981 1991 2001 2011 2021

infrastructure, human health, and the natural Source: World Bank Climate Change Knowledge Portal

1
Prepared by Yevgeniya Korniyenko and Dorothy Nampewo.
2
Aligishiev, Melina and Zanna, 2021.

INTERNATIONAL MONETARY FUND 27

UNITED ARAB EMIRATES

habitat. For example, both agriculture and urbanization have increased the pressure on non-
renewable natural water sources that could result in a growing gap in water availability. 3 Moreover,
the UAE’s critical infrastructures, such as desalination and power stations, and habitats located on
coastal zones, are at risk with rising sea levels. Desertification has also increased the severity of
sandstorms.

3. The authorities have set ambitious

Baseline GHG Emissions vs. a Paris Pledge and
climate objectives, including achieving Net NZE Target
Zero emissions by 2050. The UAE was the first 300

country in the Middle East and North Africa

(MENA) region to announce the intention to 250

achieve Net Zero emissions by 2050. In

mtCO2e
September 2022, the UAE enhanced its voluntary 200

climate commitment under the Paris Agreement

Baseline
to target a 31 percent reduction in greenhouse 150
Nationally-Determined Contribution (NDC)
gas emissions by 2030 (up from 23.5 percent Net Zero Emissions Pathway
announced previously). The UAE Energy Strategy
100
2019 2021 2023 2025 2027 2029 2031 2033 2035
envisages an investment of AED 600 billion (USD Source: CPAT tool and IMF staff estimates.
163 bn, or 52.1 percent of 2021 non-resource
GDP) in clean energy and renewables, efforts to modernize infrastructure capable to support energy
transition, and increase energy efficiency to reduce energy demand. 4 However, NDC targets must be
accelerated to reach long-term Net Zero targets, while ensuring a smooth energy transition will
require sustained commitment to ongoing efforts and forward-looking policies to respond to the
risks and challenges that could arise from global decarbonization efforts (UAE 2022 AIV, Box I).

4. The UAE is committed to climate policies, but the costs are large, and the
implementation need is urgent. The UAE is already investing heavily in clean energy and
renewables, implementing green building codes, and building efficient and climate resilient public
transportation, among others, as detailed in its updated Second NDCs, the “2030 Agenda for
Sustainable Development: Excellence in Implementation - Voluntary National Review”, and in the
2021 UAE Article IV. 5 To deliver on climate commitments, the government is working on the UAE
Pathway (launched at COP27), which envisages participation of both private and public sectors to
cover large implementation needs and reduce direct fiscal costs. The intention is to prioritize low- or
zero-carbon investments in projects that have a strong business case, those that require long-term
implementation but have potential large gains for energy transition, and the sectors with the highest

3 Agriculture sector represents about 85 percent of total water consumption.

4 The UAE Energy Strategy 2050 seeks to bring the contribution of clean energy in the total energy mix from 25
percent to 50 percent by 2050, reduce the UAE’s carbon footprint of power generation by 70 percent, and reduce
final energy demand by 40 percent. These targets are being revised up by the authorities in line with more ambitious
NDCs.
5 The UAE 2021 AIV, Annex VI has a detail discussion of UAE progress on climate related SDGs and adaptation

policies.

28 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

emissions and highest energy intensity. 6 The UAE’s current approach to energy transition which
maintains investments in traditional energy markets while increasing investments in greening fossil
fuel extraction processes and renewables provides the balance required to deliver the desirable
results while ensuring energy security.

5. Managing the UAE’s transition to a less carbon-dependent economy is expected to be

a key challenge going forward. While the UAE has made significant progress in reducing
dependence on hydrocarbon revenue and exports, its CO2 emissions per capita are high relative to
the OECD average, while energy intensity remains significantly above world average. On the upside,
the UAE’s low oil extraction costs (Figure 1), substantial public financial buffers, ambitious supportive
reforms and the move to facilitate green policies and finance make it more resilient to potential
price declines than many other fossil fuel exporters. However, it is important to look beyond current
high energy prices, as the required financing need could be larger than assessed by the government
and complementary policies and significantly larger investments in clean energy and renewables
might be required under a faster-than-expected global decarbonization scenario (see Box 1 and
2022 UAE AIV, Box 1).

Box 1. Alternative Policies to Mitigate Climate Change Challenges in UAE

The UAE energy transition may require significantly larger front-loaded investments in green and renewable
energy to stay on track to achieve Net Zero by 2050 (as discussed in 2022 UAE AIV, Box 1). This could put
additional pressure on public finances, as attracting larger private capital may prove difficult in the short- to
medium-term. To mitigate effects on public finances the UAE may consider alternative and supportive fiscal
policies.

Tax policies, gradual removal of energy subsidies, and more efficient and green public financial
management (PFM) frameworks could further support government efforts to ensure macroeconomic
sustainability and meet energy transition challenges. The IMF Carbon Pricing Assessment Tool (CPAT)1
indicates that the UAE may need larger than announced investments in renewables by 2030 to stay on track
to achieve Net Zero emissions by 2050. To contain pressure on public finances, the implementation of the
Net Zero Initiative could also be achieved by a combination of policies, such as continuing investments in
green and renewable energy, a gradual removal of energy subsidies, the introduction of climate PIMA, green
PFM, and budget tagging system, and consideration of climate taxation.

For example, the CPAT tool shows that a carbon tax and emission trading system would be the most
efficient (in addition to investment in renewables) in reducing emissions compared to other
instruments. An estimated carbon tax (or ETS emissions price) of $75 per ton by 2030 would be consistent
with UAE’s intermediate emissions objectives, without other mitigation measures (Text Charts). However,
________________________
1/ CPAT is a tool which allows for rapid, country-specific analyses of carbon pricing reforms on several metrics, e.g.,
effects on GDP growth and employment. See Simon Black, Victor Mylonas, Ian Parry, Nate Vernon, and Karlygash
Zhunussova, 2022, “Climate Policy Assessment Tool (CPAT): A Tool To Help Countries Mitigate Climate Change,” IMF
forthcoming.

6The highest contributions to reduction of carbon dioxide are expected to come from the electricity generation
sector (66.4 percent), industry (16.6 percent), transport (9.7 percent), carbon capture, utilization, and storage (5.3
percent), and waste (2.1 percent).

INTERNATIONAL MONETARY FUND 29

UNITED ARAB EMIRATES

Box 1. Alternative Policies to Mitigate Climate Change Challenges in UAE (concluded)

energy subsidies and price reforms would also help to bring electricity and gas prices in line with market
prices, reduce fiscal burdens by better targeting subsidies to the most vulnerable, and lower energy
demand.2
GHG Emissions excl. LULUCF GHG Emissions excl. LULUCF
($75 Carbon Tax) ($75 ETS)
300 300

200 200
mtCO2e

mtCO2e
100 100

0 0

Baseline Baseline
- Carbon tax - ETS
Nationally-Determined Contribution (NDC) Nationally-Determined Contribution (NDC)
Net Zero Emissions Pathway Net Zero Emissions Pathway
18% Reduction 17% Reduction

Sources: IMF CPAT tool and IMF staff estimates.

______________________
2/ Subsidizing the consumption of fossil fuel has significant negative externalities that can be captured in estimates of
the implicit and explicit cost of subsidies Fossil Fuel Subsidies (imf.org).

6. This paper aims to assess the impact of green and sustainable policies on the UAE
long-term potential non-oil growth. Full implementation of announced reforms and targets under
the UAE 2050 Strategies is expected to have large positive impacts on growth and diversification. 7
The analysis is a partial equilibrium based on the IMF’s DIGNAR-19 model and Carbon Pricing
Assessment Tool (CPAT). The analysis suggests that achieving the Net Zero emissions target by 2050
may require large investments in renewables and clean energy by 2030 to stay on track to achieve
Net Zero emissions by 2050. This may require a combination of policies, such as those that would
help to attract private capital in green projects, gradual removal of energy subsidies, the
introduction of green PFM and climate-PIMA 8, and consideration of climate taxation to support the
transition. Investments in green and sustainable policies reinforced by successful supporting
reforms’ implementation have the potential to almost double the current projected medium-term
non-oil GDP growth of about 4 percent and raise potential non-oil GDP growth and economic
diversification in the medium -to- long-term.

7 Among others, these reforms include: (i) achieving CO2 emissions reduction targets set in the Second NDCs; (ii)
developing green and sustainable finance; (iii) fully integrating costs and benefits of climate policies to policy
frameworks; and (iv) enhancing disaster risk management strategies to deal with immediate physical risks.
8Climate Public Investment Management (PIMA) and green Public Financial Management (PFM) deliver IMF
Technical Assistance to incorporate climate considerations into long-term fiscal management. See Strengthening
Governance for Climate-Responsive Public Investment (imf.org) for details.

30 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

Figure 1. Energy Transition Exposure and Resilience

UAE CO2 emissions per capita are high relative to the While energy intensity remains significantly above world
OECD average… average.
Average Emission Levels Energy Intensity
Absolute (MtCO2e, RHS) Per bln US$ GDP (tCO2e) Per capita (CO2e)
(In kWh)
4
1,800 35
3.5
1,600 UAE World
30 3
1,400
25 2.5
1,200
2
1,000 20
OECD average per 1.5
800 capita CO2e 15
1
600
10 0.5
400
5 0
200

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0 0
ARE GCC MENA Source: World Bank, BP, and Madison Project Database.
Note: Energy intensity is measured as primary consumption per unit of gross
Source: CAIT. domestic product. This is measured in kilowatt-hours per 2011 $ (PPP).

Energy sectors are the largest emitters of CO2. The UAE’s energy consumption has begun to shift toward
renewables and nuclear.

Direct Primary Energy Consumption

(In percent, from Fosil, Renewable and Nuclear Fuels)
100

99.9

99.8

99.7

99.6

99.5

99.4

99.3

99.2
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Fosil Nuclear Renewable

The UAE’s extraction costs are low and breakeven prices The UAE is one of the least exposed to climate transtion
are favorable. and comparatively resilient to its impacts.

Note: Operational Cost includes production costs (i.e., salaries, lease

costs and maintenance), transport costs (e.g., processing costs and
transport fees), general and administrative costs, and production tax.

Sources: CAIT, and IMF staff calculations.

INTERNATIONAL MONETARY FUND 31

UNITED ARAB EMIRATES

7. The rest of the paper is structured as follows: the next section discusses the literature
on modelling green and sustainable policies. A scenario assessment of the growth impacts of
green and sustainable policies on UAE growth is discussed in section C, while fiscal implications of
climate policies in UAE is discussed in section D. Developing and facilitating green and sustainable
finance in UAE; and conclusions and further policy considerations are discussed in sections E and F,
respectively.

B. Modelling of Green and Sustainable Policies: Literature Overview

8. Fostering green and sustainable policies helps to tackle climate challenges and
contributes to sustainable long-term growth. This would be accompanied by scaling-up
investments in renewables and increasing the share of renewables in the total energy mix. Such
investments have been shown to have the strongest prospects both for mitigating climate risks and
replacing fossil fuels (Moriarty and Honnery, 2016). In addition, they provide potential solutions to
environmental challenges (Dincer, 2000) and improve capacity to provide sustainable, cost effective,
and user-friendly energy sources (Dincer and Ronsen, 1998).

9. Energy transition would require sizeable investment that is supported by enabling

policies. Required significant green investments may necessitate tapping private sector finance
(Semieniuk and Mazzucato, 2019; Bergek et al., 2013). Indeed, recent analysis concludes that
financing of green polices needs to double or triple over the next years if countries are to achieve
the Net Zero targets by 2050, requiring significant buffers, alternative sources of financing
(Semieniuk and Mazzucato, 2019), and a supportive and enabling investment environment.
However, these investments may not be attractive to private investors given the long lead times and
uncertainty in returns to investments (Semieniuk and Mazzucato, 2019, Bergek et al., 2013).

10. Innovative financing solutions for the private sector and fiscal policies could support
green investments. Alternative policies such as those designed to boost the return on green
investments could help attract large scale private investors (Polzin et al, 2015). Innovative financing
sources such as the issuance of green bonds (Ando et al., 20229) and carbon pricing or feed-in-
tariffs have been found to have a positive and significant impact on green investments (Eyraud,
Clements and Wane, 2013). In addition, policies such as boosting domestic revenue mobilization
and elimination of subsidies would create fiscal space for green investment (Gurara, Melina and
Zanna, 2019).

11. Strengthening domestic public investment management policy frameworks is critical

to ensuring maximum gains from green investments. Recent analysis based on the IMF DIG and
DIGNAR models, highlights how growth dividends from public investments could be adversely
affected by inefficiencies in public investment. This could arise partly from low absorptive capacity
due to weak public investment management frameworks (Gurara, Melina and Zanna, 2019).
Strengthening public investment frameworks along with proper sequencing of public investments

9
Sakai, A., Fu, C., Roch, F. and Wiriadinata, U. 2022. “Sovereign Climate Debt Instruments: An Overview of the Green
and Catastrophe Bond Markets.” IMF Staff Climate Note 2022/004, International Monetary Fund, Washington, DC.

32 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

would increase public investment efficiency and ensure maximum gains without exerting pressures
on public resources.

12. Green and sustainable policies are associated with higher medium-term growth and
employment. Investments in green energy are associated with high growth dividends in the
medium- to -long-term. Recent analysis suggests that green and sustainable infrastructure
investments have output multipliers ranging 1.1-1.5, higher than traditional infrastructure
investments multipliers in the range of 0.5-0.6 (IMF, 2021). In addition, investing in low carbon
energy seems to be more labor intensive than brown energy investments revealing the potential of
green investments to increase employment. Garrett-Peltier (2017) find that each $1 million shifted
from brown to green energy will create a net increase of 5 jobs. Other studies have come to a similar
conclusion that investments in green energy are more labor intensive than investing in brown
energy (Hepburn et al., 2020; Engel and Kammen, 2009).

C. Growth Impacts of Green and Sustainable Policies in UAE: Scenario

Analysis

13. Using the IMF’s DIGNAR-19 model, we assess the impact of the AED 600 billion
planned investments in green energy under the UAE Energy Strategy 2050. The IMF’s DIGNAR
model is a partial equilibrium model designed to deliver quantitative macroeconomic assessments
and policy scenario analysis in open developing economies (Aligishiev, Melina and Zanna, 2021). The
modelling framework abstracts from the full input-output structure of the economy and
incorporates three sectors of production that include nontraded goods, non-resource traded goods,
and traded natural resources. The model also includes financially and non-financially constrained
households. The government has access to several fiscal instruments (productive and unproductive
expenditures and various taxes), concessional and non-concessional debt, and assumes a natural
resource fund that serves as a fiscal buffer which is drawn down to cover a revenue shortfall or
accumulates savings from excessive revenues. The summary of the model structure and key
assumptions used for the calibration of the UAE economy are provided in Annex A.1. Using these
assumptions, we consider three scenarios as detailed below.

14. Announced green investments are assumed to deliver high growth dividends with
successful implementation of the UAE’s massive reform agenda, including the Projects of the
“50”. These projects include reforms of labor and product markets, further trade and FDI
liberalization, enhancing digitalization and technology advancement and fostering a sustainable
energy transition.

• Labor market reforms including enhancement of visa policies, provision of appropriate pension
schemes and safety nets (including for expatriates), support of private sector employment,
continued support to female labor force participation and more efficient and inclusive
investment in education and training in emerging fields would raise human capital, attract, and
retain skilled labor force, and contribute to a more dynamic labor market. We assume that these
reforms would lead to a 2 percent increase in labor supply relative to the baseline, consistent

INTERNATIONAL MONETARY FUND 33

UNITED ARAB EMIRATES

with authorities’ targets and in line with similar GCC countries (see for example Moreau and
Aligishiev, 2022).

• Trade and FDI liberalization and leveraging the benefits of digitalization and advancement of
technology and innovation would enhance efficiency gains and support total factor productivity
while improving the business environment and attract private capital. 10 These combined with
reforms in public expenditure management such as improved coordination of the fiscal
framework with the UAE 2050 Strategy to fully account for green investment needs and costs;
introduction of climate-PIMA and green PFM would increase public expenditure efficiency and
enhance the returns on green investments. We assume that these gains would increase public
expenditure efficiency by 20 percent, relative to the baseline, similar to other GCC countries (see
for example Moreau and Aligishiev, 2022 for Saudi Arabia).

15. The baseline scenario is aligned with the assumptions in the macro-framework
underpinning the UAE 2022 Article IV Consultations. The scenario assumes that public
investment would remain steady at around 10.5 percent of GDP in the long-term. It also assumes a
continued implementation of the government’s reform agenda, which is expected to contribute to
medium-term annual non-oil GDP growth of about 4 percent. The UAE is currently pursuing reforms
in the labor and product markets, trade and FDI, and digitalization (as also discussed in Chapters 1
and 2). Although these are expected to deliver gains in the short term, maximum gains would be
achieved with full implementation in the medium to long term (Figure 2).

16. The first alternative scenario considers the impact of additional green investments
relative to the baseline. Public investment is expected to grow by an additional 2 percent of GDP
per year until 2050 under the UAE Energy Strategy. 11 The additional increase in public investment
reflects higher investments in renewables and green energy. The additional expenditure combined
with partial implementation of the reform agenda is assumed to encompass both investments in
renewables and “greening” of the extraction processes of fossil fuels using advanced technologies.
The results indicate that this scenario would deliver non-oil GDP growth of around 6 percent in the
medium- to long-term.

17. The second alternative scenario considers the impact of additional green investments
combined with full implementation of the authority’s reform agenda. 12 This scenario assumes
that additional investments in green energy are combined with a well-coordinated and full
implementation of the reform agenda, including trade liberalization and digitalization reforms

10
See SIP Chapters 1 and 2 on “Quantifying gains from trade liberalization” and “Assessing the impact of ICT
investments on growth”.
11
In nominal terms, this corresponds to the AED 600 billion (USD$ 163 billion) cumulative new investments by 2050.
12
For example, in 2021-22, the UAE announced ambitious national strategies including the set of new projects and
initiatives “The Project of the 50’”, the national plan “We The UAE 2031”, Digital Strategy and the Industrial Strategy
“Operation 300 bn”. The UAE aim’s to more than double the manufacturing value added from AED 133 bn to AED
300 bn, double nominal GDP from AED 1,490 bn to AED 3,000 bn, double the contribution of the digital economy to
GDP to 20 percent by 2031, generate AED 800 bn in non-oil exports, and attract over USD 150 bn FDI by 2031.

34 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

discussed in Chapters 1 and 2. The results reveal that the growth dividends under this scenario
would double non-oil growth to around 8 percent by 2050. While high, the results are consistent
with the relatively small share of the non-oil sector in total GDP and with findings for other GCC
countries (see for example Moreau and Aligishiev, 2022 for Saudi Arabia). Our findings are also
consistent with recent IMF analysis which confirms high output multipliers associated with green
investments (well within the 1.1 - 1.5 range (Batini et al, 2021)).

Figure 2. Green Investments, Reforms, and Impact on

Non-Hydrocarbon GDP
Green Investments, Reforms and Impact on Non-
Hydrocarbon GDP (In percent)
9
8
7
6
5
4
3
2
1
0
2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Baseline scenario
Alternative scenario 1
Alternative scenario 2

Source: IMF staff calculations.

Notes:
Baseline Scenario: Is aligned with the assumptions in the macro-framework underpinning the UAE 2022 Article IV
consultations.
Alternative Scenario 1: Assumes that additional investments in green energy are expected to grow by an additional 2
percent of GDP per year until 2050 under the UAE Energy Strategy.
Alternative Scenario 2: Assumes that additional investments in green energy are combined with a well-coordinated
and full implementation of the reform agenda. Full implementation implies that reforms are fully implemented leading
to a 20% increase in public investment efficiency & return on investments, increase in skilled labor supply & private
investments.

INTERNATIONAL MONETARY FUND 35

UNITED ARAB EMIRATES

18. Labor market reforms would enhance productivity and real wages. Full implementation
of the current labor reforms as one of the assumptions in the second alternative scenario, combined
with a scale up of green energy investment would lead to an increase in labor supply by around 10
percent by 2027. At the same time real wages would increase by around 4 percent over the same
period, reflecting potential gains in productivity. These findings are consistent with the literature
suggesting a labor productivity payoff from low carbon energy investments (Garrett-Peltier, 2017
and Hepburn et al., 2020). The findings are also consistent with recent IMF analysis that shows a 7
percent wage premium associated with green-intensive job earns in comparison to pollution-
intensive jobs (IMF 2022).

19. A well-coordinated and prioritized reform agenda would support the growth dividend
of larger green investments. While the growth impact of additional investments would be hump-
shaped, implying higher productive gains of public investments in the short-term with diminishing
returns, successful implementation of the UAE’s ambitious 50-year reform agenda would improve
the investment climate for green energy, attract more private investment and skilled labor. The
overall improvement in public investment efficiency would transform into a higher rate of return of
green investment projects. These findings are consistent with the literature that reform policies
would help to improve the investment climate for green energy and boost domestic and foreign
investments as well as increase opportunities for growth and employment (see for example Gurara,
Melina and Zanna 2019; Hepburn et al., 2020; and Engel and Kammen, 2009).

D. Fiscal Implications of Climate Policies in UAE

20. The UAE pursued countercyclical fiscal policy after the GFC, helping to build large fiscal
buffers to support ambitious reform agenda. The UAE has amassed significant sovereign financial
assets, estimated at around 350 percent of GDP in 2021 (comparable only to Norway), while also
scaling-up investments in infrastructure (Figure 3). Fiscal and structural reforms have also improved
fiscal and external breakeven oil prices and led to associated improvements in fiscal vulnerabilities to
oil price volatility (Figure 1). Maintaining adequate financial (stabilization) buffers should help the UAE
to withstand any large and persistent shocks, including related to global decarbonization efforts.
These buffers also allow for a countercyclical fiscal
policy and provide ample support to the government
2050 Strategy and UAE Green Agenda.

21. Nevertheless, volatility and unpredictability

of oil prices have increased in recent years, while
fiscal buffers were tapped to first respond to the
COVID-19 crisis and then provide targeted support to
the most vulnerable households to shield them from
recent commodity prices shock.

36 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

Figure 3. Financial Wealth and Capital Stock

Sources: Bloomberg, Penn World Table 10.0, and IMF staff estimates.
Note: Net financial wealth is estimated based on publicly available information for total assets of CBUAE, UAE SWFs and Developmental
Funds, such as Abu Dhabi Investment Authority, Investment Corporation of Dubai, Mubadala Investment Company, Abu Dhabi
Developmental Holding Company, Emirates Investment Authority, Sharjah Asset Management, and Fujairah Holding.

22. Accelerating energy transition reforms would put additional pressures on public
finances. Frontloading investments in adaptation and mitigation would mean higher non-oil
primary deficits during the transition period, resulting in lower net public financial wealth (Figure 4).
Alternative financing strategies (including relying more on green and sustainable private finance)
would help to preserve net public financial wealth (2022 UAE AIV, Annex III). Mainstreaming private
sector green finance and alternative and supporting fiscal policy options for meeting emissions
goals, as well as appropriate design of these policies, could mitigate impacts on public finances.

Figure 4. Public Finance and Energy Transition

Total Net Wealth Non-resource Primary Balance
Anchor Calibration: Constant share of non-resource GDP Anchor Calibration: Constant share of non-resource GDP
Y-axis: % non-resource GDP Y-axis: % non-resource GDP
Anchor attained after transition period (with fiscal multipliers' effect) Anchor attained after transition period (with fiscal multipliers' effect)
Anchor attained after transition period (no fiscal multipliers' effect) Anchor attained after transition period (no fiscal multipliers' effect)
Baseline projection Baseline projection
1200 0

1000 -5

800 -10

600 -15

400
-20
200
-25
0
-30
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

Sources: Country authorities and IMF staff estimates.

Note: Constant share of non-resource GDP estimates nonhydrocarbon primary balance NHPB target consistent with
consumption of a constant share of non-resource GDP overtime. The frontloading scenario shown on the charts assumes
additional AED 600 bn investments in renewables by 2050 that are financed by exhausting existing public financial
wealth, while the NHPB adjustment is postponed to 2050. No growth benefits beyond the fiscal multiplier effects are
assumed.

INTERNATIONAL MONETARY FUND 37

UNITED ARAB EMIRATES

E. Developing and Facilitating Green and Sustainable Finance in UAE to

Support Energy Transition

23. The UAE has the most advanced sustainable finance framework in MENA. The UAE
Sustainable Finance Framework (SFF) 2021-2030 envisages enhancing both supply and demand of
sustainable finance and strengthening the enabling environment for diversified and innovative
sustainable finance products. The UAE Sustainable Finance Working Group (SFWG) 13 identified three
actions to support the development of the nation-wide SFF: (i) strengthening consistent
sustainability disclosures across UAE, (ii) fostering sustainability focused corporate governance, and
(iii) developing UAE taxonomy of sustainable activities. To operationalize the SFF, the UAE Ministry
of Climate Change and Environment (MoCCAE) is working on defining a common green taxonomy
at the sectoral level, identifying eligible green projects, and matching them with the least-cost
financing instruments. Additionally, the authorities are assessing the need for targeted incentives
and enhancing federal and local regulations to facilitate public-private collaboration (including PPP
laws) for green projects. The UAE is also developing green finance capacity building programs to
facilitate green projects implementation and setting a mechanism to monitor the initiatives,
including in the financial sector.

24. Efforts are being undertaken to green the financial system. The CBUAE has added
climate change to the list of its strategic priorities and is promoting standards in line with
international best practices, focusing on risk management, stress testing, and data collection, as well
as on deliverables related to the UAE taxonomy of sustainable activities. The CBUAE also supports
the inter-agency work on the comprehensive response of the insurance industry to climate-related
risks and opportunities. Abu Dhabi Global Market (ADGM) and DFS participate in the Network for
Greening the Financial System (NGFS). 14

25. Despite the authorities’ actions, sustainability considerations have only been partially
mainstreamed into key businesses activities and the level of green finance remains low.
Although issuances of green and green-linked bonds and loans in the UAE have increased, volumes
remain quite low relative to estimated USD 163 billion financing need. Moreover, issuances have
been mostly undertaken by the energy and financial sectors, and most of the pioneering green
projects in the UAE are government funded or led, with limited private-sector participation.

13
The Group includes the Ministry of Finance, the Ministry of Economy, the CBUAE, the MoCCAE, the Securities and
Commodities Authority, the DFS Authority and the ADGM amongst others.
14
The NGFS is a group of central banks and supervisors that share best practices and contribute to developing
environment and climate risk tools. The ADGM Financial Services Regulatory Authority and the DFS Authority both
joined NGFS in 2019. The NGFS group has 95 members with 16 observers.

38 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

GCC* Countries Sustainable Debt Issued, (USD bn) Green Financing by Industry, 2003-22, (USD bn)
(By Instrument Type) 13
8
12
Utilities
7 11
Industrials
6 10
9 Government
5
8
4 Financials
7
3 6 Energy

2 5 Consumer staples
4
1
3
0
Saudi UAE Saudi UAE Saudi UAE Qatar Saudi UAE Bahrain Saudi UAE Bahrain 2
Arabia Arabia Arabia Arabia Arabia
1
<=2018 2019 2020 2021 2022
0
Green Bond Green Loan Sustainable Bond Sustainable Loan
ARE SAU EGY PAK IRQ GEO MAR QAT JOR KAZ UZB AZE KGZ
*No issuance yet for Kuwait and Oman, per IMF definition

Sources: Bloomberg BNEF and IMF staff estimates.

26. The UAE could strengthen private green and sustainable finance through a number of
avenues.

• The UAE has diverse green finance products and services, with the total amount of green
investments amounting to 6.8 percent of GDP (AED 80 billion15). The 2016 State of Green
Finance Report identified 16 types of products and services, ranging from green transition and
project financing to green auto loans, sukuks, and credit lines, among others. The UAE was the
first Gulf country to issue bank and company green sukuk. In 2017, First Abu Dhabi Bank issued
a green bond valued at USD 587 million; in 2019, Majid Al Futtaim, a Dubai real estate company,
issued successive USD 600 million green sukuk. Since 2003, the UAE has attracted USD 13 billion
in green bonds and loans.

• There is significant potential for the UAE SWFs to catalyze green investments. SWFs are well-
suited to support green investments given their substantial assets and inter-generational focus.
UAE SWFs are investing in green infrastructure assets directly or via commitments on green
infrastructure funds. In 2015, the Dubai Green Fund was established to support the
implementation of viable green economy projects and programs, deploying about USD 27
billion. The fund serves as seed capital to encourage private finance to climate and green energy
related activities, including energy efficiency and green energy power generation. Among other
examples, Abu Dhabi’s Mubadala and its subsidiaries support many wind and solar projects,
including in developing countries, while Mubadala’s Masdar is developing the first sustainable
real estate investment trust in the UAE, with the Masdar Green REIT established at ADGM. SWFs
could be further used to catalyze green investments by integrating national climate strategies
into their long-term investment strategies. SWFs, PPPs, and joint investments in climate-friendly
projects with institutional investors and multilateral development banks could further expand
financing options.

15 As identified by the 2016 State of Green Finance Report.

INTERNATIONAL MONETARY FUND 39

UNITED ARAB EMIRATES

• GREs, including ADNOC, could also play a key role in driving sustainable finance. Given the
prominent role of UAE GREs in the 2050 Strategies, they could offer opportunities to advance
green transition. 16 For example, ADNOC is committed to supporting the national drive to
achieve Net Zero emissions by 2050. To further reduce the intensity of its GHG emissions by 25
percent by 2030, ADNOC is investing to diversify outside its core business in new energy
solutions and low carbon technologies and establishing partnerships to support the global
energy transition. For example, Mubadala, ADNOC, and ADQ, established the Abu Dhabi
Hydrogen Alliance to develop low-carbon green and blue hydrogen markets. ADNOC is also
investing in CO2 utilization capabilities and providing solutions with a broader impact by
strengthening Carbon Capture Utilization and Storage (CCUS) infrastructure in the UAE.

• Supportive climate policies, including carbon pricing, could further enhance green finance options.
A carbon trading platform is being explored by the Dubai Carbon Centre of Excellence, while
ADGM is working on carbon credit markets. Market mechanisms like cap-and-trade systems and
voluntary carbon markets have been shown to reduce the overall cost of emission reductions
and help develop private finance. There is also an opportunity for developing a regional carbon
market, potentially building on the methodologies and framework of Qatar’s Global Carbon
Council or the proposed Riyadh Voluntary Exchange Platform initiative.

• Other tools, like government guarantees and risk insurance, as well as investment mechanisms
could also play a role but should remain targeted. Guarantees could support private sector
investments, while risk insurance would ensure risk sharing mechanism in case of project failure.

27. The UAE’s participation in internationally coordinated platforms could further

promote and scale-up green finance internationally. For example, IRENA and the UAE
announced the Energy Transition Accelerator Financing (ETAF) Platform, a new global climate
finance facility to accelerate the transition to renewable energy in developing countries. To grow
green finance portfolio in the context of international cooperation, the UAE might also consider
enhanced participation in Debt-for-Nature and Debt-for-Climate Swaps.

F. Conclusions and Other Policy Considerations

28. Managing climate change challenges and energy transition policies will be key to
ensuring sustainable long-term growth. The UAE is committed to climate adaptation and
mitigation policies that would ensure necessary transition of its economy away from fossil fuels. Our
analysis shows that scaling up investments in clean energy and renewables while continuing to
invest in the development of diversified and greener traditional energy products and markets under
the UAE 2050 Energy Strategy would increase potential non-oil GDP in the medium- to long-term to
6 percent. The growth benefits could increase to about 8 percent in the medium- to long-term with

16The 30 UAE companies are committed to stepping up their efforts to combat climate change by measuring their
carbon footprint and taking concrete steps to reduce it, and by integrating sustainability principles across their
operations.

40 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

full and successful implementation of the UAE ambitious reform agenda as discussed also in
Chapters 1 and 2. Nevertheless, the global decarbonization could happen faster and might require
additional substantial financing.

29. Accelerating energy transition reforms could put pressure on public finances.
Frontloading investments in adaptation and mitigation would require alternative financing strategies,
including relying more on green and sustainable private finance to help preserve net public financial
wealth. Mainstreaming private sector green finance, energy transition enabling environment, and
alternative and supporting fiscal policy options for meeting emissions goals, as well as appropriate
design of these policies, could mitigate impacts on public finances.

30. The UAE authorities are working on addressing the identified financing challenges to
mainstreaming green finance in UAE. This includes resolving bottlenecks such as: (i) no universal
definition of ESG finance; (ii) absence of nation-wide taxonomy; (iii) the lack of adequate
enforcement of policies and regulations; (iv) scarce ESG financial disclosures at the company level 17;
(v) high risk of green sectors; (vi) long payback period and lack of long-term finance; and (vii) lack of
profitability and clarity in benefits. Lack of data and standard methodology for measurement,
reporting and verification (MRV) were also considered as barriers, since it affects decision-making
such as due diligence and risk assessment. Developing and disseminating consistent climate related
dashboards and unified databases will promote growth of green private finance, while education
and training programs will enable finance providers to better identify, assess, price, and mitigate
ESG risks. A sufficient base of well-qualified lawyers and accountants would further support the
growing sustainable finance sector.

31. The UAE should continue strengthening its governance, legislative and regulatory
frameworks and their enforcement to create an enabling environment for private green
finance markets. The focus should remain on setting a coherent UAE wide set of standards for ESG
products to guide investors and avoid “greenwashing.” The UAE’s nation-wide taxonomy for ESG
finance, along with pipeline of well-defined green projects, will help inform investors and set a path
for economic transition. The UAE’s regulators could help reinforce this initiative by enhancing
legislations, removing financial and non-financial barriers, enforcing green finance rules and
guidelines, boosting the capacity of the financial sector, and considering offering incentives such as
preferential rates and credit allocation policies. Additionally, the nation-wide company level ESG
disclosure standards should be followed, while ESG scoring methodology to assess ESG
performance, industry practices, and corporate performance developed to support the industry.

17Only few organizations headquartered in the UAE currently support Taskforce for Climate-related Financial
Disclosures (TCFD).

INTERNATIONAL MONETARY FUND 41

UNITED ARAB EMIRATES

References
ADNOC. Overview - Abu Dhabi National Oil Company (adnoc.ae).

UAE Ministry of Climate Change and Environment. (2021). UAE Sustainable Finance Framework.
https://www.moccae.gov.ae/assets/download/24b84d14/UAE_Sustainable_framework_21.pdf.aspx?vi
ew=true

Aligishiev, Melina and Zanna. 2021. DIGNAR-19 Toolkit Manual, No 2021/007, IMF Technical Notes
and Manuals, International Monetary Fund.

Batini, Nicoletta and di Serio, Mario and Fragetta, Matteo and Melina, Giovanni and Waldron,
Anthony, Building Back Better: How Big are Green Spending Multipliers? (March 1, 2021). IMF
Working Paper No. 2021/087.

Berg, A., Portillo, R., Yang, S., and L.-F. Zanna. 2013. Public Investment in Resource Abundant
Developing Countries. IMF Economic Review. Vol. 61, No. 1, pp. 92-129.

Bergek, A., Mignon, I. and Sundberg, G., 2013. Who invests in renewable electricity production?
Empirical evidence and suggestions for further research. Energy Policy, 56, pp.568-581.

Buffie, E.F., A. Berg, C. Pattillo, R. Portillo, and L. F. Zanna. 2012. Public investment, growth, and debt
sustainability: putting together the pieces. IMF Working Paper 12/144. IMF, Washington, D.C.

Dincer, I., 2000. Renewable energy and sustainable development: a crucial review. Renewable and
sustainable energy reviews, 4(2), pp.157-175.

Dincer, I. and Rosen, M.A., 1998. A worldwide perspective on energy, environment and sustainable
development. International journal of energy research, 22(15), pp.1305-1321.

Eyraud, L., Clements, B. and Wane, A., 2013. Green investment: Trends and determinants. Energy Policy,
60, pp.852-865.

Garrett-Peltier, H., 2017. Green versus brown: Comparing the employment impacts of energy
efficiency, renewable energy, and fossil fuels using an input-output model. Economic Modelling, 61,
pp.439-447.

Gurara, Daniel and Melina, Giovanni and Zanna, Luis-Felipe, Some Policy Lessons from Country
Applications of the Dig and DIGNAR Models (March 2019). IMF Working Paper No. 19/62.

Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J. and Zenghelis, D., 2020. Will COVID-19 fiscal recovery
packages accelerate or retard progress on climate change? Oxford Review of Economic Policy,
36(Supplement_1), pp.S359-S381.

42 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

IMF 2018. Public Investment Management Assessment— Review and Update:

https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/05/10/pp042518public-investment-
management-assessment-review-and-update

IMF GFSR, October 2022, Chapter 2, “Scaling up private climate finance in EMDEs: Challenges and
opportunities”.

IMF WEO, April 2022, Chapter 3, “A Greener Labor Market: Employment, Policies, and Economic
Transformation”.

Melina, G., S. C. S.Yang, and L. F. Zanna. 2016. “Debt Sustainability, Public Investment and Natural
Resources in Developing Countries: The DIGNAR Model.” Economic Modelling, Vol 52 (Part B), pp.
630–49.

Moriarty, P. and Honnery, D., 2016. Can renewable energy power the future? Energy policy, 93, pp.3-
7.

Polzin, F., Migendt, M., Täube, F.A. and von Flotow, P., 2015. Public policy influence on renewable
energy investments—A panel data study across OECD countries. Energy policy, 80, pp.98-111.

Sadeghi, A (2018) “How Public Investment Could Help Strengthen Iran’s Growth Potential: Issues and
Options. IMF Working Paper No. 18/129.

Sakai, A., Fu, C., Roch, F. and Wiriadinata, U. 2022. “Sovereign Climate Debt Instruments: An Overview
of the Green and Catastrophe Bond Markets.” IMF Staff Climate Note 2022/004, International
Monetary Fund, Washington, DC.

Moreau, F and Aligishiev, (2022): Assessing the National Investment Strategy Using the DIGNAR-19
model : Saudi Arabia Selected Issues Paper IMF Country Report No. 22/275

Semieniuk, G. and Mazzucato, M., 2019. Financing green growth. Handbook on green growth, edited
by Roger Fouquet, Edward Elgar Publishing (2019), pp. 240-259: Retrieved from

https://www.peri.umass.edu/economists/gregor123/item/1211-financing-green-growth

Simon Black, Victor Mylonas, Ian Parry, Nate Vernon, and Karlygash Zhunussova, 2022, “Climate Policy
Assessment Tool (CPAT): A Tool To Help Countries Mitigate Climate Change”, IMF forthcoming.

UAE Securities and Commodities Authority’s Master Plan for Sustainable Capital Markets (2019).

INTERNATIONAL MONETARY FUND 43

UNITED ARAB EMIRATES

Annex I. The DIGNAR-19 Model

1. The Debt Investment Growth Natural Resources and COVID-19 (DIGNAR-19) model is
an extension of the DIGNAR model by Melina, Yang and Zanna (2014, 2016) that accommodates the
effects of the COVID-19 pandemic. The model has helped inform policy analysis, based on
qualitative and quantitative scenario analysis, on issues such as public investment surges, fiscal
consolidations, PFM reforms and the collapse of commodity prices, among others. The model has
features of the debt model of Buffie et al. (2012) and the natural resource model of Berg et al.
(2013). It includes a resource fund and a range of fiscal tools, such as consumption tax, income tax,
and government spending, which is further divided into consumption, investment, and transfers. The
model also contains resource-abundant developing economy features, such as absorptive capacity
constraint and public investment inefficiency, which makes the model suitable for analysis in
resource rich countries such as the UAE (see Gurara, Melina and Zanna ,2019 for an overview of the
model application).

2. The model consists of two types of households and three production sectors. The
intertemporal optimizing households who have access to capital and financial markets and are able
make future savings and the “hand to mouth” households who are poor, financially constrained and
consume all their earnings. The production sectors include a nontraded good sector, a (non-
resource) traded good sector, and a natural resource sector. The model further assumes that the
natural resource sector is exogenous with all production in the sector assumed to be exported.

3. The government uses revenue from taxes, resource revenues; bond sales, and the principal
and interest earnings from the resource fund to finance public consumption, public investment,
transfers to households, debt service payments, and savings in the resource fund.

4. The model also includes a resource fund that serves as a fiscal buffer which is drawn down
to cover a revenue shortfall or accumulates savings from excessive revenues. The resource fund can
also be used in combination with other available fiscal tools in the model such as changing the rate
of consumption or income tax, cutting, or expanding public consumption, and reducing or
expanding transfers to households to cover the required public expenditure needs including public
investments in line with fiscal rules there in, that allow to control the speed of fiscal adjustments
needed to close the fiscal gap.

5. The model further incorporates three main economic mechanisms for the analysis of
public investment scale-up: (i) a growth-investment nexus, (ii) a fiscal response required to
maintain debt sustainability, (iii) the potential for both crowding-in and crowding-out of private
investment (iv) and the potential to increase labor supply. Higher public capital is assumed to raise
productivity of private factors and increases real output as specified in the equation below 1:

1 See IMF (2022) for Saudi Arabia and Melina, Yang and Zanna, (2016) for details.

44 INTERNATIONAL MONETARY FUND

 UNITED ARAB EMIRATES

𝑦𝑦𝑡𝑡 = 𝐴𝐴𝑡𝑡 (𝐾𝐾 𝐺𝐺 𝑡𝑡−1 )𝛼𝛼𝑔𝑔 (𝐿𝐿𝑡𝑡 )𝛼𝛼𝑁𝑁 (𝐾𝐾𝑡𝑡−1 )1−𝛼𝛼𝑁𝑁

where 𝑦𝑦𝑡𝑡 is the real output of the economy; 𝐴𝐴𝑡𝑡 is the total factor productivity; 𝐿𝐿𝑡𝑡 is labor; 𝐾𝐾𝑡𝑡 and
𝐾𝐾 𝐺𝐺 𝑡𝑡 are private and public capital stock respectively. 𝛼𝛼𝑔𝑔 𝜖𝜖 (0,1) and 𝛼𝛼𝑁𝑁 𝜖𝜖 (0,1) are elasticities with
respect to public capital and the labor share in production, respectively. The level of public capital at
any given year is a sum of the stock of capital in the previous year, net of depreciation, and the new
effective public investment expenditure:
𝐺𝐺 𝐺𝐺
𝐾𝐾
� 𝑡𝑡 = (1
��− 𝛿𝛿)𝐾𝐾�
���� ��
𝑡𝑡−1
+ ∈ 𝐼𝐼𝐺𝐺 𝑡𝑡
���
𝑁𝑁𝑁𝑁𝑁𝑁 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑂𝑂𝑂𝑂𝑂𝑂 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑁𝑁𝑁𝑁𝑁𝑁 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤

where 𝐼𝐼 𝐺𝐺 𝑡𝑡 is the total public investment expenditure; 𝛿𝛿 ∈ (0,1) is the depreciation rate; and 𝜖𝜖 ∈ (0,1]
governs the efficiency of public investment. Higher investment expenditure translates into higher
capital stock, which in turn increases the marginal product of private capital. Higher marginal product
of capital incentivizes the private sector to match higher public expenditure with more private
investments. The strength of this crowding in effect depends on the size of the private investment
adjustment costs:
2
𝐺𝐺 𝐺𝐺
𝑘𝑘 𝐼𝐼t
𝐾𝐾
� 𝑡𝑡 = (1 − 𝛿𝛿)𝐾𝐾
��������� 𝑡𝑡−1 + 𝐼𝐼
⏟ 𝑡𝑡 + � − 1� 𝐼𝐼t
2 𝐼𝐼t−1
𝑁𝑁𝑁𝑁𝑁𝑁 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑂𝑂𝑂𝑂𝑂𝑂 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑁𝑁𝑁𝑁𝑁𝑁 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑠𝑠𝑡𝑡

where 𝐼𝐼𝑡𝑡 is private investment expenditure and 𝜅𝜅 ∈ [0,1) governs the size of the adjustment cost.
Higher values of 𝛼𝛼𝑔𝑔 and 𝜖𝜖 increase the size of the investment multiplier, while higher values of 𝜅𝜅
decrease it.

6. Calibrating DIGNAR-19 for UAE. The DIGNAR-19 model is calibrated at an annual

frequency using recent data capturing salient features of the UAE’s economy. The key parameter
values necessary to pin down the initial steady state are presented in Annex 1. Table 1. In some
cases, parameters are calibrated in line with data provided by the IMF country team. The initial
efficiency of public investment is set at 50 percent in line with the IMF’s average score for the
Middle East and Central Asis countries in 2017. Additional parameters are as in Aligishiev, Melina
and Zanna (2021).

INTERNATIONAL MONETARY FUND 45

UNITED ARAB EMIRATES

Table 1. United Arab Emirates: Calibrated Parameters and Initial Values for the
Steady State
(In percent)
Potential real non-oil GDP growth rate 4.0
Exports to GDP ratio 71.9
Imports to GDP ratio 68.7
Private investment to GDP ratio 10.5
Public investment to GDP ratio 10.5
Public consumption to GDP 11.4
Total public revenues to GDP ratio 31.0
Share of government natural resource revenues in total 55.0
government revenues
Public debt to GDP ratio 29.2
Private foreign debt to GDP ratio 76.9
Share of the natural resource sector to GDP 30.0
Implied interest rate on domestic debt 5.0
Public investment efficiency 50.0/70.0
Depreciation rate of public capital 7.0
Inverse of the Frisch elasticity of labor supply (skilled) 0.5
Inverse of the Frisch elasticity of labor supply (low skilled) 0.5

Source: IMF staff calculations.

46 INTERNATIONAL MONETARY FUND