MoF: Government spending efficiency is key to mitigate the economic repercussions of COVID-19

Given the spread of COVID-19 pandemic, countries around the world have had to take several measures to contain the spread of the virus. They have also had to take preventive and remedial steps to overcome its effects. Thanks to the wise leadership, who underscored the UAE’s commitment to devise plans to overcome the medical, health, economic and social repercussions of the virus, while enabling flexibility to provide resources and redirect government spending to suit the requirements of the circumstances.

Anti-virus measures and prevention of its spread

COVID-19 has affected the government’s budget, as it had to shift key priorities to meet the needs of the front and emergency lines. The UAE increased the expenditure allocated to the Ministry of Health and Prevention, which was initially 7% of the federal budget for 2020, in order to manage the spending on precautionary measures needed to combat the spread of the pandemic. This, in addition to ensuring rapid response to the urgent needs of employees in the healthcare sector.

The UAE took several measures to combat the pandemic, such as providing unremitting support to qualified medical teams, providing health insurance to cover COVID-19 testing and treatment, as well as those who are not. Additionally, the country established fully equipped, high-tech health facilities in Dubai with a capacity of 5,000 beds and one with 1,200 beds in Abu Dhabi. The UAE also launched a new laboratory for COVID-19 tests, initiated the national disinfection programme, restricted movement of people, and launched smart applications such as the interactive health map that includes data on 13 test centres and hospitals, healthcare centres and clinics across the country.

His Excellency Younis Haji Al Khoori, Undersecretary of MoF, noted that the federal and local governments in the UAE have reduced operating costs to provide financial leeway to increase spending on healthcare sector, given the reduced government revenue due to the economic slowdown caused by the pandemic. The measures taken include assessing spends on ongoing construction projects, and reviewing spending on non-urgent conferences and training.

These steps have led to the UAE’s success in dealing with the pandemic efficiently. The UAE ranked first in the world in terms of the number of tests, with more than 3.5 million tests for early detection of cases and isolation of patients who tested positive.

The impact of the crisis on economic activity

The spread of COVID-19 has had major impact on several economic activities around the world. In the UAE, the real estate sector has been affected by low demand due to the decline in the purchasing power of local buyers and concerns of global investors during the pandemic. The transportation sector was among the most affected sectors in the UAE and the region, due to the complete closure of the aviation sector and the decline in demand due to the curfews. This, in turn, led to a recession in the tourism, hospitality and leisure activities in the country, as some businesses were forced to close down during the lockdown period.

The pandemic greatly affected tourism in Dubai - a fundamental pillar of the emirate's economy. For context, the tourism and hospitality sector generated AED 102 billion ($28 billion) in 2019 with about 16 million international visitors. Dubai was third in the world in attracting direct international tourism spending.

The postponement of EXPO 2020 was one of the vital projects of the tourism sector that was affected by the pandemic. The decision to postpone the EXPO 2020 for one year (set to be launched on October 1, 2021) was lauded by the international community. This move will allow all participants to overcome the repercussions of COVID-19 and focus on the common goal to re-build and find solutions to the emerging challenges facing the world. The Dubai EXPO 2020 will contribute about AED 122.6 billion ($33 billion) to the UAE economy by 2031 with about 14 million international participants.

Stimulus packages to mitigate the economic repercussions of the pandemic on the private sector

The UAE government has responded to the crisis at federal and local levels, by launching substantial financial stimulus packages to reduce the burden on the private sector. This is achieved by reducing the cost of doing businesses with significant reductions in government fees, debt relief and reducing payments for companies.

Financial measures taken include reducing electricity and water consumption bills for commercial and industrial activities and providing easy payment installments, in addition to waiving and reducing several fees, such as merchant service fees and bank charges. Other measures to reduce administrative fines, such as fines on expired permits, identity and nationality fines were also undertaken.

The Central Bank of the UAE (CBUAE) also launched a comprehensive economic support plan for customers, individuals and companies affected by the COVID-19 pandemic. The CBUAE announced an AED 256 billion stimulus package ($70 billion, or 20% of the GDP), and this initiative has provided the necessary liquidity for financial and non-financial markets. The CBUAE announced that within two months, UAE banks and financial institutions withdrew 77% (AED 38.5 billion) of loans amounting to AED 50 billion.

In terms of financial policies, the UAE government provided stimulus packages amounting to AED 26.5 billion ($7 billion). The packages included a variety of measures that provide debt relief and reduce costs for companies and families. The Securities and Commodities Authority also issued decisions to support the financial markets in the country.

Furthermore, the stimulus programmes also targeted the infrastructure sector. The government prioritised the viability of ongoing vital capital projects. However, despite the headwinds, Dubai retained its position as the third global destination, between January and May this year. It witnesses a total inflow of AED 10 billion through 135 foreign investment projects.

The UAE had accelerated its plans to undergo a major restructuring process that was recently undertaken, and one of its goals was to ensure speed and flexibility in adapting to the ‘new normal’ that’s brought about by COVID-19. The restructuring includes merging ministries and entities to reduce government expenditure and increase efficiency. The new structure includes closing 50% of government service centres and converting them to digital platforms within two years, as well as merging around 50% of federal authorities with other authorities or ministries.

An overview of the expected future effects of the pandemic and lessons learned

The International Monetary Fund predicts that the global economy will shrink by 3% in 2020 due to the economic repercussions of the pandemic. For the Arab Gulf region, the IMF expects a negative overall growth of 3.9%; driven by COVID-19 and the decline in oil prices. The UAE is expected to see a 3.5% dip in GDP in 2020, according to these forecasts.

His Excellency Al Khoori said: “The UAE has completed the restriction phase and is looking forward to the economic recovery stage with the aim to compensate the losses in H2 of this year. We expect that the wholesale and retail sector and financial services will witness the quickest and most substantial recovery. The real estate and shipping activities will also provide positive contributions.”

His Excellency added: “One of the most important lessons we have learned from the spread of the pandemic is the importance of re-prioritising public funds and relying on appropriate cost-modeling for operational expenditures of ministries. Government activities still account for a large share of economic activity in the region, so disturbances to public spending, including government-related companies, will have severe economic impact on employment, trade, and capital flow, which will require a broader set of measures during the recovery phase.”

Highlighting the measures that can be taken, His Excellency Younis Al Khoori said: “These measures include the acceleration of major capital projects with the postponement, or indeed cancellation of others that are not necessary, or will support economic development in the medium term, especially projects that have not yet started. We will also need to review residence laws due to the risk of a sudden decline in population and a rapid loss of a skilled workforce due to the temporary closure of businesses during the lockdown period.”

-Ends- 

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Evita Karam
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© Press Release 2020