IMF expects inflation to fall to 2.5%
The head of the International Monetary Fund's mission in the UAE, Natalia Tamireza, said the introduction of the country's value-added tax (VAT) had gone smoothly and that the inflation that it jumped on would be reduced thereafter. Inflation is expected to average 3.5% this year, up from 2% last year, but will eventually drop to around 2.5%.
It also predicted that the new tax would increase revenues by about 1.5% of GDP in the long term.
The value-added tax, imposed at 5 percent at the beginning of the year, represents a major administrative and cultural shift in a country where taxes were minimal.
"Given the challenges, the application of VAT has been managed relatively well and relatively smoothly," Tamiriza told Reuters after a visit to the UAE for talks with the authorities.
Annual consumer price inflation rose to 4.8 percent in January, its highest level since 2015, but fell to 3.4 percent in March.
Tamiriza said the latest data suggest the impact of the tax will be short-lived, partly because of inflation in sectors of the economy not covered by VAT.
The fall in real estate markets in Abu Dhabi and Dubai pushed rents of housing units down, pushing the consumer price index down sharply.
"The real estate market has a big impact on the economy, and the authorities need to carefully monitor this," she said.
Average rents fell 10.2% in Abu Dhabi in 2017, while Dubai fell 5.2%, according to central bank data.
"There is a steady supply coming into the market at least for this year, and the balance between supply and demand is likely to keep prices down," said Tamiriza, but for reasons including measures taken by the authorities to curb speculations, weak property prices are not a systemic threat to the economy.
Tamireza said it was too early to assess the impact of the US withdrawal from the Iranian nuclear deal on the UAE, partly because the impact on Iran itself was not yet clear.
In a related context, the IMF praised the Egyptian government's performance in implementing the economic reform program. He predicted that the level of inflation in Egypt by the end of the current fiscal year to 10.4%.
The IMF also revised its forecast for the growth rate of the Egyptian economy during the current fiscal year to 5.2%, from 4.8% in January.
Egypt's annual inflation rate continued to drop since August to 12.9 percent at the end of April, the Central Agency for Mobilization and Statistics (CAPMAS) said in a statement yesterday.
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