The United Arab Emirates’ introduction of value-added tax has gone smoothly and inflation, having jumped in response, will moderate, the head of the International Monetary Fund’s mission to the country said on Thursday.
Natalia Tamirisa said the 5 per cent VAT rate imposed at the start of this year was a big cultural and administrative shift in a country that has traditionally had minimal taxation.
“Given the challenges, VAT introduction has been well managed and relatively smooth,” she told Reuters after a visit to the UAE for talks with authorities.
Annual consumer price inflation jumped to 4.8 per cent in January, the highest since 2015, but dropped back to 3.4 per cent in March. Tamirisa said the latest data suggested the impact of the tax would be short-lived, partly because inflation had dropped in areas of the economy not covered by VAT.
Slumping real estate markets in Abu Dhabi and Dubai have pulled down residential rents, which are heavily weighted in consumer price indexes.
Inflation is expected to average 3.5 per cent this year, up from 2.0 per cent last, but will ultimately settle around 2.5 per cent, Tamirisa predicted.
She said the new tax was expected to lift revenues by 1.5 per cent of gross domestic product in the long run.
Tamirisa said property market weakness was having a significant economic impact and authorities needed to monitor this carefully. Average rents sank 10.2 per cent in Abu Dhabi in 2017 and 5.2 per cent in Dubai, according to the central bank.
“There is persistent supply coming into the market so at least for this year, the balance between supply and demand is likely to keep prices soft,” Tamirisa said.
But partly because authorities had taken steps to limit speculation, the weak property prices did not pose a systemic threat to the economy as they did almost a decade ago during the Dubai financial crisis.
Tamirisa said it was too early to assess the impact on the UAE of the US pullout from the Iran nuclear deal, partly because the impact on Iran itself was not yet clear.
The UAE could benefit if Iran found it harder to sell its oil, giving Arab oil producers more room to boost their crude exports at higher prices. But Dubai has close business links with Iran and these could suffer, economists say.