Second-Biggest Arab Economy Quickens Steps to Boost Growth

(Bloomberg) -- Dubai announced measures aimed at curbing rising costs that have reduced the city’s appeal to expatriates and investors alike.

The Executive Council said Dubai plans to waive some fees on aviation and real estate transactions, freeze school fees, and cut charges levied on businesses, according to a statement posted on the state-run WAM news agency on Wednesday. The measures came on the heels of a decision by Dubai’s larger neighbor, Abu Dhabi, to spend 50 billion dirhams ($13.6 billion) over three years to stimulate growth.

The U.A.E., where expatriates make up nearly 80 percent of the population, is facing serious economic challenges. A combination of lower oil prices, a stronger U.S. dollar to which the local currency is pegged, and weaker regional economies are hurting growth.

“This is a different type of downturn than in 2008 because the drivers are different,” said Razan Nasser, a senior economist at HSBC in Dubai. “This time around, there is ample supply in the market and cost of living is a main concern, so it makes sense for the government to try to stimulate demand through cost-reducing measures.”

Dubai’s government is halving the so-called market rate, a municipal charge on businesses, to 2.5 percent and waiving a 4 percent fee for delayed property registration. The decision to waive 19 fees related to the aviation industry and aircraft landing permits is designed to attract more than 1 billion dirhams in investments, the Executive Council said. Further measures will follow, according to WAM.

In a nod to the city’s residents, Dubai decided to freeze private school fees for a year. The high cost of education is one of the largest expenses facing families in a country where public education is limited to citizens.

Currency Peg

The dirham’s peg to the dollar is at the heart of Dubai’s economic woes. The U.A.E.’s central bank is likely to follow the U.S. Federal Reserve and raise borrowing costs even as the economy slows, said Bilal Khan, a senior economist at Standard Chartered Plc.

“This means that fiscal policy needs to be used to support domestic demand, which has not kept pace with supply increases in a range of sectors,” Khan said.

The U.A.E.’s economic growth slowed to 0.5 percent last year from 3 percent in 2016. Dubai’s economy grew 2.8 percent last year and is set to expand 3.4 percent this year, the International Monetary Fund estimated.

Dubai led the way for Gulf nations seeking to shift their economies away from oil, turning itself into the Middle East’s main banking, commerce and transport hub. But with many oil-rich neighbors still struggling to recover from the 2014 slump in crude prices, the emirate’s economic growth has also slowed.

Economists said the measures will provide some relief to businesses, but won’t change the economic picture significantly.

“This is going to be a harder recovery in a way than that in 2008,” Abu Dhabi Commercial Bank’s chief economist Monica Malik said. “Back then the wider Gulf rebounded quickly as oil prices surged, government spending was strong and Dubai benefited from capital inflows due to the Arab Spring. This time around, we have a weaker region and that affects the U.A.E. as regional hub.”

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