MTEF Development in Abu Dhabi. Fiscal Policy Unit October 31, 2010

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1 MTEF Development in Abu Dhabi Fiscal Policy Unit October 31, 2010

2 Index Abu Dhabi Overview Medium-Term Expenditure Framework Overview Components, Process, Document Setting Budget Ceilings Macroeconomic Model Core Principles Prioritization and Finalization Top-Down and Bottom-Up Key Requirements for a Successful MTEF

3 Abu Dhabi Overview

Overview of the Emirate of Abu Dhabi General Information Abu Dhabi Total Area: 67,340 sq km (87% of total area of UAE)

H. Sheikh Khalifa Bin Zayed Al Nahyan Political System United Arab Emirates Federal government with limited functions

Macroeconomic and fiscal policy Economic development Education and health Debt Economic characteristics 2009 Nominal

0 (m b/d) Demographics Population, 000 2009 1,643 Non nationals 1,236 (75%) Nationals 407 (25%) Unemployment 3.

4 Overview of the Emirate of Abu Dhabi General Information Abu Dhabi Total Area: 67,340 sq km (87% of total area of UAE) 30% area inhabited Wealthiest and largest of the 7 Emirates 8% of global oil reserves 3% of global gas reserves Ruler: H.H. Sheikh Khalifa Bin Zayed Al Nahyan Political System United Arab Emirates Federal government with limited functions UAE foreign, defence and monetary policies Each Emirate has full autonomy over its internal affairs Natural resources Macroeconomic and fiscal policy Economic development Education and health Debt Economic characteristics 2009 Nominal GDP, $bn 149 Oil Sector 74 (49%) Non Oil Sector 75 (51%) G.D.P. per capita, $ 94,842 Oil production 2.0 (m b/d) Demographics Population, ,643 Non nationals 1,236 (75%) Nationals 407 (25%) Unemployment 3.3% Ruler of Abu Dhabi Crown Prince Abu Dhabi Executive Council Councils Departments Authorities SOURCE: EIU; IIF, EIU, Euromonitor,CIA, Government websites

5 Abu Dhabi Economic Developments Impact of Global Financial Crisis on Abu Dhabi was through oil prices, which reduced oil-gdp Non-oil GDP growth slowed from 9.7% in 2008 to 6.0% in Abu Dhabi Nominal GDP, (mil AED) Oil GDP Non-Oil GDP Abu Dhabi faced accelerating inflation during period up to 2008 Inflation fell in 2009, and remains subdued CPI Inflation CPI Inflation 5

6 Abu Dhabi Government Flow of Funds ADNOC Non-Oil Revenues Royalties & Taxes Abu Dhabi government entities Federal government ADIA 1 ADIC Budget Deficit Budget Surplus State-Owned Enterprises

7 Overview of the MTEF

8 MTEF in One Slide 1. Forecast Budget Ceilings 2. Executive Committee Questionnaire High Level Allocations Comprehensive, Coherent Expenditure Plan 3. Entity Level Process Ranked, Analysed, Agreed Upon List of Projects

9 MTEF Process Chart

10 Ideal MTEF Outline 1. Introduction Statement of Government Priorities 2. Macroeconomic Outlook Global Outlook, World Oil Market Outlook, Budget Ceilings, Domestic Economic Outlook, Assessment of Major Risks 3. Intergovernmental Fiscal Relations Federal Level, Other Emirates, International Aid 4. Public Sector Governance Role of Public Sector, SOE Policy, PPP Policy 5. Private Sector Incentives Role of Private Sector, Supporting Policies, SME Policy 6. Factor Market Policies Capital Markets, Labour Markets 7. Sector Strategies Social, Economic, Environmental, Infrastructure صفحة 10

11 Ceiling Setting

12 Key Elements of a Macroeconomic Model GDP CPI Aggregate Supply Pricing Block Production Block Aggregate Demand Money Gap Capital Investment Final Demand Block Monetary Growth Imported Inflation Expenditures Revenues Current Account World Economy Fiscal Block Balance of Payments Block Oil Price Capital Flows Balance Monetary Block Central Bank Net Foreign Assets

13 USD/bbl Forecasting Oil Prices How will Oil Prices evolve over the next years? Three ways to forecast: Structural Economic Model ARIMA Model Futures Prices Alternative Oil Price Projections ARIMA Model Mean IMF NYMEX Futures

14 Setting Budget Ceilings Key Principles of Fiscal Policy: 1. Macroeconomic stability no precipitous expenditure movements -- expenditures should not be linked to oil prices 2. Sustainability cyclically balanced budgets -- expenditures will be linked to oil prices -- expenditures should be reasonably conservative 3. Growth adequate spending to sustain strong, but non-inflationary growth -- expenditures should be reasonably liberal No single answer; no simple answer the key is Balance صفحة 14

15 What can we say? Budget ceilings have got to be linked to oil prices in the long run, but the impact should be dampened in the short run But basing expenditure on expected revenues, which are forecasted based on oil prices, inevitably introduces oil price cycles into domestic expenditure. Is it even possible to build mechanisms for counter-cyclical or cyclicallyneutral budgets, which are balanced over the cycle? Principle(?): Only let expenditure move from a smooth predetermined path if long-run oil market fundamentals move Need to analytically distinguish structural from cyclical oil price movements صفحة 15

16 Future Issues Rules versus Discretion Benefits of Rules Removes policy decisions from the political arena Makes policy decisions purely technical Weaknesses of Rules Requires political mandate Must be flexible in light of unforeseen shocks Policy Coordination Economies of the Seven Emirates are Highly Interdependent Coordination of fiscal policy across Emirates and with the Federal Government Coordination of fiscal and monetary policies صفحة 16

17 Prioritization and Finalization

18 High-Level Budget Priorities The Priorities of top leadership are necessary Questionnaire for equivalent of the Cabinet Quantification of priorities with high-level allocation Based on COFOG classifications Brings ceilings to the sector level Information content: Last year s actuals Current year s Budget Funding requests صفحة 18

19 Bottom-Up Process What is the output? Sectoral Development Plans, which should be: Ranked Analytical Joint Comprehensive Sectors roughly consistent with COFOG Government departments, authorities, agencies and SOEs Baseline process differs from that for new spending Allow 2-3 months for the process to continue Should not be concurrent with budget process صفحة 19

20 Putting it all together Combining the top-down and bottom-up outputs Sector by sector Review high-level sectoral funding allocation Review and confirm Baseline Determine remaining free funds Approve highest ranked initiatives, until free funds exhausted Resulting package Consistent with planned spending ceilings, macro stability Consistent with top level aspirations Consistent with sector level priorities Top level review صفحة 20

21 Uses of the MTEF Gives a Coherent and Comprehensive Plan of Government Intentions Use by Budgeting MTEF gives direction to Budget formulation MTEF can support the move to performance-based Budgeting Use by Debt Management Office Forms core of Medium-Term Borrowing Plan Government entities have greater certainty over future sector funding Greater confidence in planning process supports better fiscal discipline Supports incentives to increase effectiveness and efficiency of government spending صفحة 21

22 Requirements for a Successful MTEF

23 Key Requirements for a Successful MTEF A dedicated team of Economists to lead Helps if someone has MTEF experience Consistent support and attention of DoF decision makers A macroeconomic model to calibrate the ceilings Attention of the government Cabinet-equivalent at key points in time Cooperation of government entities Since it is a repeated process local staff should be used not consultants! An important output is staff with MTEF experience صفحة 23

Annual National Accounts

Annual National Accounts Gross Domestic Product 2005-2012 June 2013 Foreword The Statistics Centre - Abu Dhabi (SCAD) is pleased to release National Accounts estimates for the Emirate of Abu Dhabi. The