MTEF Development in Abu Dhabi

October 31, 2010

Fiscal Policy Unit

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

Abu Dhabi Overview

SOURCE: EIU; IIF, EIU, Euromonitor,CIA, Government websites

Overview of the Emirate of 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

Abu Dhabi

General Information Political System

Economic characteristics 2009

▪ Nominal GDP, $bn

Demographics

• Population, 000

149

– Oil Sector 74 (49%)

– Non Oil Sector 75 (51%)

▪ G.D.P. per capita, $ 94,842

▪ Oil production 2.0 (m b/d)

1,643

– Non nationals 1,236 (75%)

– Nationals 407 (25%)

• Unemployment 3.3%

▪ 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

United Arab Emirates

Councils Departments Authorities

Ruler of Abu Dhabi

Crown Prince

Abu Dhabi Executive Council

2009

Abu Dhabi Economic Developments

5 0

2

4

6

8

10

12

14

16

2003 2004 2005 2006 2007 2008 2009

CPI Inflation

CPI Inflation

0

100000

200000

300000

400000

500000

600000

700000

800000

2003 2004 2005 2006 2007 2008 2009

Abu Dhabi Nominal GDP, (mil AED)

Oil GDP

Non-Oil GDP

• 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 2009

• Abu Dhabi faced accelerating inflation during period up to 2008 • Inflation fell in 2009, and remains subdued

ADNOC

ADIA1

ADIC

Royalties & Taxes

Budget Surplus

Budget Deficit

Abu Dhabi government entities

Federal government

State-Owned Enterprises

Abu Dhabi Government Flow of Funds

Non-Oil Revenues

Overview of the MTEF

1. Forecast Budget Ceilings

2. Executive Committee

Questionnaire

High Level Allocations

3. Entity Level Process

Ranked, Analysed, Agreed Upon List

of Projects

Comprehensive, Coherent

Expenditure Plan

MTEF in One Slide

MTEF Process Chart

“Ideal” MTEF Outline

10 صفحة

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

Ceiling Setting

Final Demand

Block

Fiscal Block

Balance of Payments

Block

Monetary Block

Production Block

Pricing Block

Oil Price

Expenditures

Revenues

Current Account

Central Bank Net Foreign Assets

Money Gap

Aggregate Demand

Aggregate Supply

Capital Investment

Monetary Growth

Key Elements of a Macroeconomic Model

GDP

CPI

Balance

Imported Inflation

Capital Flows

World Economy

Forecasting Oil Prices

70

75

80

85

90

95

2010 2011 2012 2013 2014 2015

USD

/bb

l

Alternative Oil Price Projections

ARIMA Model Mean

IMF

NYMEX Futures

How will Oil Prices evolve over the next years?

• Three ways to forecast: • Structural Economic Model • ARIMA Model • Futures Prices

Setting Budget Ceilings

14 صفحة

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

What can we say?

15 صفحة

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 cyclically-neutral 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

Future Issues

16 صفحة

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

Prioritization and Finalization

High-Level Budget Priorities

18 صفحة

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

Bottom-Up Process

19 صفحة

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

Putting it all together

20 صفحة

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

Uses of the MTEF

21 صفحة

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

Requirements for a Successful MTEF

Key Requirements for a Successful MTEF

23 صفحة

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