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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