UAE's VAT application has gone smoothly and inflation will stabilize, says IMF

VAT imposed at 5 percent at the beginning of the year, represents a major administrative and cultural shift.

The start-up of the country's value-added tax (VAT) has gone smoothly, and the inflation it leaped on will then ease, the head of the International Monetary Fund (IMF) mission in the United Arab Emirates said on Thursday.

Natalia Tamirisa added that VAT, imposed at 5 percent at the beginning of the year, represents a major administrative and cultural shift in a country that used to impose minimal taxes.

"Given the challenges, the application of VAT has been well managed and relatively smooth," Tamirisa told Reuters after a visit to the UAE for talks with the authorities.

Annual consumer price inflation jumped to 4.8 percent in January, its highest level since 2015, but fell to 3.4 percent in March.

Tamirisa said the latest data suggest the impact of the tax will be short-lived, partly because of inflation in sectors of the economy not covered by VAT.

The fall in real estate markets in Abu Dhabi and Dubai pushed rents of housing units down, pushing the consumer price index down sharply.

Tamirisa predicted inflation would average 3.5 percent this year, up from 2.0 percent last year, but would eventually stabilize at around 2.5 percent.

She said she expected the new tax to raise revenues by about 1.5 percent of GDP in the long term.

She added that the weakness of the real estate market has a big impact on the economy and that the authorities need to watch carefully. Average rents fell 10.2 percent in Abu Dhabi in 2017, while Dubai's 5.2 percent fell, according to central bank data.

"There is a steady supply coming into the market at least for this year, and it is likely that the balance between supply and demand will remain at twice the price," Tamirisa said.

But for reasons including the measures taken by the authorities to curb speculations, weak property prices are not a systematic threat to the economy, as was the case some 10 years ago during Dubai's financial crisis.

Tamirisa said it was too early to assess the impact of the US withdrawal from the Iranian nuclear deal on the UAE, partly because the impact on Iran itself was not yet clear.

The UAE may benefit if Iran faces difficulties in selling its oil because it will give Arab oil producers more room to increase their exports of crude at higher prices. But Dubai has close business ties with Iran, where economists say such activities may be affected.

(With inputs from Reuters)