Central Bank fails to stem surge in money supply

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21 July 2008
Money supply in the UAE has continued its rapid growth over the past 18 months despite measures to curb its increase by borrowing from local banks and investing the funds abroad, official figures showed yesterday.

Money supply M1 jumped by nearly Dh100 billion at the end of March from the start of 2007 while M2 swelled by more than Dh200bn and M3 by nearly Dh250bn, the 's latest bulletin revealed.

Bankers attributed the surge to a sharp rise in private capital inflow, a fiscal boom in the country and higher public spending on development and other projects. The surge in money supply, which is normally associated with inflation, occurred despite the 's measures to stem liquidity growth by sharply boosting the issue of certificates of deposits (CDs) and investing the borrowed funds in banks abroad.

The report showed the borrowed more than Dh170bn from the country's 24 national banks and 28 foreign lenders in 2007.

The borrowing, mostly through CDs, boosted the combined deposits of those banks with the to a record Dh231bn at the end of 2007 from Dh58.4bn at the end of 2006. Bankers expected the deposits to have risen further in the first half of 2008.

"The is pursuing its policy of absorbing part of the excess liquidity in the local market by issuing more CDs and encouraging banks to increase their deposits with it," an Abu Dhabi-based bank manager said. The massive borrowing allowed the to sharply increase its assets abroad and boost profits to a record high level in 2007.

From around Dh103.2bn at the end of 2006, the assets shot up to a record Dh285.9n at the end of 2007. Foreign assets accounted for nearly 99 per cent of the total.

Its deposits abroad jumped to Dh184bn at the end of 2007 from Dh57.3bn at the end of 2006 while held-to-maturity securities leaped to Dh98.8bn from Dh43.2bn. The surge in such investments boosted the 's net profits by 42 per cent to Dh3.778bn last year from nearly Dh2.654bn in 2006. But those measures had no impact on domestic liquidity although curbing money supply growth is currently the only fiscal tool available to the to tackle inflation.

M1, which includes mainly currency outside banks and demand deposits, soared by at least Dh100bn to Dh221.8bn at the end of March from Dh120bn at the start of 2007. M2, covering M1 plus time and savings deposits, leaped to Dh624.36bn from Dh399bn while M3, which comprises M1, M2 and other quasi-monetary deposits, shot up to an all-time high of Dh754.5bn from Dh506bn.

The surge in the banks' combined assets to a record Dh1.34 trillion at the end of March catapulted the UAE to the position of the largest Arab banking sector by overtaking Saudi Arabia. The UAE also ranked first in terms of capital and deposits.

By Nadim Kawach

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