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26 March 2008

Dubai: The money supply in the UAE grew 36.7 per cent last year, the Central BankCentral Bank reported on Tuesday, confirming the growing impact of excessive money supply in the highly inflationary situation.

The money circulating in the economy was Dh692.40 billion at the close of last year, compared with Dh506.64 billion a year earlier, the central bank said in a statement on its website.

"It is only natural to expect the money supply in the UAE to grow. After all, the economy is booming and the population is increasing in size. However, the above figures are excessive and alarming," Marios Maratheftis, Regional Head of Research and Mary Nicola, econ-omist, Standard Chartered said in a statement. The narrower measures of money supply, such as M1 and M2, also grew 51 per cent and 42 per cent respectively, according to the latest data published on central bank.

While M1 is currency plus overnight (demand) deposits plus vault cash, M2 includes the sum of M1 and savings deposits. M3 is the sum of M2 and repurchase agreements, money market fund shares/units and debt securities up to two years.

Bank assets

According to Central BankCentral Bank statistics, total assets of UAE banks grew 42.3 per cent from Dh865 billion in 2006 to Dh1.23 trillion in 2007. The overall bank lending and personal loans surged by 40 per cent and 39 per cent, respectively last year.

The UAE is estimated to be facing double-digit inflation. Although the official figures have been under 10 per cent, the International Monetary Fund recently revised its inflation estimates of eight per cent to around 11 per cent for 2007.

With no real way to soak up the excess liquidity, money is rampant in the economy and abetting record-high inflation numbers.

"We have highlighted in the past that rapid money supply growth has severe implications on current and future inflation. There is plenty of money circulating in the economy and this will not only affect goods price inflation but also asset prices. Even though the economy is increasing in size, there is essentially too much money chasing too few goods," said Maratheftis and Nicola.

Options

In the context of surging money supply and the consequent increase in inflation, many economists believe that a revaluation of the dirham would absorb some of the excess liquidity by encouraging investors to switch their dirham holdings into US dollars.

By Babu Das Augustine

© Gulf News 2008. All rights reserved.

 

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