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Money supply surges to Dh104bn to fuel inflation

posted on 01/08/2006: 875 views

The amount of money circulating in the UAE surged 29 per cent in 2005 over 2004 to Dh104.45 billion, the Central Bank's just-released year-end monetary statistics reveal. This massive rise further confirms steep inflation across the country, analysts said.

On the back of higher oil revenues due to the climbing price of crude, the money supply – which includes currency, notes and coins in circulation and monetary deposits in local currency – reached Dh104.45bn last year, from Dh80.82bn the prior year.

"The increase in money supply is not surprising given the high rates of actual inflation,” observed David Butter, a senior economist and Middle East analyst for London-based Economist Intelligence Unit (EIU).

The EIU said in a recent report that inflation exceeded 10 per cent in 2005, while Abu Dhabi-based investment bank Prime Emirates said it reached 15 per cent last year. The surge in money supply triggered the exceptional 2005 performance of the banking sector, the Central Bank's year-end statistics show.

The banking sector's total assets and liabilities rose 42 per cent to Dh638.01bn, from Dh449.75bn in 2004. Total bank deposits, meanwhile, rocketed 41 per cent to Dh409.67bn in 2005, over Dh290.5bn in 2004. "There was excess liquidity in the system in 2005 – so people were putting more money in banks. "Also, several banks underwent capital increases last year and there were lots of rights issues during the year,” said a senior Dubai-based banking analyst.

With so much money at their disposal, banks in the UAE underwent aggressive lending campaigns in retail and corporate banking – and to investors taking part in initial public offerings.

The result is illustrated in the numbers: the banks' credit increased some 42 per cent to Dh362.63bn, from Dh255.6bn in 2004. Inflation, meanwhile, will likely remain a concern due to the Central Bank's limited ability to curb growth in money supply, analysts said. By convention, central banks increase interest rates to curb borrowing and offset inflation. But since the dirham is pegged to the US dollar, the Central Bank can only raise interest rates in tandem with US rates. This has become problematic in recent years because inflation in the UAE is much higher than that recorded in America.

EIU predicts inflation will reach 8.5 per cent this year, with other estimates running as high as 10 per cent. Hence, the analysts said the Central Bank should fight inflation by tightening lending rules to reduce the money available for consumers and expanding its programme of certificates of deposits. The Central Bank did issue 31 per cent more such certificates – which absorb excess liquidity – in 2005 over 2004, to Dh21.03bn. (Emirates Today)


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