The UAE liquidity squeeze shows no signs of loosening, despite emergency measures.
Central Bank action fails to stave off crisis
The UAE liquidity squeeze shows no signs of loosening, despite the central bank today unveiling emergency measures to inject billions of dirhams into the system. Late last night, the central bank sent a short note to all banks in the UAE, stating how its Dh50 billion emergency lending facility, announced on Monday, would ease tightness in the local money market. No specifics were given.
This morning, however, the intended effect of the emergency facility ? to combat high lending rates between banks ? was not achieved. The UAE interbank offer rate (EIBOR) rose to 3.7625 per cent this morning, up from 3.66 per cent on Wednesday and nearly double the previous month. Inter bank lending rates have risen across the region, as financial turmoil in the West forced international financial institutions to withdraw their cash. The shortage of money has created fears that UAE banks would be unable to continue normal operations, and that funding for essential property and infrastructure projects could dry up.
According to the note sent to local banks last night, the central bank will lend local banks an amount equivalent to their reserve requirement, while charging them 3 per cent interest above the current central bank repo rate, which stands at 2 per cent today. Banks can also choose to borrow more than the amount of their reserve requirement, but will be charged extra: the repo rate plus 5 per cent interest.
"It's not clear whether what they have sent defines the entire mechanism by which the Dh50 billion is going to be used by the banks," said Ahmed El Shall, chief financial officer of Dubai Bank. "The rest of the mechanism by which the facility could be used, such as a discount window or some other open market operation, has not be detailed yet." "No one knows" whether more details are yet to come, he said. email@example.com