x Abu Dhabi, UAEMonday 18 December 2017

UAE central bank reduces liquidity as signs of economic recovery increase

Banking system no longer needs support as interest rates ease

We are happy to pay extra in taxes for world-class services, says one reader / The National
We are happy to pay extra in taxes for world-class services, says one reader / The National

The Central Bank of the UAE said it has removed excess liquidity from the banking system in another sign that toughest years since the slump in oil prices began are behind us.

The move is a reversal of the bank's policy of pumping money into the banking system to relieve pressure on lending rates that were rising because of sluggish deposits.

Governments around the region were forced to tap deposits from banks to plug budget deficits created by the drop in value of hydrocarbons. However, as the price of oil rebounded this year from multiyear lows in 2016, governments borrowed money from international markets and found ways of diversifying sources of income, including the reduction of subsidies, the need for supporting the banking system with jolts of liquidity has receded.

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The UAE central bank removed Dh3.1 billion of excess liquidity in August, taking the total withdrawals to Dh11.3b in two months, Wam, the official UAE news agency reported on Sunday. In July, the central bank withdrew Dh8.2b of excess liquidity in July.

Since the beginning of the year, the central bank pumped Dh31.6b in to the banking system. The reduction of liquidity has been accompanied by a rise of certificate of deposits which the central bank uses as a policy tool in the absence of an independent monetary policy to soak up the excess liquidity.

Certificates of deposits in August rose to Dh114.4b from Dh111.1b in July and Dh102.8b in June. While these are not massive amounts of money in the context of UAE banking assets - at about Dh2.654 trillion at the end of June - it is nonetheless a positive sign, adding to a host of others, that the country is on a stronger economic footing following several years of lukewarm growth. Even though improvements may not lead to significant economic growth this year, it will most certainly be reflected, economists say, in GDP growth next year.

The other indicators signalling that we have turned the corner are improvements in the monthly readings of the Purchasing Managers' Index (PMI), a gauge of the health of the non-oil economy. The Emirates NBD PMI gained pace at the fastest rate in 30 months in August as growth in new orders and output picked up.