Central Bank borrowed Dh141bn in 2007

The UAE Central Bank borrowed a record Dh141 billion from local banks in 2007 as it sharply boosted the issue of certificates of deposits (CDs) in a bid to stem swelling domestic liquidity.

More than half the funds were borrowed in the last quarter of 2007 and the big rise in the CDs issue reflected a rush by the country's 23 national banks and 28 foreign units to invest in safe tools within the UAE, its figures showed. From Dh32.3bn at the end of 2006, the cumulative CDs issued by the Central Bank jumped to Dh173.5bn at the end of 2007, an increase of around Dh141.2bn during last year, the figures showed.

The value of the CDs issued in the first three quarters was estimated at around Dh58.7bn, indicating that the Central Bank sharply stepped up its borrowing from the banks in the last quarter as inflation pressure continued to build up.

The borrowing was reflected in a huge growth in the Central Bank's deposits with other financial institutions to Dh184bn at the end of 2007 from Dh57.3bn at the end of 2006, according to the Central Bank report.

Bankers said last year's CD issue was the highest by the Central Bank and was intended to absorb growing liquidity in the market mainly because of a sharp rise in deposits, an economic upsurge and return of some overseas funds. But the figures showed liquidity remained at record high levels at the end of last year, indicating rising inflationary pressure and strong domestic demand.

The bankers said the rush for certificates of deposits last year was because most banks had high liquidity levels and the interest rates on those instruments were relatively good, noting such tools usually have fixed interest rates and are risk-free.

The report showed the Central Bank's held-to-maturity securities, which are debt securities that a bank has the ability and intent to hold until maturity, also increased to around Dh98.8bn from nearly Dh43.29bn in the same period.

Bankers expected investment in local CDs, which range in maturity from one week to five years, to remain strong after the Central Bank introduced a new CD issue system late last year involving auctions.

"A new expanded Central Bank CD issuance system based on auction has been introduced," the Central Bank said in late November.

"Certificates of deposit, marketable among banks licensed by the Central Bank to operate in the UAE, will be issued in the transferable book-entry form.

The issuance will be in dirhams, dollars and euros at a minimum amount of one million [nominal value] in the respective currencies."

The Central Bank's figures showed the latest CDs issue sharply boosted its total assets to nearly Dh285.9bn at the end of 2007 from Dh103.2bn at the end of 2006. On the liability side, current account and deposits soared to Dh65.2bn from Dh30.9bn in the same period.

The CDs issue was illustrated in the balance sheet of UAE banks, with their combined deposits with the Central Bank jumping to around Dh231.1bn from around Dh58.4bn, the figures showed.

The surge was also reflected in a decline in the banks' foreign assets following a rapid growth over the past few years. From around Dh231.9bn at the end of 2006, their foreign assets dived to nearly Dh196.8bn at the end of 2007.

But the report showed the massive CDs issue had no impact on domestic liquidity, with money supply M1 leaping to Dh181bn from Dh120bn and broad money M2 shooting up to a record Dh565bn from Dh399bn.

Experts have generally associated growth in money supply to inflation but Central Bank Governor Sultan bin Nasser Al Suweidi said last month a study conducted by the Central Bank found no such relationship in the country.