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29 March 2024

UAE may introduce treasury bonds

A file photo shows towering buildings along Dubai's Sheikh Zayed Road. Financial experts are optimistic that the proposed UAE bonds would bring down soaring inflation rate and mop up surplus liquidity from the markets. (AFP)

Published
By Abdel Hai Mohamed

The introduction of treasury bonds is being considered by the Ministry of Finance, which is studying the issue with World Bank experts.

Treasury bonds are issued by governments to finance debt and are used by many countries as an important financial tool. If the plan goes ahead it will be the first such offering by a Gulf nation.

Financial experts welcomed the study and said the bonds would bring down the rising inflation rate and mop up surplus liquidity from the markets.

It would also help the ministry to finance infrastructure and development projects since the current budget is mostly geared towards financing the service sectors.

"The study on treasury bonds has not been completed yet," Younis Haji Al Khouri, the ministry's Director-General, told Emirates Business. "The study will be put forward to the Cabinet for a decision. Treasury bonds are very important but we have to study them carefully before applying them – knowing what their strengths and weaknesses are."

Co-ordination work with the World Bank started immediately after the announcement of the federal government's strategic plan.

Khalid Yousuf Mirza, Director of the Financial Operations Department, said: "A bond programme would create a bond market in the country and benefit infrastructure projects. Treasury bonds are one of the best tools of financial policy and can be used to stimulate the national economy.

"The reduction of liquidity is not the main reason – the ministry aims to catch several birds with one stone. There is inflation, liquidity and the need to finance projects."

Dr Mohammed Afifi, a financial adviser at Al Fajr Securities, supported the study, saying: "Bonds are a major borrowing tool – they will enable the UAE Government to borrow from individuals and companies to finance its projects."

Afifi believes the main reason behind the proposed bond introduction is the government's desire to reduce the vast liquidity in the economy – estimated by the Central Bank at Dh696bn – which cannot be placed in secure investments. He said this liquidity had pushed up inflation since the beginning of 2008 and estimated the current rate to be 16 per cent – six per cent above government estimates.