Booming economy triggered increase in liquidity last year
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(OSAMA ABUGHANIM) | |
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Figures released by the UAE Central Bank on Sunday showed all types of money supply – including M1, M2 and M3 – jumped between 36 per cent and 52 per cent at the end of 2007, while deposits soared by 29 per cent to their highest level.
The figures showed total money supply, or monetary aggregates, was at its highest level at the end of 2007, while the surge in deposits allowed the country’s banks to boost credits by at least 40 per cent last year to take advantage of the economic upsurge and mega projects being carried out in the region.
From Dh120.02 billion at the end of 2006, M1 shot up by 51.4 per cent to Dh181.66bn at the end of 2007. M2 leapt by 41.7 per cent from Dh399.29bn to Dh565.7bn and M3 by 36.7 per cent from Dh506.64bn to Dh692.54bn in the same period, according to the bank.
“This is a clear indication of a boom in the domestic economy and the banking sector and also an indication of the inflation pressure,” said Ziad Dabbas, a financial adviser at the National Bank of Abu Dhabi.
Money supply growth data is used to monitor economic activity and price levels and this makes it an important instrument for controlling inflation. The International Monetary Fund (IMF) has repeatedly urged the UAE and other Gulf states to rein in public spending and liquidity if they want to tackle inflation, which has soared to its highest level in the region.
The UAE is hit hard by inflation, which was as low as 2.2 per cent during 1998-2003 before worsening to 3.1 per cent in 2003, five per cent in 2004 and 7.8 per cent in 2005. It surged to 10.1 per cent in 2006 and was expected to have climbed further last year.
The Central Bank report showed loans and advances by the country’s 22 national banks and 27 foreign units surged by 40.1 per cent to Dh722.061bn at the end of 2007 from Dh515.375bn at the end of 2006. Deposits also soared by around 29 per cent to Dh720.06bn from Dh558.26bn. Total assets shot up by 42.3 per cent to a record Dh1.232 trillion from Dh865.99bn, allowing the UAE to maintain its position as having the second largest banking sector in the Arab world after Saudi Arabia.
Shareholders equity swelled by 21 per cent to Dh116.39bn from Dh96.19bn as the banks are planning to strengthen their financial base in line with Central Bank instructions. But their combined capital adequacy ratio fell to 14.43 per cent from 16.7 per cent during the same period because of the sharp growth in assets.
The Central Bank maintained its earlier estimates of combined net profits of the 49 banks of Dh24.44bn in 2007 compared to Dh18.79bn in 2006 and nearly Dh18.58bn in 2005.
What is money supply?
M1: M0 plus demand deposits, which are checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted into currency.
M2: M1 plus all time-related deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain economic monetary conditions. A key economic indicator used to forecast inflation.
M3: M2 plus all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The broadest measure of money; it is used by economists to estimate the entire supply of money within an economy.
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