United Arab Emirates

The United Arab Emirates initially operated a currency board with only limited monetary policy operations, but growing financial development enabled a move to loose exchange rate targeting  in the 1980s and full exchange rate targeting in 1992.

Years Targets and attainment Classification
1974-80 UAE Currency Board established 1973 issues UAE dirham, which replaced Qatar-Dubai riyal and Bahrain dinar; at least 70% of currency plus demand deposits to be backed by external assets; peg to USD with narrow spread within wider formal margins, kept even when other Gulf countries allowed more flexibility from 1975; banks initially required to change currency at rates no better than Board’s rates +/- differential set by Board, but this dropped after late 1976-early 1977 speculative pressure (due mainly to teething problems and lack of controls  by Board), banks became free to change currency at whatever rates they choose; number of banks, especially in Dubai, increasing, in relatively liberal environment; Board has limited powers to start with but obtains some more, e.g. gradually acquires governments’ deposits and sets some interest rates (formerly set by interbank agreement) from 1974, sets reserve requirements from 1976, banking supervision department established 1978; from 1978 dirham is formally pegged to SDR with 7.25% margins, and repeated small adjustments made 1978-80 to effective rate against USD which remains intervention currency; monetary growth mainly determined by government net domestic expenditure and bank credit to private sector, in highly open economy; statistical database remains limited augmented currency board ACB
1981-91 Currency Board becomes Central Bank of the UAE December  1980, with same backing rule but larger capital, greatly increased powers (including in banking supervision), and clearer role as banker to the Federal government and repository of major forex revenues of oil exporting Emirates; continued formal peg to SDR but now (constant) de facto peg to USD, even when this moves dirham outside margins vs SDR; central bank regulates interest rates on small deposits until late 1982, only, and focuses on bank liquidity and stability; central bank issues CDs from 1984, initially in foreign currency but later in domestic, and CD issues become key monetary policy instrument, along with forex swaps; central bank supports banking system over Kuwait invasion 1990-91 with extra liquidity and confidence-inducing measures; ongoing (and needed) improvement in statistical database (due in part to problems arising from loose Federal structure) loose exchange rate targeting LERT
1992-2017 peg is still formally to SDR but now well-established, and the “central objective of monetary policy in the U.A.E. is maintaining a stable relationship versus the U.S. dollar” (RED 1991 p34); 1997 central bank spreads on USD narrowed with minute depreciation of central rate; 1998 authorities reject proposal to auction and trade CDs to enable OMOs, or issue of government debt securities, because emirate authorities unwilling to allow Federal government to issue debt; 2002 peg now officially to USD, in context of moves towards GCC monetary union in 2010 (later postponed); 2008 extra liquidity provided in response to GFC and then to problems in Dubai; 2009 following decision to locate GCC monetary union central bank in Riyadh, UAE announces its withdrawal from project, citing need for more prior development of financial infrastructure; some macroprudential measures introduced 2014; still no government debt markets, and little or no development of interbank market using repos on negotiable CDs, but 1-week CD rate comes to be treated as policy rate; new central bank and banking law finally approved 2018 (increases central bank autonomy and strengthens macroprudential framework); statistical database much improved by end of period full exchange rate targeting FERT

Selected IMF references: Currency Arrangements and Banking Legislation in the  Arabian Peninsula, 1974; RED 1974 pp26-7, 39-40; SR 1975 p11; RED 1976 p36-9, 50-1; RED 1978 pp41-3, 55-6; SR 1978 p5; SR 1979 p5; RED 1980 p37; SR 1980 p3; RED 1981 pp25-7, 43-4; RED 1982 p33; RED 1983 p31; SR 1985 p10; RED 1988 pp29-32; SR 1988 pp4, 10; SR 1990 p14; RED 1991 pp38-40; RED 1994 pp35-6; RED 1996 pp82-4; RED 1998 pp49-52, 62; SR 1998 p18; SR 2000 pp16-17; SISA 2003 pp15-16; SR 2003 p30; SR 2004 p27; SR 2005 p42; SR 2008 pp5, 11-12; SR 2010 pp7-8; SR 2011 p22; SISA 2013 pp13-14, 22-3; SI 2014 p6; SR 2014 pp4, 11; SR 2015 p16; SI 2017 pp23-9; SR 2018 p15.

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