In an unfastened and emerging economic system like the United Arab Emirates, a distinct pecuniary system is needed to be able to carry on a successful and efficient trade. A pecuniary system is defined as “ set of mechanisms by which a authorities provides money ( hard currency ) in a state ‘s economic system. ”
By virtuousness of the 1980 Union Law No. 10, the Central Bank of the UAE ( CBU ) controlled the pecuniary system of the United Arab Emirates. The CBU was to be the “ bank of Bankss ” who enforces commissariats of the jurisprudence, sets ordinances, and issues policies, handbills for the care and nutriment of the UAE economic system. The same jurisprudence besides put into circulation the Emirian dirham ( AED ) which replaced the Qatari/Dubai dinar and the riyal as currency of the UAE.
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The 2003 IMF ROSC reveals that the CBU ranked among those Bankss with best banking patterns. Despite this award, the CBU has its failings viz. in the transparence in describing the sum and the procedure involved in one-year net net incomes. Though, CBU may miss in this country it already has the media to implement this: Statistical Bulletins, Annual Reports, and the CBU web site itself, which is invariably updated.
The UAE dirham is linked to the US dollar and much of UAE goods and services are sold in dollars ; thereby, doing less fluctuations in its pecuniary values. However, the UAE does non hold control over its contractionary policy, therefore, it can non besides command rising prices rates. On the other manus, both the IMF and an independent analyst see this in a positive visible radiation in relation to UAEs relentless economic system, at least for the medium-term.
Keywords: pecuniary system, pecuniary policy, Central Bank of UAE, currency
The Monetary System of the United Arab Emirates
The United Arab Emirates, as in the other provinces of the Gulf Cooperating Council ( GCC ) , engage in an unfastened and free economic system ; thereby, promoting concerns from all over the universe to put in its emirates, peculiarly in Abu Dhabi and Dubai. To successfully and expeditiously carry on trade with their universe spouses, the UAE employs a pecuniary system, or a medium of exchange.
There are several definitions for what a pecuniary system is. Financial Times Lexicon defines a pecuniary system as “ the system of money in a peculiar state or the universe as a whole, and the manner that it is controlled by authoritiess and cardinal Bankss. ” On the other manus, BusinessDictionary.com labels a pecuniary system as a “ set of mechanisms by which a authorities provides money ( hard currency ) in a state ‘s economic system. ” This set of mechanisms is non limited to a batch but besides encompasses a cardinal bank which in bend regulates local and foreign commercial Bankss.
The Central Bank of the UAE
The Central Bank of the UAE ( CBU ) operates most of the mechanisms and processs of the UAE pecuniary system. CBU was created per Union Law No. 2 of 1973 on May 19, 1973, so known as the UAE Currency Board, and was tasked to replace with a national currency the dinar of Bahrain and the riyal of Qatar and Dubai, which were still in circulation after the Union of Emirates was established in 1971. Thereafter, the 260 million UAE dirhams replaced a sum of 131 million riyals and 12.9 million dinars. The rate for the exchange is one dirham for one riyal and 10 dirhams per 1 dinar.
Although, the map of the Currency Board is limited to publishing the dirham and doing certain that it is to the full covered in both gold and foreign currencies, it guaranteed both the organisation of UAE banking and set up regulations regulating sound banking concern with the assistance of the International Monetary Fund ( IMF ) .
In December 10, 1980, the Currency Board issued the Union Law No. 10 of 1980, which officially changed it to the Central Bank of the UAE. The said jurisprudence drafts the maps of the Central Bank, its pecuniary system, and its organisation of banking in order to back up the state ‘s fast turning economic system.
The transition of 1980 Union Law No. 10, which authorized the CBU to systematise, supervise and implement its pecuniary, recognition and banking policies, supported its fiscal and economic stableness. The 2003 IMF ROSC cites these CBU mandates:
Publishing the dirham currency harmonizing to the commissariats of the jurisprudence ;
Guaranting for the support of the currency every bit good as its stableness and free convertibility ;
Guaranting a recognition policy which will help in a balanced economic growing ;
Forming, developing, and supervising the efficiency of UAE banking systems ;
Serving as the authorities bank through: a ) offering fiscal advices to the Government ; B ) prolonging authorities militias in gold and in other currencies ; degree Celsiuss ) managing all province minutess with the IMF and WB every bit good as other establishments, and the Arab/International Monetary Funds ; and
Bases in as the “ bank of the Bankss ” operating in the state.
CBU Gov. Sultan Bin Nasser Al Suwaidi ( 2010 ) reaffirms the bank ‘s function in keeping a fixed exchange rate of the dirham against the US dollar and guaranting that the dirham could be converted to other foreign currencies.
Since the transition of Union Law. No. 10 of 1980, the CBU Board has been implementing, publishing handbills, ordinances and determinations, which greatly aided the economic growing of UAE and doing its system one of the best in the universe.
The emirates, through the Central Bank of the UAE have become globally competitory and its chief metropoliss, particularly Abu Dhabi and Dubai, have become commercial hubs pulling foreign investors and immense multinational companies. ( Central Bank of the UAE, www.centralbank.ae/en ) .
The UAE Currency
The UAE currency is the Arab Emirate Dirham ( AED ) , or dirham. Some of its abbreviations are DH or Dhs. One dirham, which is minted in coins, consists of 100 fils. Yemeni filss are minted as coins and are available in denominations of 1, 5, 10, 25 and 50.
Dirham are besides available in denominations of 5, 10, 20, 50, 100, 200, 500 and 1,000. Each bank note denomination have its typical color-brown, green, bluish, violet, tap, green/brown, navy blue, and greenish-blue, severally. The value of the note is indicated in both Arabic and English.
Dirham value in gold is 0.186621 gm and has a level rate of 3.67 AED to 1 USD, with a really narrow border of -0.0027 % , the exchange rate is much more stable compared with that of other currencies ( hypertext transfer protocol: //www.exchangerate.com, 2010 ) .
Dubai Online ( 2010 ) lists the following current exchange rates with other popular currencies:
Monetary Policies in the UAE
The UAE owes much of its success in banking to implementing tight pecuniary policies while keeping an unfastened and free economic zone.
The Nations Encyclopedia ( 2010 ) states that the UAE dirham -US dollar linkage merely shows that petroleum oil is sold in US dollars and that domestic involvement rates will besides travel in melody with the US involvement rates.
As an unfastened and free economic system, the authorities kept to a lower limit its directives on how private sectors conduct their concerns. No direct revenue enhancements are imposed on net incomes earned by the corporation every bit good as on personal income. This regulation, nevertheless, does non use to foreign Bankss and oil companies. In add-on to the fact that trade barriers and exchange controls does non be, capital and net incomes earned by foreign concern can besides be moved from UAE to the place base without fees. Furthermore, imposts responsibilities are non merely low but besides has a batch of freedoms and tolerant visa policies permits easy hiring of skilled migratory workers ( www.dubai.ae ) .
Sultan Bin Nasser Al-Suwaidi, Governor of CBU, expressed his frights in his address during the 18th World Conference of Banking Institutes ( 2009 ) that the crisis of finance around the Earth may somewhat “ cut down the chances for the UAE economic growing ” but to assist decrease its impacts, he offers the undermentioned stairss to be taken:
The UAE pecuniary policy will go on its way on keeping low official involvement rates ;
A “ sensible but low rate of recognition enlargement and restricted banking enlargement will be enforced by the recognition and banking policies of the UAE CBU ;
Comprehensive appraisal of UAE banking patterns is by and large conducted by the International Monetary Fund ( IMF ) missions utilizing available informations provided by the state itself and self-assessment certifications.
The IMF 2003 Report on the Observance of Standards and Codes ( ROSC ) as cited by eStandardsforum ( 2010 ) reveals that while CBU “ observes most good transparence patterns sing pecuniary policy, ” it besides has its failings. For case, there has ne’er been a public revelation of the procedure of finding the sum every bit good as sum of one-year net net incomes. At present, this policy has n’t been changed.
As a whole, the ROSC recommended for the CBU to reenforce their coverage methods, particularly with respects to the banking determinations and operations.
The UAE has been reported to be among the states with some of the best banking patterns in the universe. This repute is mostly due to the pecuniary system employed by the United Arab Emirates. In a turning economic system like the UAE, pecuniary policies have the power to command its economic system and have the authorities provide for the money that it needs.
However, the recent 2008 planetary crisis demo a dwindling of this assurance and loopholes in the pecuniary policy of the state were noted ( Albastaki, 2010 ) . The web log further opined that entire pecuniary policy control had ne’er been antecedently an issue due to an wrong premise that the “ economic system will ever turn and the market will non fluctuate. ” The UAE so realized that it should hold had entire pecuniary policy control, specifically in commanding the involvement rates, to debar some of the negative effects of the rising prices. Among the grounds for which is the AED dirham-US dollar linkage.
Monetary policies are used to command economic factors as unemployment, rising prices, international trade, productiveness, and investings. Even if the UAE have some abilities in its enlargement policies due to the state ‘s oil militias, the UAE does n’t hold a contractionary pecuniary policy which uses an addition in involvement and revenue enhancement rates ( Albastaki, 2009 ) . Although, the state may good be able to command other factors, if and when the UAE economic system will maturate and it still does non hold entire control over its contractionary pecuniary policy, one of its predicted consequences will be that the circulation of money will acquire out of manus.
Albastaki ( 2009 ) concludes that pecuniary policies should give entire authorization on money supply, enlargement, and contraction policies for the economic system to go genuinely stable.
On the other manus, Dr. Tarek Coury ( 2009 ) believes that the UAE will non be affected excessively much by the “ deflationary trap ” experienced by other states. Since the UAE pegs its dirham to the US dollar, it lacks a contractionary pecuniary policy ; hence, the CBU can non command rising prices rates and rising prices rates, in bend, be given to be fickle.
Among its effects would we that “ investing determinations on the aggregative degree are made harmonizing to the existent rate of involvement ” ( Coury, 2009 ) . When the kineticss in investings become unstable, this dirham-dollar linkage would hold its advantages in the long tally because it ensures minimum pecuniary perturbations. Coury ( 2009 ) further purports that this set-up is particularly good for an emerging economic system like the UAE.