\ufeffMonetary Policy in the UAE<\/p>\n
Name<\/p>\n
Affiliation<\/p>\n
Table of Contents<\/p>\n
TOC o “1-3” h z u HYPERLINK l “_Toc413348612” Introduction PAGEREF _Toc413348612 h 3<\/p>\n
HYPERLINK l “_Toc413348613” Monetary Policies in the UAE PAGEREF _Toc413348613 h 3<\/p>\n
HYPERLINK l “_Toc413348614” Discussion PAGEREF _Toc413348614 h 4<\/p>\n
HYPERLINK l “_Toc413348615” Implications PAGEREF _Toc413348615 h 4<\/p>\n
HYPERLINK l “_Toc413348616” Economic growth PAGEREF _Toc413348616 h 4<\/p>\n
HYPERLINK l “_Toc413348617” Low unemployment PAGEREF _Toc413348617 h 5<\/p>\n
HYPERLINK l “_Toc413348618” Stable prices PAGEREF _Toc413348618 h 5<\/p>\n
HYPERLINK l “_Toc413348619” Conclusion PAGEREF _Toc413348619 h 5<\/p>\n
HYPERLINK l “_Toc413348620” Reference PAGEREF _Toc413348620 h 6<\/p>\n
Introduction <\/p>\n
The Government of the UAE employs an active expansionary monetary policy that is dedicated to growing the economy and producing the desired economic goals of stable prices, low unemployment and high and sustained economic growth as evidence by the article provided “Dubai plots return to credit markets”. Dubai is planning to sell more bonds in order to finance a\u00a0more diverse economic strategy. With more money “in hand”, Dubai will move forward with plans to increase real GDP by increasing government spending on things such as infrastructure and investments in the aviation market. This is a strategy that is in lock-step with government\u2019s fiscal policy in order to achieve the three economic goals. While the goal remains the same, the implications\u00a0are more severe and potentially more disastrous. As with fiscal policy, we gain a better understanding of how this may or may not affect the three economic goals by dichotomizing the subject into Hands-on (active) monetary policy, or Hands-off(free market) monetary policy. Again, it is understood that the Hands-off monetary policy in essence means little or no government intervention which is ultimately a contradiction of monetary policy (Ellaboudy, 2010).<\/p>\n
Monetary Policies in the UAEThe UAE owes much of its success in banking to enforcing tight monetary policies while maintaining an open and free economic zone. Espinoza & Prasad (2012) states that the UAE dirham -US dollar linkage simply shows that crude oil is sold in US dollars and that domestic interest rates will also move in tune with the US interest rates.<\/p>\n
As an open and free economic system, the government kept to a minimum its directives on how private sectors conduct their businesses. No direct taxes are imposed on profits earned by the corporation as well as on personal income. This rule, however, does not apply to foreign banks and oil companies. In addition to the fact that trade barriers and exchange controls does not exist, capital and profits earned by foreign business can also be moved from UAE to the home base without fees. Moreover, customs duties are not only low but also has a lot of exemptions and tolerant visa policies permits easy hiring of skilled migratory workers (www.dubai.ae).<\/p>\n
Sultan Bin Nasser Al-Suwaidi, Governor of CBU, expressed his fears in his speech during the 18th World Conference of Banking Institutes (2009) that the crisis of finance around the globe may slightly \u201creduce the prospects for the UAE economic growth\u201d but to help lessen its impacts, he offers the following steps to be taken (Hebous, 2006). The UAE monetary policy will continue its direction on maintaining low official interest rates;<\/p>\n
A \u201creasonable but low rate of credit expansion and restricted banking expansion will be enforced by the credit and banking policies of the UAE CBU; Comprehensive assessment of UAE banking practices is generally conducted by the International Monetary Fund (IMF) missions using available data provided by the country itself and self-assessment documentations. The IMF 2003 Report on the Observance of Standards and Codes (ROSC) as cited by e- Kamar & Ben Naceur (2007) reveals that while CBU \u201cobserves most good transparency practices regarding monetary policy,\u201d it also has its weaknesses. For instance, there has never been a public disclosure of the process of determining the amount as well as amount of annual net profits. At present, this policy hasn\u2019t been changed. As a whole, the ROSC recommended for the CBU to reinforce their reporting methods, especially with regards to the banking decisions and operations.<\/p>\n
DiscussionThe UAE has been reported to be among the countries with some of the best banking practices in the world. This reputation is largely due to the monetary system employed by the United Arab Emirates. In a growing economy like the UAE, monetary policies have the power to control its economy and have the government provide for the money that it needs. However, the recent 2008 global crisis show a dwindling of this confidence and loopholes in the monetary policy of the country were noted (Kamar & Ben Naceur, 2007). The blog further opined that total monetary policy control had never been previously an issue due to an incorrect assumption that the \u201ceconomy will always grow and the market will not fluctuate.\u201d The UAE then realized that it should have had total monetary policy control, specifically in controlling the interest rates, to deflect some of the negative effects of the inflation. Among the reasons for which is the AED dirham-US dollar linkage.<\/p>\n
Monetary policies are used to control economic factors as unemployment, inflation, international trade, productivity, and investments. Even if the UAE have some abilities in its expansion policies due to the country\u2019s oil reserves, the UAE doesn\u2019t have a contractionary monetary policy which uses an increase in interest and tax rates (Hebous, 2006). Although, the country may well be able to control other factors, if and when the UAE economy will mature and it still does not have total control over its contractionary monetary policy, one of its predicted results will be that the circulation of money will get out of hand.<\/p>\n
Hebous (2006) concludes that monetary policies should give total authority on money supply, expansion, and contraction policies for the economy to become truly stable. On the other hand, Espinoza & Prasad (2012) believes that the UAE will not be affected too much by the \u201cdeflationary trap\u201d experienced by other countries. Since the UAE pegs its dirham to the US dollar, it lacks a contractionary monetary policy; hence, the CBU cannot control inflation rates and inflation rates, in turn, tend to be erratic.<\/p>\n
Among its effects would us that \u201cinvestment decisions on the aggregate level are made according to the real rate of interest\u201d (Ellaboudy, 2010). When the dynamics in investments become unstable, this dirham-dollar linkage would have its advantages in the long run because it ensures minimal monetary disturbances. Ellaboudy (2010) further purports that this set-up is especially beneficial for an emerging economy like the UAE.<\/p>\n
Implications<\/p>\n
Economic growth\u00a0Buy selling bonds the UAE is\u00a0stating implicitly that it believes that by acquiring the cash and issuing the bond to the purchaser at a certain interest rate, it can turn around and invest the cash into the channels it\u00a0sees fit, whether this be infrastructure or aviation, and then payback the debt when the investment turns profitable. The plan faces many contingencies and hinders on the ability\u00a0of the UAE to take full advantage by putting the cash to work in the most efficient way possible, and if history is any indicator Dubai’s track record of risky bets is not a sure thing.\u00a0Be that as it may, the results will undoubtedly be higher of GDP due to active Hands-on monetary policy.\u00a0 A Hands-off monetary policy would, in essence, require that no\u00a0debt be issued, rather sufficient cash to invest would have to be literally “in hand” before forward motion could begin on any project,\u00a0regardless of how profitable the investment is deemed to be. This antiquated notion of “looking before you leap” seems to be falling further behind the times with every bond issued.<\/p>\n
Low unemploymentIn a Hands-off market economy, implementing monetary policy to achieve particular results, for example changing the money supply by selling more government issued bonds to achieve higher output of GDP, is considered bad money management and contrary to the idea of Hands-off\u00a0economics. To simplify the perspective lets imagine the\u00a0UAE is a small household family. Would it be sound policy for a house that is extended beyond\u00a0their means to engage in more borrowing in order to achieve a higher standard of living? Even if the goal is thought to be an increase of the households overall income, the risk of\u00a0“mortgaging your future” could have unintended consequences that are far reaching and generational. \u00a0The UAE could never be confused with a small household, with\u00a0vast future wealth coming from a seeming less endless supply of oil.\u00a0By using the\u00a0Hands-on theory, Dubai will sell government issued bonds and use the\u00a0cash to build roads and airports, putting its citizens to work immediately, effectively\u00a0keeping unemployment\u00a0low and GDP high (Ellaboudy, 2010).<\/p>\n
Stable pricesHere, it seems, is where\u00a0“the wheels fall off the wagon” when it comes to Hands-on monetary policy. To put in less contrived words, increasing the supply of money has\u00a0been proven to increase overall prices and not just in the short term. It is foolish to think that monetary policy is the lone contributor to inflation, many factors must be weighed, but none seemingly have the same direct impact as monetary policy.\u00a0The short-term\u00a0gains are indeed popular for Hands-on monetary policy and the results are hard to\u00a0argue with, but at what cost? (Espinoza & Prasad, 2012)<\/p>\n
ConclusionThe UAE had and has been proving to be successful in its implementation of monetary policy. The heads of\u00a0each state within the UAE are seemingly aligned in their lazier-like focus of achieving the three economic goals and allowing the citizens to continue their high standard of living that is on par with many western\u00a0European nations.\u00a0The question remains of sustainability and willingness to adapt to an\u00a0ever increasing globalized economy.<\/p>\n
ReferenceEllaboudy, S. (2010). The global financial crisis: economic impact on gcc countries and policy implications.\u00a0International Research Journal of Finance and Economics,\u00a041, 180-193.<\/p>\n
Espinoza, R. A., & Prasad, A. (2012). Monetary policy transmission in the GCC countries.<\/p>\n
Hebous, S. (2006).\u00a0On the monetary union of the Gulf states\u00a0(No. 431). Kiel advanced studies working papers.<\/p>\n
Kamar, B., & Ben Naceur, S. (2007). GCC monetary union and the degree of macroeconomic policy coordination.\u00a0IMF Working Papers, 1-33.<\/p>\n","protected":false},"excerpt":{"rendered":"
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