Business | Banking
Central Bank announces swap plan
The UAE Central Bank said yesterday its board of directors have resolved to provide swap facilities (dirham/US dollar) to banks operating in the country.
- By Himendra Mohan Kumar, Staff Reporter
- Published: 23:29 December 24, 2008
Abu Dhabi: The UAE Central Bank said yesterday its board of directors have resolved to provide swap facilities (dirham/US dollar) to banks operating in the country.
The central bank said it would buy US dollars against the dirham spot and sell dollars against the dirham in a forward contract, at the same time, with the aim of "providing further services to the banking system".
"These facilities shall be provided to all banks operating in the UAE, regardless of whether or not they have a shortfall in their Dirham net position," the apex bank said in a statement.
"These operations will begin by the Central Bank buying US dollar against the dirham (spot) and selling US dollar against the dirham (forward) at the same time," it said.
The tenors of these facilities shall be one week, one month, two months, three months, six months, nine months and twelve months.
Furthermore, the Central bank said its board reviewed the projected budget for the fiscal year 2009, and adopted it as follows:
Total expected revenues of Dh4.176 billion, total expected expenses of Dh1.576 billion, including interest expense on certificates of deposit, and with expected net profit of Dh2.600 billion.
Economists welcomed the move.
"This for sure, will have a positive impact on the economic performance of the country," Mohammad Amerah, an Abu Dhabi-based economist told Gulf News.
"The Central Bank wants to inject more liquidity into the economy to activate the economy as it feels there's a shortage of liquidity. It wants to encourage commercial banks to extend more loans to institutions and private sector individuals and companies," he added.
Sanjay Uppal, Group Chief Financial Officer of Emirates NBD said in the current environment, it's a very positive move by the Central Bank. "This is going to provide additional AED liquidity into the financial system and our expectation is there would be some easing of the EBOR rate (Emirates Interbank Offered Rate)," he said.
However, Amerah cautioned that excess liquidity might increase pressure on prices to move upward in the domestic economy.
The central bank and finance ministry have together launched Dh120 billion of emergency funding since September.
- With inputs from Reuters
Explained
What is a Swap?
Dollar-dirham swaps are a mode of injecting dirham liquidity in case a bank needs access to dirham urgently. Swap arrangements involve an outright sale by commercial banks of foreign currency denominated assets, at the spot price, and the injection of dirham liquidity of an equivalent amount.
The foreign currency denominated assets are to be repurchased at a specified future date for periods of one week, one month, or three months. This arrangement was created at the request of local banks to overcome temporary shortages of dirham liquidity.
- UAE Central Bank
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