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No Risk of Deflation: Al Suwaidi

DUBAI — The UAE Central Bank ruled out the possibility of the Arab world’s second-largest economy slipping into deflation, despite the sharp fall in the rate of inflation to a record low of 1.9 per cent in April.

Sultan Nasser Al Suwaidi, Central Bank governor, said the economy was in fact showing signs of positive growth.

“Evidence of economic growth is beginning to emerge. There are some positive signs,” Al Suwaidi told reporters on the sidelines of a symposium in Dubai on Thursday.

“A lower inflation has been expected as a result of the global financial crisis. But the dynamics in the UAE does not really have a scope for deflation,” he said.

Some economists had voiced concerns about the dismal prospects of deflation gripping the economy following the release of the UAE’s first-ever monthly inflation data on Wednesday.

Deflation, a decrease in the general price level of goods and services, occurs when the annual inflation rate falls below zero, and sets in expectations of further price losses freezing both business and household spending and cringing economic growth to a halt.

The country’s first-ever monthly consumer price index, or CPI, data showed annual inflation rate slowing sharply in April on the back of a slump in housing rents and food prices. Cost of transportation, communications, furniture, services and medical care also declined.

The CPI index fell 2.7 per cent between January and April, again reflecting a sharp drop in the housing index over the period.

Al Suwaidi said the mismatch between loans and deposits at UAE banks was narrowing and was unlikely to need any measures by the Central Bank to rectify the problem. “The loan-to-deposit gap faced by UAE banks has shrunk to a great extent.” The gap had widened as foreign investors pulled money out of banks because of the global crisis.

Central Bank data showed the gap between loans and deposits at UAE banks narrowed to Dh 36.1 billion at the end of April from Dh71.2 billion at the end of December.

“If they (loans) run at 200 miles per hour and deposits run at 100 miles per hour of course they will go way ahead,” Suwaidi said.

The difference between the loans that the banks have lent and their deposit base has narrowed by almost a third since the beginning of this year, a probable sign that the banks might be more willing to restart the credit flow in the coming months.

“If they (loans) slow down to 50 miles per hour and the deposits rates run at 100 then they will catch up of course. I hope we won’t need to take any measures. The market will correct itself,” he said.

The UAE in September announced a various measures including emergency funding for the country’s banks to boost liquidity. In October, it guaranteed bank deposits and said it would pump more cash into the banking system. The UAE has also cut its key interest rate to just one per cent.

· issacjohn@khaleejtimes.com