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The total amount of currency in circulation plus demand deposits — also known as M1 or narrow money — contracted 13.5 per cent in July and 10.7 per cent in June, the central bank said on its Website on Sunday.
The slower decline in money supply reflects “an easing of liquidity conditions in the banking sector, and a pick-up in confidence,” said Farouk Soussa, head of Middle East government ratings at Standard & Poor’s in Dubai. The rebound in oil prices to above $60 a barrel “gives a solid underpinning to the economy” and investment projects in Abu Dhabi are also fuelling growth, he said.
Month-on-month, M1 increased by Dh1.3 billion to Dh218.3 billion in August, after decreasing by a billion to Dh217 billion in July, according to the central bank data.
Another measure of money supply called M2, which includes M1 plus time and savings deposits increased by 0.5 per cent, while the broadest measure of money supply — M3 — which includes deposits by the government fell marginally in August to Dh930.3 billion from Dh933 billion in July.
“Sentiment is gradually improving and presumably this will reflect on greater economic activity,” said Giyas Gokkent, chief economist of the National Bank of Abu Dhabi. “So, I see improvement in economic activity on a quarterly basis, but significantly lower than a year earlier.”
Separately, the central bank also reported that the UAE banks set aside 50 per cent more money for non-performing loans in July compared with a year before. The value of bad loan provisions jumped to Dh33.6 billion from Dh22.4 billion in August 2008, the data showed.
However, according to Gokkent, the ratio of provisions to the total loans extended by the banks, which currently stands at 3.2 per cent, is “a relatively reasonable figure by international standards” particularly for a period of marked economic slowdown, due to which some businesses and individuals may have had the difficulty in servicing their loans.
“The end of the rapid loan growth of past years means that the proportion of provisions to loans may continue to rise somewhat,” Gokkent said. “It is difficult to predict at what point non-performing loans, or NPLs, and therefore provisions will stabilise.”
Cheap availability of the money and record high oil prices in the last few years had encouraged the UAE banks to go on a lending spree, which took their loan books beyond their deposit base. However, as the global credit crisis turned into an economic crisis, the banks have shunned lending and are competing with each other to attract deposits.
In the first seven months of this year, banks have lent Dh13.3 billion in the first eight months of the year while raising Dh41.6 billion in deposits during the same period. The loan-to-deposit gap, decreased to Dh42.9 billion in July from Dh47.3 in June.
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