UAE Central Bank Governor Sultan bin Nasser al-Suwaidi has long been disenchanted with a job he has had since 1991. So, it was no surprise when he announced on 12 December that he could leave it before the year’s end.
Running a financial system is tough assignment in any country. In the UAE, it is often mission impossible.
The federation’s central bank was founded 17 years ago this month and is one of the world’s newest. It replaced the UAE currency board set up in 1973 to regulate the supply of the dirham, which was launched that year. From independence until then, Abu Dhabi had used the Bahraini dinar; the first bank’s first governor, Abdelmalik al-Hamar, was a Bahraini.
The UAE central bank’s most persistent challenge was supervising the federation’s banking system. Each emirate is technically sovereign and they initially used their powers to grant bank licences. Some of the new institutions lent imprudently and this led to a banking crash when oil prices slumped in 1986. Mergers followed that produced the domestic banking structure we know today.
The greatest irritation for the central bank was regulating institutions that sometimes saw themselves as beyond federal control. This was compounded in the 1990s by a rising inflow of foreign money. Some of this was due to money-laundering operations. It produced yet another headache for the central bank.
A new issue emerged in 2001 when Dubai announced plans to create the Dubai International Financial Centre (DIFC), a free zone that was to operate outside the central bank’s scrutiny. The anomaly was regularised in 2004 when the UAE cabinet passed a financial free zone law which maintained the central bank’s supremacy. Effectively, however, detailed regulation was divested to the Dubai Financial Services Authority (DFSA), a part of the DIFC.
The central bank is now being pounded by the twin tasks of dealing with explosive money supply growth and preparing for the GCC’s goal of achieving currency union in 2010. Seeking some room for manoeuvre, Al-Suwaidi hinted at the start of 2007 that preparations for a single currency might be presaged by co-ordinated GCC revaluations against the dollar. This idea was swiftly dismissed. Since the summer, currency speculation and inflation have dominated Al-Suwaidi’s agenda.
In some people’s eyes, his departure was overdue. But this is a diversion from the real issue, which is the need for the UAE to have a coherent national development policy.
Its economy is dominated by two growth engines. The largest is Abu Dhabi, which has this year earned about $50 billion from oil exports and almost as much again from foreign investments. The second is Dubai, which is harvesting income from logistics, tourism and other service sectors. Due to globalisation and record oil demand and prices, these two are combining to make the UAE the world’s most powerful money-making machine. Money supply growth is now more than 30 per cent a year and probably accelerating.
A by-product is a growing development imbalance. Abu Dhabi will soon be one of the world’s richest cities and is autonomously taking steps to improve its education, health and housing. The poorer emirates are living in the shadow of an economic behemoth and are inexorably losing young talent to the boom cities.
The problems faced by Al-Suwaidi were overwhelmingly due to these factors. How could he hope to contain inflation when exchange rate policy, the sole effective monetary policy instrument, was determined by the regional power balance and the UAE’s relations with US? And what chance does a national financial policy have when the federation is still effectively seven autonomous economic units?
The burdens of these contradictions will pass on to Al-Suwaidi’s replacement. The responsibility for devising a roadmap for the UAE’s long-term economic future as a unit rather than a collection of autonomous entities rests elsewhere.
The UAE is in the grip of a boom that could last for a generation. It needs a national economic policy supported by appropriate monetary, fiscal and public investment strategies that will deliver the benefits efficiently and equitably across the entire country.
But that, in turn, requires agreement about the ultimate goals of a project that will change the face of the region and the nation. This is a political issue that is not in the job description of any central bank governor, nor should it be. And unless it is addressed, the new governor will have exactly the same problems as his predecessor did.