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Mon 28 Sep 2009 11:21 AM

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Lending conditions improving in UAE - central bank

UPDATE 2: Economic conditions remain fragile, says Sultan Nasser al-Suweidi.

Lending conditions in the UAE are improving but economic conditions remain fragile, UAE central bank governor Sultan Nasser al-Suweidi said on Monday.

"The gap between loans and deposits is narrowing because liquidity is steadily improving but I think the economic situation in the UAE and other countries is fragile," al-Suweidi told reporters on the sidelines of a meeting of Arab central bank governors.

Separately, al-Suweidi said interbank rates in the UAE had come off since the central bank last month rejigged the panel of providers for the Emirates interbank offered rate in the hope it would lower rates. Bankers say the new system will start on October 1.

"There has been a decent lowering of the EIBOR rates since the announcement," he said.

"It is the banks who set EIBOR but it is the central bank that provides the mechanism and is liaising between them and I think that is the right way to run this," al-Suweidi said.

Earlier, al-Suweidi said the UAE economy may shrink or grow slightly in 2009 in the wake of the economic crisis.

"Growth will be small if there is any," he said, adding that growth could be "slightly negative" or positive or in-between.

Deflation, he said, would not have an impact on the UAE economy, the second-largest in the Arab world.

The governor told reporters that the UAE could see no compromise possible now that would allow it to rejoin plans to create a Gulf Arab monetary union.

"We have certain concerns with the GCC monetary union (and) we don't want to act as a stumbling block. We don't see compromise at this point," he said.

Gulf Arab monetary union plans were thrown into disarray in May when the UAE, the second-largest Arab economy, broke ranks with Saudi Arabia, Kuwait, Qatar and Bahrain by withdrawing.

The UAE – the second of six members of the Gulf Cooperation council (GCC) to pull out of the Gulf union after smaller Oman – linked its decision to a choice to base a joint central bank in Saudi Arabia, by far the region's largest economy.

Central Bank of Oman Executive President Hamood Sangour al-Zadjali said on Monday that Oman's decision to leave plans for Gulf Arab monetary union were final.

When asked whether there was anything that could bring the Gulf Arab state back to the bargaining table after its 2006 decision to leave the project, Zadjali said: "Our decision is final not to join."

The remaining four countries have since reaffirmed their commitment to a planned single currency. (Reuters)