The system which is accepted as a wealth measure and also a particular standard of value in a defined region is the monetary system. The use of international trade and investment for altering the policy and legislation of particular governments is the current trend. The modern currencies are not related to the commodities like silver or gold and not even a contract for delivering goods or services. The currency in the value of fluctuation is based on the factors like politics, credit worthiness, perception etc to monetary policy. The economy of United Arab Emirates is the one of the strongest economy and they have large number of economic policies which make them strong economy. UAE's monetary system includes the money market undisturbed by the adoption of standard of gold. It also includes bearing of foreign trade and also the wheat producers of UAE and United States on a common monetary level. According to the report of the committee related to UAE currency which is placing UAE on the basis of gold. The report declares the permanency of the adopted policy and the situation was when the mints were closed for freeing the coinage of silver. The decline in silver had become so great for embarrassing the UAE government, the mints were closed originally. The government of UAE received its silver revenues and the next target was to make a large share in gold. The monetary authority of UAE has the ability to control the supply of money and for conducting an independent monetary policy in United Arab Emirates. According to the data and study it is revealed that the major contributor to the base of monetary, private sector credits comes under the control of the monetary authority. (Papazian, 2010)
In determining the money supplies both the monetary authorities and the public behavior in the different assets and goods market. Whenever a pattern of public behavior and also the system of public is stable and predictable then only the stock of the money will be in the hands of the monetary authorities. In UAE the pattern of public behavior and public system are stable that is why the money stock is in the control of monetary authorities. Money multiplier is the tool that the monetary authorities of UAE use to control the money stock if this case occurs. There are two factors that dominates monetary economics which are M, V, Y, B, m and here M stands for the money stock, V stand for the velocity ,Y stands for GNP, B stands for the monetary base and m for the multiplier.
The base is constituted for the large volume of search which is applied and in this the relationship between the policy of monetary and the exchange rates, vector auto regression for the controllability of money, the relationship between the real sector of the economy and the monetary and also the uncertainty on the economy due to the effect of policy induced. It is assumed that base is controllable when the researches have directly related the multiplier with the series methods which are related to series methods. The government of UAE uses this models which are related to series for forecasting the stock of money growth. There is no location of study of multiplier based monetary control for any GCC economies. Some factors help us to know how monetary policy is controlled in UAE and how money supplies through the forecast of money multiplier in UAE. Now we are going to discuss the factors that are contributing to the monetary base variations. The first one is the UAE banking sector:
In 1973, the process of starting a Central bank with the help of formation of currency board was established. The board at that time was related in the charge of issuing the local currency and the maintenance of its parity. In the early 70's a rapid increment in the oil prices which helped in translating into higher expenditure of the government and a monetization of the UAE economy is very rapid. Due to the domestic liquidity in the year 1975, exercise some banking supervision and the management of monetary was started by the board. The measures related to the capital adequacy, loans for depositing ratio and the swap operations that are allowed were also started by the board. The commercial banks became subjected to the periodic examination due to the establishment of banking supervision unit.
CENTRAL BANK OF UAE:
Central bank of UAE was established in the year 1981 with the objectives to direct and control the monetary, the policies which are related to credit and banking in relation to the general policy of states and the main purpose is to help and support the national economy and in the stabilization of currency. By taking the policies like monetary and credit into consideration, deregulation of the money market which means the removal of ceiling on the interest rates is done by the Central bank. This bank in order to have control over the expansion of the credit which is domestic, bank redefined the legal reserve ratio requirements. Another objective of the bank is to meet the enough liquidity for meeting the potential unexpected demands and it was decided by the bank to stop paying interest rate on all the reserves which are required. (Dubai economy , 2010)
MONETARY POLICY IN UAE:
The bank worked on reconstructing its various departments and also worked towards the enhancement of the soundness of the system of banking by the end of 1991. The instruments which are related to the monetary policy were improved and expanded and also expanded to improve the central bank's control over the aggregates of monetary. The domestic interest rates and the rates of US dollars kept by the bank for the maintenance of the US dollar are nominal. The bank continued its work for using the reserve requirements and also the instruments which were most effective for the control of movement which are short terms and the major monetary aggregates. The excess reserves by the banks which are commercial are totally negligible. The central bank certificate of deposits which is an effective tool available to the central bank and the main purpose is the liquidity management. These certificates of deposits that are used by the central bank are designed for developing some type of operation in the open market. These CD's are available for the banks on the different process and it can be discounted at the central bank. The use of the swap arrangement is continued by the banks which are created to overcome the shortage of dirham liquidity temporarily. There is no risk which is associated with the repurchase and purchase of currency which are foreign. There are number of measures to ensure the soundness of the banking system which has been adopted by the central bank. These measures also include the method towards the adaptation of the international accounting standard and also the provision requirements for the loans which are non performing, capital adequacy ratio, assessment of risk by the central bank, various limits on the loans which are applied by the individuals and also the various limits on the exposures which are large enough. All these discussions which we have done about the United Arab Emirates it can be now concluded that the sound banking system is existing in UAE. It is also concluded that the Central bank of UAE depends on the market based on the measures which are direct to control monetary aggregates which includes the required reserves and the CD's up to certain extent.
The controllability of the process of money supply in the United Arab Emirates is very good and has potential of controlling. For controlling they use the models like money multiplier in the perfect way and in the correct place. The sources of variation in the monetary system in UAE are typically private and also the public domestic credit and it also includes the net foreign assets. In UAE among these all factors the major expansionary factor is used as a credit to various sectors but specially the private sector. Second is the foreign assets and the government credit is considered overall as contradictory. Major expansionary factor which means credit provided to the private sector is most important for the study and this all comes under the control of the monetary authority.
PRESENT MONETARY SYSTEM IN UAE:
Before the outbreak of the crisis in financial sector few years ago, inflation was the most discussed topic in United Arab Emirates. But today the major concern is not the inflation but the major concern now is naturally the trigger behind the UAE's has been the international crunch. This country has been left by the foreign capital for attending the issues related to the pressing liquidity present in the home markets and the dollar credit supply to the banks and other entities has diminished very quickly and by chance if it is available then it is available at a very high cost. Some other problems like the fall of the oil prices and the threat of recession which is global raises the further tension about their future. The other main important subject is the monetary architecture of the country. Here the issues are not from the short term purpose but from the perspective of structural policy. These issues depend on the historic evolution of the central bank that we have discussed above and power which are vested in the institution. These also depend upon the fiscal revenues nature and also the spending from the time of inception of UAE. United Arab Emirates has had no taxation and therefore all the revenues of the government has been generated from the oil revenues and the other problem is that the Central bank has the monetary policy tools but they are very limited and the main reason is the dollar peg due to which the interest rates are co-opted and it is also the fact that in reality it never had the monetization power. The process of monetization is the process which helps the Central bank to buy new types of government bonds and which further helps in injecting the money in the system. Open market purchases and sales occur when the central bank buys and also sells the bonds of the government by which the reserves and the money supply are also affected. But in UAE there is no active government market and the above discussed things are also not done by the central bank of the UAE. By keeping all these considerations in main we can say and conclude that the central bank of UAE has limited avenues of new injection of money. Most of the growth in UAE in the currency which is issued and the supply of money are driven by the inflows of the dollar and these dollar inflows include petro dollar inflows which is inflows through the government spending and there are also other dollar inflows like the investment of foreign portfolio, foreign investment which is not indirect, tourism sector etc. (Terterov, 2006)
We have done the discussion about the certificates of deposit for the similar thing the central bank has launched a new auction system and its issues to liquidity extraction but this system cannot be used for injecting the liquidities as the Central bank is working as the issuer. This system can be used for various purposes to the bank but the central bank is not able to use this system to inject new money. So there are risks for the UAE but the most dangerous risk is the missing of architectural value that is the government expenditure's monetization and also the management of money supply which is limited management. The money supply in UAE is more dependent on the dollar inflows or outflows. These inflows can be through liabilities of bank or oil revenues or it can be through the tourism as tourism helps in generating the inflows. Recently one credit facility named as Dh50 has been made available by the central bank to the local banks in UAE. This facility helps the local banks in the management of their needs of liquidity and it is available in the discount window of the central bank but the main thing is that it has impact on the supply of money. The main drawbacks of this policy is that it is cannot be targeted to some specific expenditures. According to the survey made in UAE it came in front that banks of the UAE were not facing that problems but it is indicated by survey that only 20% of these facilities are actually used by the banks. One more effort is done by the UAE government and that was the introduction of Dh70 billion injections through the two years deposit. (Monetary Policy as tool to combating inflation: DPE weekly report, 2010)
They introduced with a purpose that this increases the money supply but it is not the correct example of monetization. In UAE it is observed that there is a steady increase in the monetary base in the money supply which is defined as the MI, M2 and M3. UAE has done the vast changes in the monetary policies and which has helped them a lot in becoming a major centre with the most dynamic and unique policies and the diversified economy. All the monetary policies and the liberal government policies are attracting the investors in a large way. Here all the things which come under the monetary system of UAE has been discussed thoroughly and also discussed about the things policies, methods etc that the United Arab Emirates government is using and also discussion has been done about the policies of the central bank either for themselves or for the other banks are also taken into consideration here.
CONCLUSION and RECOMMENDATION
There is some recommendation that should be used by the UAE related to the monetary system. UAE government should launch some policies or methods for giving the support for the presence of relationship which is stable between the monetary base and the M1 &M2 which are known as the major monetary aggregates. It is suggested to the monetary authority in UAE should use the models like the money multipliers models like for the short term forecast of the aggregates which are major and are named as M1 and M2. The diversification of the UAE economy that is away from the oil should also results in the building up of structures like the independent and the self sufficient structures of monetary. After discussing about the issues which are raised for the GCC states that it is suggested to the United Arab Emirate i.e. the attention given to the key architectural issues are very important and it may help them across the board.
