The Central Bank of the United Arab Emirates (UAE) has decided to provide currencies swap facilities of the UAE dirham and U.S. dollar to local banks in a bid to inject more liquidity into the country's banking system, local newspaper Gulf News reported on Thursday.
This is the latest move by the UAE government to boost liquidity of the country's banking system since the financial crisis emanating from Wall Street swept the world in September.
The swap facilities will enable the central bank to buy dollars against the dirham spot and sell dollars against the dirham in a forward contract at the same time. The tenors of these facilities can be one week, one month, two months, three months, six months, nine months and twelve months.
"These facilities shall be provided to all banks operating in the UAE, regardless of whether or not they have a shortfall in their dirham net position," the bank said in a statement.
On Dec. 15, Governor of the Central Bank Sultan bin Nasser Al Suweidi said that the country has adequate resources to inject liquidity into the banking system.
The UAE government has issued treasury bonds to cover the amount of the stimulus package given to the local banks, Suweidi said.
In order to boost liquidity in local banking system, the UAE government announced in September and October to provide emergency lending facilities for local banks worth 50 billion dirhams (13.62billion dollars) and 70 billion dirhams (19.07 billion dollars) respectively.
In addition, the central bank announced on Oct. 8 a two-percentage-point cut in its lending rate to 3 percent. It also lowered the rate on its repurchase of certificate of deposit (REPO) from 2 percent to 1.5 percent with effect from Oct. 8.
In mid-October, the UAE cabinet said that it decided to take preventive measures to support the banking system. Under the measures, the government will provide a three-year guarantee to deposits and savings in all national banks and foreign banks with "significant operations" in the country. The government will also guarantee all inter-bank lending operations between banks operating in the country and inject sufficient liquidity in the financial system if and when necessary. (1 U.S. dollar = 3.67 dirhams)