An outward-oriented development strategy and prudent financial policies resulted in an impressive economic growth and led to a large accumulation of external financial assets. The major Emirates intend to leverage the favorable economic environment to carry out reforms that will encourage more private sector participation. Owing to the complexities of interlinkages between financial and real sectors, broad and proper information is needed to allow comprehensive economic development. As a result of deficient data, significant constraints on economic monitoring, analysis, and policy formulation are imposed.
June 12, 2006
This statement provides information on recent developments in the U.A.E. that has become available since the staff report was circulated to the Executive board on May 25, 2006. The new information does not change the thrust of the staff appraisal.
Recent economic developments
1. During January–April, 2006, credit to the private sector increased by 10.8 percent and broad money increased by 8.1 percent. At end-May, the U.A.E. increased diesel prices by 2.3 percent to 8.90 dirham ($2.43) per gallon.
Capital markets related issues
1. As of June 7, the Abu Dhabi Securities Market (ADSM) and Dubai Financial Market (DFM), respectively, declined by about 41 percent and 62 percent from their peaks in November 2005.
2. In May, the Central Bank of the U.A.E. (CBU) issued a circular to commercial banks requiring them to report their exposure to the equity markets and instructed them to provide full details on their outstanding loans to both institutional and individual investors. Also, in May, the CBU issued a circular that increased the ceiling for loans extended by banks against pledges of shares of companies which have been in operations for more than 5 years. The ceiling was raised from 70 percent to 80 percent of the market value of these shares.
3. Recently, the cabinet approved new rules allowing companies to buy back up to 10 percent of their own shares. Previously, companies could only buy their own shares if the shares fell below book value. The federal government is currently in the process of amending the Company Law. Under the amended law, the existing regulation that requires private businesses to float a minimum of 55 percent of their shares to become a public joint stock company will be reduced to 30 percent. This change is expected to encourage more companies to go public.
4. The authorities agreed to an FSAP Update. This will include a full assessment of the capital markets in the U.A.E; and the legal regime of the Dubai International Financial Center and the Dubai Financial Service Authority. Developments in the banking sector will also be assessed.
5. In April, the cabinet approved amendments to the Commercial Agency Law. The two main amendments include setting the ceiling for ownership of nationals in publicly traded insurance companies at 75 percent, and requiring the two stock markets, ADSM and DFM, to convert to public joint stock companies. Recently a decree was issued to form a committee to transform the DFM into a public joint stock company.