Liquidity in the United Arab Emirates is tight and this is putting the economy under pressure. Ensuring that liquidity conditions improve should be a policy priority – and the sooner it happens, the better.
Throughout last year markets anticipated a revaluation of Gulf Co-operation Council currencies. As a result, the region received strong capital inflows, but these were largely speculative and short-term in nature. This created a problem since the bulk of these short-term deposits ended up being loaned out longer-term. The flows had a very pro-cyclical impact on the Gulf and added to the economic boom.
Now, however, the inflows have been reversed, which has led to a tightening in liquidity, just as economic growth has begun to slow.
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