The new law on government debt marks an important step forward in the UAE’s economic course. The legislation, passed on Wednesday by the Federal National Council, enables the Federal Government to borrow by selling bonds and establishes limits on that government borrowing.
This mirrors efforts elsewhere in the US and Europe to put the brakes on government borrowing. In the US, for example, the state of California has recently found itself saddled with so much debt that ratings agencies are saying it is dangerously near default, after the financial crisis crippled the state’s income and made new sources of cash scarce. Officials say the UAE’s new law is designed to prevent such a situation from happening here, by limiting the amount of money that individual emirates can borrow on their own.
Aside from regulating the country’s debt levels, the new law will also have the added benefit of allowing the Government to create a situation in which it can use the bonds to control money supply. By selling bonds denominated in local currency, the Government can effectively mop up any excess money flowing through the economy. If the Government deems it necessary to do the opposite, it could effectively inject cash into the country.
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