Distributive policy

Dirham bonds are key to the UAE’s monetary and fiscal policy objectives

The UAE’s recently launched dirham-denominated government bonds (treasury bills) are a major step forward in the development of the debt capital market in the country and will be a key tool in achieving monetary policy objectives and budgetary.

Clearly, dirham bonds offer the government a new source of domestic financing to tap into, if needed. From a fiscal perspective, this would help it diversify its funding sources and reduce its reliance on bank financing, external borrowing, or drawdowns on reserves in times of fiscal tightening.

Domestic public debt issuance could help develop an active domestic corporate bond market and an interbank repo market.

While the availability of local-currency-denominated government bonds would provide a useful price benchmark for other debt issuers in the market, corporate debt issues would give companies the opportunity to diversify their moving away from traditional sources such as bank financing and external borrowing.

As the market develops, smaller companies could follow larger ones in issuing debt securities. Finally, the development of the domestic debt market could attract more foreign investment that could further stimulate the national economy.

Transmission of the policy

The local currency bond market plays a key role in achieving monetary policy objectives through active liquidity management. Over the years, the Central Bank of the United Arab Emirates (CBUAE) has consolidated its framework with a view to keeping money market rates in line with those involved in pegging the currency through instruments such as certificates deposit and banknotes.

Issuing dirham bonds of varying maturities is a step forward in providing an active tool for managing liquidity and pricing and distributing market-based funding.

In a credit market typically dominated by banks, government-related entities (GREs) and large corporations tend to hog a lot of credit, with banks opting for lower risks. With the availability of longer-term financing through competitively priced bonds, GREs and large corporations have a new source of funding, giving more access to bank credit to less well-off businesses. noted.

With the normalization of interest rates by the US Federal Reserve, funding costs for UAE banks will increase as domestic deposit rates and the cost of external funding increase.

Clearly, an active local currency bond market gives CBUAE and banks the flexibility to manage liquidity by conducting open market operations. [buying and selling of these bonds by CBUAE] and the trading of these instruments in the interbank repo market.