Lessons for the Gulf States
Edited by Ronald MacDonald and Abdulrazak Al Faris
Chapter 7: Operational Implications of Changing to Alternative Exchange Rate Regimes
Warren Coats1 INTRODUCTION In preparing to discuss the operational implications and requirements for alternative monetary policy regimes, I reviewed available information on how policy is currently conducted. Regrettably the main findings of the IMF assessment of the UAE’s observances of the Monetary Policy Transparency Code remain largely valid: ‘The main weaknesses relate to the lack of detail in (i) reporting on monetary operations, the CBUAE’s Balance Sheet, and macroeconomic developments, (ii) describing and explaining its monetary policy framework and instruments . . . . The CBUAE has no publication that explicitly outlines and explains its monetary policy framework and how it operates its policy instruments’ (IMF, 2003, pp. 46–7). While the CBUAE (Central Bank of the UAE) has now published a description of its monetary policy tools (‘Qualified Monetary Instruments’2), it has not published a guide to how it uses them for monetary policy. Policy has been firmly anchored to a fixed exchange rate for the US dollar for over a quarter of a century. The CBUAE will buy or sell dollars at the official exchange rate on demand (presumably with a small spread). As a result, the lack of a clear statement of its uses of its other instruments (minimum reserve requirements, FX swaps, Certificates of Deposit (CDs) auctions, advances and overdrafts) is not as important as it would be with a different policy regime. The primary consequence of its provision of extensive domestic liquidity management instruments and facilities for banks has been the pre-emption of the development of an active interbank...
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