With the United Nations selecting the United Arab Emirates' anti-money-laundering law as a model for other countries to follow, central bank governor Sultan Bin Nasser Al Suwaidi can feel proud that his policies are being recognized at the highest level.
Last year saw the UAE's central bank implement some of the region's strictest new regulations designed to clamp down on money-laundering and terrorism financing, and the IMF now considers the UAE a model in this area. Tighter supervision has been put in place across the financial sector, and steps have been taken to bring parts of the informal economy under supervision as well. Informal money transfer operations known as ?hawala? are now required to report quarterly on transactions that exceed Dh2,000.
With a tradition of financial sector liberalism already firmly in place, investment income in 2003 grew to more than $5 billion. New opportunities in this sector will come from a new securities regulation regime and regulations to provide a structure for Islamic banking instruments, both of which were areas of focus for the central bank in 2003.
The next step will be the implementation of the Dubai International Financial Centre (DIFC). Though the federal government has only recently signed the final laws governing the DIFC's operation, Al Suwaidi has worked with the DIFC for several years. Together they have hammered out a preliminary set of regulations that have made the Centre one of the most eagerly awaited financial enterprises in the Gulf. A more comprehensive regulatory regime is now being considered by the central bank. Though the recent dismissal of two top executives proved to be something of a publicity nightmare, the project is still seen as moving forward, and most of the 40 or so international banks that have expressed interest in the development are still expected to join.
Governor Al Suwaidi is also moving to open the UAE banking sector to foreign competition. At the recent International Financial Reporting Standards conference in Dubai, Al Suwaidi announced a three-pronged strategy for allowing more foreign branches in the UAE. Banks from other GCC states will be the first to get more liberal treatment, followed by banks that already have branches in the country, and finally other foreign banks. The central bank is also moving towards a more uniform tax regime that would tax foreign and domestic banks at the same level, Al Suwaidi said.
Banks' minimum capital requirements, set at Dh40 million, are also expected to rise to a level more in line with international standards, he said. The move should increase the pressure towards consolidation that is already evident in many Gulf markets.
The International Financial Reporting Standards conference, organized by the International Accounting Standards Board, was a first for the Middle East, and its location in the UAE was a feather in the cap of the country's central bank. Al Suwaidi has put the Emirates' strong reputation for combating money-laundering and terrorist financing down to the fact that the central bank has been focusing on the issue since long before September 11, 2001. The UAE has already frozen some $3.1 million of funds purportedly linked to terrorism financing efforts, according to Al Suwaidi. Earlier this year the central bank also moved to freeze the assets of SMB Computers, after the firm was allegedly embroiled in an arms scandal.
Under Al Suwaidi's direction, the central bank has also taken important steps in recent years to help move the UAE's economy forward. The recent increase in credit levels to the private sector, led by the central bank's monetary policy, has helped spur the economy. Construction and trades continue to provide grist for the nation's seven still-growing city-states, as real estate projects like The World and developments like the vast Mall of the Emirates, complete with indoor ski resort, continue to go up.
Such activity has led to increased inflationary pressures, which the central bank has confronted with a firm maintenance of its dollar-pegged exchange-rate policy, a move the IMF has lauded. Though official figures show consumer inflation in 2003 running at only 3.3%, commercial inflation ? especially inputs to the construction sector ? has in some cases run at double-digit levels. The question is whether current levels of real GDP growth (8% in 2003, and a forecast 7% in 2004) will bring any shocks to the system.