Aug. 9--In its latest GCC brief, NBK reports that, they may not always be published promptly, but recent releases of official monetary statistics by the Central Bank of the UAE (CBUAE) help to provide fresh details about the state of the country's battered financial system. The broad thrust of the latest data suggest that -- although helped by a combination of emergency policy measures, rising equity prices and improved confidence of late -- the monetary system remains in a fairly fragile state, with few signs that banks are set to resume lending in a way that would help generate a decent rebound in economic growth.

Deposit growth subdued Growth in key measures of the money supply has decelerated sharply over the past year or so, a reflection of weaker economic activity and the withdrawal of foreign funds from the local market. As chart 1 shows, annual growth in the broad M2 measure of the money supply fell to 6% in June, the lowest since recent records began. Admittedly, it has now risen for three straight months in a row in month-on-month terms, which suggests that the rate of decline could be easing. But month-to-month changes in the data can be bumpy, and the figures are not adjusted for seasonal trends.

Moreover, the narrower measure, M1 has fallen for three of the past four months and is declining at an annual rate of 11%. Because it is a more liquid measure, M1 is often more volatile than its broader counterpart and could be exaggerating the degree of slowdown in economic activity. And even here, the month-on-month declines have been less vicious than in 2H 2008 -- again, hinting at a degree of stabilization. But nevertheless, the sharp change of gear in the liquidity environment has been a huge shock to the financial system. Some slowdown in money growth was desirable after the heady increases of 2007 and 2008: easy money no doubt helped fuel speculative lending to the property sector, excessive risk-taking and inflated the value of financial assets. But these types of numbers look consistent with falling output -- not the type of slowdown that the authorities had in mind.

Lending grinds to a halt Clearly, the weak economy has been both a cause and a consequence of the change in the financial environment. But it is also striking that such weak monetary growth has come about despite the much-vaunted increases in government expenditure outlined in the budgets of the Federal and Dubai governments for this year -- 21% and 11% respectively.