Monetary deposits spur money supply

Driven by a rise in monetary deposits, money supply aggregates in the UAE under two key classifications (M1 and M2) grew in December2017, reflecting a steady rebound in economic activity.
The latest monetary data provided by the UAE Central Bank on Wednesday shows that Money Supply aggregate M1 - a measure of money in circulation that includes all physical money, such as coins and notes, demand deposits and checking accounts - increased by 0.4 per cent, from Dh490.3 billion at the end of November 2017 to Dh492.4 billion at the end of December 2017.
The money supply aggregate M2 - a calculation of money supply that includes all the elements of M1 as well as savings deposits and other money market instruments such as fixed deposits which are less liquid - increased by 2.2 per cent, from Dh1,248.8 billion at the end of November 2017 to Dh1,276.2 billion at the end of December 2017.
"The increase in M1 was mainly due to a rise of Dh1.9 billion in monetary deposits. The increase in M2 was brought about by a Dh25.3 billion increase in quasi-monetary deposits," the central bank said.
While a surge in money supply indicates growth in overall economic activity, it has a strong bearing on a country's inflation rate and exchange rates. A more rapid increase in the quantity of money relative to the output results in inflation.
According to renowned economist Milton Friedman's famous quote, inflation is "always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
According to the latest projection by the International Monetary Fund, consumer price inflation in the UAE, despite the introduction of VAT, would average at 2.9 per cent in 2018 and 2.5 per cent in 2019.
An increase in money in circulation and growth in credit mean more money for people and businesses to spend, leading to increased demand for goods and services, resulting in higher supply compared to demand in November, according to analysts.
However, the Money Supply aggregate M3 - a measure of money supply that includes all elements of M2 as well as large time deposits, institutional money market funds and other larger liquid assets - decreased by 0.5 per cent, from Dh1,494.3 billion at the end of November 2017 to Dh1,487.1 billion at the end of December 2017.
"M3 mainly fell due an Dh34.6 billion reduction in government deposits, overshadowing the increases in M1 and M2," the central bank said.
Gross bank assets, including bankers' acceptances, increased by 0.3 per cent, rising from Dh2,687.1 billion at the end of November 2017 to Dh2, 695 billion at the end of December 2017.
Gross credit dropped by 0.9 per cent from Dh1,594.8 billion at the end of November 2017 to Dh1,580.7 billion at the end of December 2017.
The data show that during December 2017, total bank deposits also decreased by Dh5.1 billion mainly due to a Dh6.6 billion reduction in resident deposits, "overriding an Dh1.5 billion increase in non-resident deposits," the central bank said. - issacjohn@khaleejtimes.com