The Government clarified the terms of its emergency Dh70 billion (US$19bn) cash injection today, stipulating how much it will charge banks for the first round of extra funds while warning them to prepare for slower credit growth, according to WAM, the state-run news service. The Ministry of Finance said it would charge banks an interest equivalent to the rate set for five-year US Treasury bonds plus an additional 1.2 per cent, or a total rate of four per cent interest, whichever is higher. With the price for five year US Treasury bonds at 2.56 on Wednesday, the government will charge the higher rate of four per cent.
Earlier this week, the Ministry of Finance and Industry announced it would inject the first Dh25 billion (US$6.8) of the Dn75 billion into local banks in an attempt to ease a credit shortage that has threatened to halt infrastructure and property development projects vital to the economy. Although the government said it would encourage banks to make the funds available to borrowers in the trade and infrastructure sectors, it did not release any specifics how such constraints would work until today.
According to the statement, the government will monitor banks to ensure that the government funds are used in a manner that benefits the entire national financial system without engaging in "speculation". Over the past two months, the UAE has taken several steps to shore up the local financial system including offering to insure all local deposits and injecting as much as Dh120bn (US$32.6bn) into local banks. So far, the moves have been unable to bring the three month Emirates Interbank Offer Rate (Eibor) down from its current peak around 4.5 per cent. On Wednesday Eibor was the highest interbank rate in the Gulf at 4.64 per cent. tpantin@thenational.ae