The UAE’s steady progress in developing the financial infrastructure needed to better facilitate international financial capital flows intensifies competition with neighboring countries and their respective economic agendas. Bahrain’s Islamic finance industry is a major segment of the country’s economy, Qatar has invested heavily in its nascent financial sector, and Kuwait’s latest country vision strives to position the country as the northern Gulf’s premier financial hub. These countries stand to lose investment opportunities as the UAE consolidates its reputation as a hub for regional and international capital through the deployment of new fiscal mechanisms and physical financial centers.
The United Arab Emirates and India signed a currency swap agreement worth $496 million in early December 2018. Currency swaps reduce dependency on a third currency and thus avoid fees arising from exchange rate volatility and transfer costs. Emirati and Indian policymakers consequently hope this agreement will boost investment and trade between the two countries. The decision aligns with Abu Dhabi’s broader economic overtures to Asian economies–both those with established historical linkages, such as India, and newer trading partners, like China.
The UAE and India possess a robust economic relationship: the two countries exchanged $52 billion in trade over 2017, of which $34 billion came from non-oil goods. India invested $6.6 billion in the UAE during 2017, while FDI inflows in the opposite direction reached $5.8 billion. India is the UAE’s top export partner, and bilateral trade is expected to grow to $100 billion by 2020.  Given the preexisting economic linkages and small size of the currency swap relative to the scale of bilateral trade and investment, the policy decision reflects a symbolic effort by the UAE to further enhance its attractiveness as a destination for Asian capital as well as a specific step to augment its financial infrastructure.
It is important to contextualize the potential impact of this development, especially given that India is not the only Asian economy to initiate a currency swap with the UAE in recent years. The UAE and China signed a three-year currency swap agreement valued at $5.5 billion in 2012 and then renewed the agreement in 2015. Although the cumulative value of the earlier agreements, reaching nearly $11 billion, dwarfed the $496 million involved in the UAE-India deal, expert observers suggested that swapping Emirati dinar for Chinese renminbi would have little effect on firm-level activities in the Emirates. Nevertheless, the swap accomplished political objectives for China–namely granting international credibility to China’s currency–and furthered the UAE’s reputation as an offshore financial hub.
In conjunction with previously announced bilateral financial agreements, the UAE launched new projects intended to attract local, regional, and international financial institutions, many of which originate in Asian economies. For example, in 2015 the government of Abu Dhabi opened Abu Dhabi Global Market (ADGM), a financial center and free zone with a focus on fintech. The CEO, Richard Teng, previously worked at the Singapore Exchange – thus positioning him as a useful executive to lead expansion into Asian markets. Moreover, the launch of ADGM’s innovation center in May 2017 witnessed the inclusion of two Indian companies, CapitaWorld and Rubique, out of a total of five companies.
Beyond currency swaps and financial free zone development, the UAE is collaborating with Saudi Arabia to launch a blockchain-based digital currency that would improve the efficiency of cross-border transactions. The UAE’s Central Bank and the Saudi Arabian Monetary Authority will oversee the issuance of the digital currency, which as of writing remains in development. This bilateral fiscal mechanism suggests a symbolic bypass of the long-debated notion of a common currency for the GCC bloc–an initiative that failed to materialize even in periods of relatively warm relations between GCC member states.
GCC member states with more pressing fiscal constraints are unlikely to view the UAE-India currency swap solely through a competitive lens but rather as a potential model for alleviating economic pressures. Bahrain and Oman, in particular, lack adequate liquidity support structures. Unlimited currency swaps amongst global central banks can bolster these support structures; however, the type of small-scale swap initiated between the UAE and India would be insufficient to prevent future currency crises in either Oman or Bahrain. A more likely scenario would be to pursue regional networks of bilateral swap agreements, as proposed by Luiz Pinto of Brookings, alongside longer-term swap arrangements with key global economies.
Given its small size and the underlying strength of trade and investment links between the two countries, the UAE-India currency swap will not initiate a major economic transformation. Nor is the financial mechanism novel: the UAE has engaged in much larger currency swaps with China since 2012. Yet the decision is significant because it demonstrates another concrete step taken by the UAE to engage Asian capital at a time when the country’s neighbors appear very much on the sidelines.
Robert Mogielnicki is a Non-Resident Fellow at the Gulf Arab States Institute in Washington. He is also a Senior Analyst at the Siwa Group and a Ph.D. researcher at the University of Oxford’s Magdalen College, where he specializes in the political economy of Gulf Arab states.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.
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