(S) UAE CONSIDERS CENTRAL BANK RESTRUCTURE AND

S E C R E T ABU DHABI 000221


NOFORN

TREASURY FOR LEVEY, BAUKOL, GLASER, MCDONALD
STATE FOR NEA/ARP (MASILKO)

E.O. 12958: DNG: CO 03/05/2034
TAGS: ECON EFIN AE
SUBJECT: (S) UAE CONSIDERS CENTRAL BANK RESTRUCTURE AND
ENHANCEMENT

REF: 08 ABU DHABI 1381

Classified By: Ambassador Richard Olson, for reasons 1.4 b and d.

THIS IS AN ACTION CABLE


1. (S//NF) Summary. On March 2-3, U.S. Treasury Department
central banking advisors from the Office of Technical
Assistance (OTA) met with UAE Central Bank officials to
discuss possible UAEG efforts to restructure and enhance its
Central Bank. While the Central Bank officials expressed a
clear desire to improve the regulator's ability to respond to
financial crises such as the one currently unfolding, they
remain divided on the extent and ultimate goals of the reform
exercise. Central Bank officials representing Dubai are
pressing for a broad initiative that will lay the ground work
for an eventual GCC Central Bank located in the UAE. UAE
Central Bank officials representing Abu Dhabi have yet to
embrace the more far reaching goals of their genetically
ambitious neighbor. OTA was represented by central banking
advisors Thomas Simpson and Peter Nicholl, and debt advisor
Michael Grifferty, joined by Treasury Attach and Econ Chief.
They met with UAE Central Bank Chairman Khalil al Foulathi,
Governor Sultan bin Nasser al Suwaidi, board members Mubarak
al Mansouri and Khalid Balama, and advisors Dr. Nasser Saidi
and Ra'ed Saqfelhait. End Summary.

(S//NF) DUBAI PREPARES TO HOUSE GCC CENTRAL BANK
-------------- ---


2. (S//NF) Dr. Nasser al Saidi, advisor to Dubai-based UAE
Central Bank Vice Chairman Dr. Omar bin Sulaiman, laid out a
clear path by which the UAE could preempt other GCC nations
and succeed in securing the right to permanently host the GCC
central bank. Dr. Nasser explained how the UAE is ideally
positioned to accommodate the eventual GCC central bank as it
has already built the most active financial sector in the
Gulf with the presence of most major international financial
institutions, newly developed foreign exchange clearing and
payments systems, and a welcoming environment suitable for
international staff and visitors. According to Dr. Nasser,
UAE Central Bank Vice Chairman Dr. Omar believes the current
turmoil in the UAE's financial sector has created the right
opportunity to drive through a financial sector and
regulatory modernization plan that will lay the foundation
for the GCC central bank to reside in the UAE. (Note: Dr.
Nasser opined in a side bar that the UAEG would likely accept
a Saudi national at the head of a GCC central bank, provided
that the institution is physically located in the UAE. Dr.
Nasser is the former First Vice Governor of the Central Bank
of Lebanon. Dr. Omar also serves as the head of the Dubai
International Financial Centre. End Note.)


3. (S) Dr. Nasser explained that the UAE embarked on a
nationwide modernization plan over two years ago that seeks
to improve governance in the UAE. The impetus for Central
Bank reform has been more recent, with the onset of the
financial turmoil exposing significant areas of weakness in
the UAE's financial sector and oversight bodies. This
experience is the first major financial crisis for the UAE,
affecting its banking, credit and real estate sectors. UAE
financial authorities have responded sub-optimally to the
crisis as they lack effecting fiscal and monetary policy
tools. In fact, Dr. Nasser confirmed that the UAE Central
Bank has no tools in place to help the banking sector, and
therefore had to invent them on the fly. Additionally, the
federal structure of the UAE, combined with and its highly
fragmented regulatory and supervisory architecture, has
restrained the government from implementing swift and
decisive action. As a result, Dr. Omar is leading an effort
to reinforce the authority of the Central Bank and widen its
scope of supervision as a means to upgrade the UAE's entire
financial sector, a core component of the UAE's aggressive
economic development plans. In this manner, the UAE Central
Bank will drive the reform process of the entire UAE
financial and banking sector.


4. (S) Dr. Nasser requested the assistance and involvement of
the U.S. Treasury Department in several areas. Dr. Nasser and
Ra'ed shared that with the approval of the Central Bank
board, they are currently reviewing proposals from four
international consulting firms. The proposals identify areas
for improvement in financial sector regulation and detail
implementation roadmaps. They have narrowed the field to two
firms and will be selecting their final partner in the coming
weeks. Dr. Nasser requested that U.S. Treasury provide
feedback on the proposals submitted by the remaining
consultants.


5. (S) Once a consulting firm is agreed upon, Dr. Nasser
welcomes U.S. Treasury involvement on various technical
elements, such as IT, operations, payments systems, economic
research, statistics, formulation of monetary policy, and
strategic planning for the Gulf Monetary Union. He foresees
the need for U.S. Treasury assistance in setting up bond and
money markets, to include an auction system for government
securities and a deposit guarantee mechanism. Dr. Nasser also
envisions Treasury guidance on defragmenting the UAE banking
and financial sector, to include markets, regulations and
authorities. During the implementation phase, Dr. Nasser
hopes for a stream of training programs for Emirati Central
Bank officials/employees, tapping the resources of the
Treasury Department, Federal Reserve and IMF.


6. (S) ACTION REQUEST: UAE Central Bank Vice Chairman has
requested an options paper from the U.S. Treasury Department
laying out various forms of engagement through which the
Treasury Department could support the restructuring effort.

(C) ABU DHABI INVITES IMPROVEMENTS, PROCEEDING WITH CAUTION
-------------- --------------


7. (S) Displaying far less ambition for change than Vice
Chairman Dr. Omar, Abu Dhabi-based UAE Central Bank Chairman
Khalil al Foulathi and Governor Sultan al Suwaidi peppered
the OTA advisors with questions about the global financial
crisis and the depth of the U.S. economic recession. The
Chairman and Governor confirmed that the Central Bank was
reviewing options for possible enhancements and regulatory
restructuring. They solicited advise on how the UAE Central
Bank should respond to the current crisis. They questioned
the OTA advisors on various models and functions of financial
oversight, including lessons learned from the U.S.'s
fragmented structure which holds commonalities with the UAE
system. They asked for OTA views and experiences on how to
confront inflation within the confines of a fixed exchange
rate currency regime.


8. (S) In a side bar following the conclusion of the meeting,
Governor Suwaidi approached OTA advisor Simpson and requested
Treasury's assistance as a second set of eyes to review the
final restructuring proposal from the selected consulting
firm.


9. (S//NF) COMMENT. While tension may exist between Abu Dhabi
and Dubai as to the extent of reform needed in the UAE's
financial sector and supervisory authorities, the UAE is
clearly embarking on a path of modernization. Moreover,
Central Bank Vice Chairman Dr. Omar, who also serves as the
head of Dubai's financial free zone, the Dubai International
Financial Centre, has a proven track record of delivering
financial sector reform. Several high level USG policy
initiatives, national security concerns and economic
interests are hindered by the fact that the UAE is plagued by
an anemic central bank that lacks both authority and
capability. The UAE clearly invites U.S. Treasury involvement
in its reform effort as a trusted partner in a time of
uncertainty, and likely as a source of political cover within
the UAE and reputational enhancement internationally. The
UAEG relies heavily on international consulting firms to
assist in a number of key governmental functions; however,
they also understand the limitations of such firms and have
been burned by grandiose plans that fail through the
execution phase. As such, the UAEG welcomes the experienced
and unbiased involvement of U.S. Treasury central banking
advisors.


OLSON