DUBAI — UAE's Gross Domestic Product (GDP) grew 8 per cent at constant prices or 20 per cent at current prices during 2005 and the economy is expected to post similar growth in the year ahead, said Sultan bin Nasser Al Suwaidi, UAE Central Bank Governor, in Dubai yesterday.

Speaking on the sidelines of the 'Bankers' Lunch' organised by Sulaiman Mazroui, Chief Manager (Group Affairs), Emirates Bank, the governor said, "The UAE economy is on sound footing with oil prices remaining stable. More than 80 per cent of the economy is driven by oil and to that extent the economy is susceptible to ups and downs. But for the near future the economy is growing at a healthy rate and the trend is likely to continue."

Asked about the growing inflationary pressures, the governor said the main source of inflation are real estate and energy sectors. With the phenomenal growth in the economy, some amount of inflation is inevitable.

Commenting on the potential overheating of the economy due to the huge inflow of liquidity, the Central Bank Governor said, the economy has expanded substantially during the past one year absorbing most of the liquidity inflow from the region, and if any sector in particular has witnessed excess growth, it will be subject to corrections.

"We have been witnessing corrections in the stock market during the recent months. Similar corrections are likely in other sectors," he said. Suwaidi however ruled out any sharp corrections that could disrupt the economic growth in a big way.

"The UAE economy is fundamentally strong and is flexible to adapt to changes and our financial system is strong enough to soft-land the potential market corrections."

Asked about the performance of the UAE banks, Suwaidi said, the banks have done exceptionally well during this year and there is no reason why they should not repeat their performance next year in their core banking activities.

Commenting on the quality of banking sector assets he said: "The banks in the country are strictly monitored and regulated. There is no need for any concern about the quality of assets. Banks' exposure to real estate sector is controlled by the central bank guidelines, which restrict them to lend up to a maximum of 20 per cent of their total deposits."

Suwaidi ruled out the opening up of the UAE's banking sector to foreign competition in the immediate future.

"It will be some time before UAE's banking sector came under the WTO agreements as the agreement on service sector has been postponed."

However the governor added that market access would be given to foreign players depending on the bilateral agreements being negotiated between UAE and other countries under Free Trade Agreements (FTAs).

"In the context of FTAs, market access will be offered strictly on reciprocal basis. We want our FTA partners to give us the same kind of market access as we give them."

Outlining the schedule for adopting the Basel II Capital Accord in the UAE, the governor said the Central Bank had initiated an awareness campaign in 2005. In the second phase, in 2006, a market study will be commissioned to assess the requirements of the banking sector and in the third phase, in 2007 the trial implementation will begin.

"We have already started addressing issues such as transparency and corporate governance in the banking sector. As part of transparency requirements, we will implement new regulations for consumer protection."

The Central Bank is now involved in setting up a Federal Credit Bureau. "The Federal Cabinet has cleared the setting up of the credit bureau. As more than 80 per cent of the data is with the Central Bank and the banking system in the country, we will work closely with banks to set up the bureau."