UAE Monetary Supply Drop Strains Banking System in May 2026

The UAE banking system faces mounting pressure as the monetary base (M0) declined by AED74.6 billion ($20.3 billion), or 8.2 percent, by March 30, 2026, following the US-Israeli war on Iran that began on February 28, according to an Oxford Economics report. Rising interbank lending rates and large-scale deposit withdrawals indicate stress on banks, prompting the central bank to inject liquidity in mid-March to stabilize the financial sector.

Monetary Base Deterioration and Withdrawal Surge

The decline in M0—which includes currency in circulation and commercial banks’ reserves at the central bank—began in early March and accelerated as the Iran war intensified. This 8.2 percent monthly decline equates to “an unsustainable” 152 percent on an annualised basis, according to the Oxford Economics report.

“A decline in M0 indicates households or companies are withdrawing cash from the banking system, from the system overall,” said Azad Zangana, head of GCC macroeconomics at Oxford Economics in Dubai. “That tends to happen at certain points in the year during Eid or festivals, but it’s normally small whereas there was a very large buildup of withdrawals over a 30-day period that became quite concerning.”

UAE central bank data on commercial banks’ deposits was available only through February, when total deposits reached a record AED2.94 trillion, comprising AED2.1 trillion in dirhams and AED847 billion in foreign currencies. Of this total, approximately AED1.7 trillion was held in accounts accessible immediately, while AED1.24 trillion was in interest-bearing time deposits requiring agreed holding periods.

“It’s likely that withdrawals by people leaving the country have contributed to M0 declining,” Zangana said. “It could also be a sign that people are losing jobs or they’re not earning enough, so are drawing down on their savings.”

The UAE’s demographic structure amplifies vulnerability to outflows. Foreigners represent approximately 74 percent of the UAE population, compared to an average of 13 percent in high-income countries, according to Oxford Economics. “That makes the UAE more vulnerable to money outflows,” Zangana noted.

War Impact on Key Economic Sectors

The US-Israeli war on Iran has damaged important UAE economic sectors including aviation, tourism, energy, and consumer-focused industries, which directly affects bank operations and deposit stability. Economists assessed the outflow risk relative to historical precedent: in 1990-1991, deposits in UAE banks declined by 15 percent following Iraq’s invasion of Kuwait, according to Giyas Gokkent, chief economist at Bahrain’s Arab Banking Corporation. Gokkent stated the Iran war is unlikely to spark outflows of similar magnitude.

Nevertheless, sizeable deposit outflows could tighten financial conditions and create fiscal costs. “Whatever happens, the large external assets of the UAE could shield the economy from volatility caused by outflows,” Gokkent said.

Interbank Lending Stress and Central Bank Response

The Oxford Economics report identified rising interbank lending costs as “a clear sign that ongoing withdrawals of capital were exerting stress on the banking system.” The spread on the UAE’s three-month interbank lending rate (EIBOR) versus the US overnight swap index more than doubled in March. EIBOR determines UAE borrowing rates, so a rising spread indicates tightening domestic liquidity and higher relative funding costs across the banking system.

In response, the central bank launched what it described as a comprehensive package to “reinforce the stability and resilience” of the UAE banking sector in mid-March. The initiative includes making extra liquidity available to banks and temporary relaxation of certain regulatory rules, according to Gokkent. This helped M0 rebound somewhat, though it has since retreated again.

“Financial stability has been maintained and stresses on banks have not mounted,” Gokkent said. “These are measures intended to mitigate the impact of adverse external shocks.”

Zangana warned that a prolonged period of elevated EIBOR spreads poses an ongoing problem for banks. “That’s why it was so important for the UAE central bank to inject liquidity,” he said. “It probably won’t be the only time this year that it does so.”

Precautionary Measures

Zangana described a mooted dirham-dollar swap arrangement between the UAE and the United States as “precautionary.” “It’s better to have that in place before you need it so that you don’t need it,” he said. “This isn’t a case of bailing the country out. The UAE still has a huge amount of reserves and foreign-denominated assets.”

FAQ

What is M0 and why did it decline?

M0, the monetary base, includes currency in circulation and commercial banks’ reserves held at the central bank. According to the Oxford Economics report, M0 declined by AED74.6 billion (8.2 percent) by March 30, 2026, primarily due to large-scale withdrawals by households and companies from the banking system. Economists attributed this to factors including people leaving the country, job losses, and reduced earnings prompting savers to draw down deposits.

What is EIBOR and why did it spike?

EIBOR is the UAE’s three-month interbank lending rate, which determines borrowing costs across the UAE economy. The spread between EIBOR and the US overnight swap index more than doubled in March 2026, indicating tightening domestic liquidity and higher relative funding costs in the banking system due to capital outflows straining bank reserves.

What did the central bank do to stabilize the banking sector?

In mid-March 2026, the UAE central bank launched a comprehensive package described as intended to “reinforce the stability and resilience” of the banking sector. The initiative included making extra liquidity available to banks and temporary relaxation of certain regulatory rules, according to chief economist Giyas Gokkent. These measures helped M0 rebound temporarily, though it has since retreated.