UAE Retains Faith in the Dollar
Media Line News Agency
July 22, 2009
The United Arab Emirates will continue to peg its currency to the United States Dollar.
Following a meeting with U.S. Treasury Secretary Timothy Geithner, who is traveling in the Gulf region, the governor of the UAE Central Bank, Sultain Al Suwaidi, reaffirmed that the dirham will remain pegged to the dollar.
"It´s not a surprising decision," Philippe Dauba-Pantanacce, Senior Economist with Standard Chartered Bank in Dubai, told The Media Line. "It is really something that at this point of time everyone was expecting."
The benefits for the UAE of pegging its currency to the dollar include importing monetary tools from abroad and hence benefiting from the credibility of the U.S. Federal Reserve. The peg also ensures a stable exchange rate between the currencies of the six member states of the Gulf Cooperation Council (Kuwait, Saudi Arabia, Qatar, Bahrain, UAE and Oman) and eases the path towards a common regional currency.
However, the idea of a common regional currency, much like to Euro for the member states of the European Union, hit a serious snag in May when the UAE became the second country in the GCC to drop it intention to participate, following the decision by Oman to drop out in 2007.
The decision by the UAE came only weeks after Riyadh, Saudi Arabia was chosen as the headquarters for the new central bank. The establishment of a common central bank was seen as an important precondition to establishing the common currency.
Speaking about the UAE´s currency decision, Dauba-Pantanacce said, "In the short term, and in the current environment, we can understand that there is a need for stability and that they don´t want to upset the current [currency] regime."
"We do think there is a need for more flexibility in the medium- to long-term perspective for this region and that it should regain some of its independence in monetary policy," he said.
The downside of the peg is that the policies set by the Fed are aimed at governing the U.S. economy and not the UAE. For example, the interest rates the Fed decided on in 2008 were appropriate for a U.S. economy affected by a global downturn, but did not suit the UAE´s economy, which was experiencing high growth levels.
This led to record levels of inflation in the UAE, in addition to a loss of purchasing power for locals and the foreign workers that make up a large majority of the region´s workforce.
The remittances sent home by the expats to countries such as India or the Philippines also lost in value, promoting the workers to go on mass strikes in demand for higher salary to compensate for the loss of income.
"I think that for this region, it is important to acknowledge that the region has reached a critical size in terms of economic indicator and GDP [Gross Domestic Production] that should lead this region to more independence." Dauba-Pantanacce said.
Following a meeting with U.S. Treasury Secretary Timothy Geithner, who is traveling in the Gulf region, the governor of the UAE Central Bank, Sultain Al Suwaidi, reaffirmed that the dirham will remain pegged to the dollar.
"It´s not a surprising decision," Philippe Dauba-Pantanacce, Senior Economist with Standard Chartered Bank in Dubai, told The Media Line. "It is really something that at this point of time everyone was expecting."
The benefits for the UAE of pegging its currency to the dollar include importing monetary tools from abroad and hence benefiting from the credibility of the U.S. Federal Reserve. The peg also ensures a stable exchange rate between the currencies of the six member states of the Gulf Cooperation Council (Kuwait, Saudi Arabia, Qatar, Bahrain, UAE and Oman) and eases the path towards a common regional currency.
However, the idea of a common regional currency, much like to Euro for the member states of the European Union, hit a serious snag in May when the UAE became the second country in the GCC to drop it intention to participate, following the decision by Oman to drop out in 2007.
The decision by the UAE came only weeks after Riyadh, Saudi Arabia was chosen as the headquarters for the new central bank. The establishment of a common central bank was seen as an important precondition to establishing the common currency.
Speaking about the UAE´s currency decision, Dauba-Pantanacce said, "In the short term, and in the current environment, we can understand that there is a need for stability and that they don´t want to upset the current [currency] regime."
"We do think there is a need for more flexibility in the medium- to long-term perspective for this region and that it should regain some of its independence in monetary policy," he said.
The downside of the peg is that the policies set by the Fed are aimed at governing the U.S. economy and not the UAE. For example, the interest rates the Fed decided on in 2008 were appropriate for a U.S. economy affected by a global downturn, but did not suit the UAE´s economy, which was experiencing high growth levels.
This led to record levels of inflation in the UAE, in addition to a loss of purchasing power for locals and the foreign workers that make up a large majority of the region´s workforce.
The remittances sent home by the expats to countries such as India or the Philippines also lost in value, promoting the workers to go on mass strikes in demand for higher salary to compensate for the loss of income.
"I think that for this region, it is important to acknowledge that the region has reached a critical size in terms of economic indicator and GDP [Gross Domestic Production] that should lead this region to more independence." Dauba-Pantanacce said.
Print
Email
