Time to reconsider dollar peg


About 150 financial experts from around the world, participating in a two-day meeting, got first hand economic briefs on the Abu Dhabi outlook in particular and the UAE’s in general, as well as learning the background to issues like inflation, which in part has stemmed from dirham’s peg to the US dollar.

Bankers and financial experts have been raising concerns over the nation’s currency’s peg to the US dollar. However, Central Bank of UAE Governor Sultan Nasser Al Suwaidi this week continued to ignore voices coming from banking and financial sectors and from individuals, by sticking to his previous position on the dirham-US dollar peg.

The issue was raised at the forum by Eirvin Knox, CEO of Abu Dhabi Commercial Bank, who in his keynote speech said the UAE and Gulf region’s economies have been reeling under rising inflationary pressure.

In Saudi Arabia, inflation has reached an official level of 6.5 per cent, where historically inflation was virtually zero for a decade.

“In the UAE it is even higher, at an estimated eight per cent,” he said.

The dollar fell 10 per cent against the euro last year, and has dropped a further 3.7 per cent this year, reaching $ 1.50 to the euro for the first time on February 26.

“The main contributor to inflation is the economic boom, further compounded by high oil prices and the UAE dirham peg to the US dollar,” he said.

He said that Inflation was fuelling an astonishing rise in the cost of basic goods which in turn was squeezing the region’s middle class.

“This then creates a challenge to attract and retain human capital which is essential to developing the nation,” he said.

The ADCB CEO said that reducing inflationary pressures is likely to be a significant goal of UAE economic policy.

“The policy makers are studying the impact of the dirham’s peg to the dollar, said Eirvin Knox, raising the possibility of a currency revaluation.

The week dollar: Between 2002 and late 2007, the US dollar fell by about 1/3 against the euro and pound sterling and other currencies. The UAE dirham peg has inevitably forced the alignment of its monetary policies to that of US, he said adding that this therefore has created a dichotomy.

“As the US Federal Reserve makes moves to ward off a recession through cutting rates and providing economic stimulus packages, the UAE is experiencing an unprecedented boom which thus further fuels inflationary pressures,” said Ervin Knox.

Basket: Later, Nassar H. Saidi, chief economist, Dubai International Financial Centre Authority (DIFC), strongly favoured a basket of currencies to deal with the current situation of high inflation.

Saidi, who served as Lebanon’s finance minister, asked GCC countries to prepare themselves for a common currency, which has a huge scope.

“We have rich hydrocarbon resources, sound financial and banking sector and growing trade which will support the currency to making it world third strongest currency,” he viewed.

When asked to comment on his views to effectively handle the current situation, he told Khaleej Times that there has been a study to this effect, which recommended for 50-60 per cent weightage to US dollar, 30-40 per cent to euro and 10 per cent to Japanese yen.

“In future, we must also include the RMB of China as the trade has outgrown phenomenally in recent years, compared with other regions”, he added.

About diversified weightage of currencies basket, he said that the GCC trades largely with Asia, so we need US dollar to support it. “Japan is the largest exporter of oil and LPG so we need some yen also, and while imports of food and machinery originates from 26-member European Union so there should be enough euros in the currency basket”, he elaborated.

Saidi said the GCC common currency could be so strong and viable that Arab countries could also peg their currencies to it, instead of pegging to US dollar.

Warning: Ala’a Eraiqat Deputy CEO Abu Dhabi Commercial Bank said that rising inflation has reduced banks margins, and has caused negative real interest rates. He warned that the issue is very serious as with the plunging interest rates, the investors have started looking into the booming real estate sector benefiting from mortgages, housing finance thereby creating an artificial demand for real estate, which can even burst the bubble.

Dr Waleed Al Mokarrab Al Muhairi, Director-General of Abu Dhabi Council for Economic Development, said that inflation is an outcome of three different sources, which are topped by an imbalance in aggravating demand and supply for housing-meaning thereby rise in rents. Other factors include an estimated 20 per cent imported inflation in the shape of dirham’s peg to US dollar and the rest of the impact comes from fuel, transportation and factors such as food prices etc.

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