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29 March 2024

UAE dirham drained by the weak dollar

(GERMAN FERNANDEZ)

Published
By Nadim Kawach

A steady decline in the US dollar over the past year has sharply depressed the UAE dirham against other major currencies and kept up pressure on monetary authorities to revalue the country's currency to stop further losses.

In 2007, the dirham lost between three and nine per cent of its nominal value against major world currencies, while the decline was as high as 15 to 31 per cent between 2002 and 2007, according to the UAE Central Bank.

The fall last year boosted the UAE's imports by more than Dh100 billion to their highest ever level, but it did not discourage financial institutions abroad from pouring dirham-denominated deposits into banks in the UAE and other Gulf oil producers amid growing speculation regional states could finally appreciate their currencies.



Dirham fall

"Due to its fixed peg to the US dollar, the dirham exchange rate dropped against most major currencies during 2007, as a result of depreciation of the US dollar against most major global currencies during the same period," the Central Bank said yesterday.

Its figures showed the dirham dived by 8.3 per cent against the euro last year and by nearly 7.8 per cent against the British sterling. It dropped by 3.9 per cent against the Swiss franc and 4.4 per cent against the special drawing unit (SDR), which is a basket of major world currencies used by the International Monetary Fund and is composed of the US dollar, euro, pound and the Japanese yen.

The figures showed the dirham rose only against the yen as a result of a decline in the Japanese currency over the past year. But it had fallen in previous years.

The dirham's plight was more underscored during 2002-2007 as it plunged by nearly 30.4 per cent against the euro, 24.5 per cent against the pound, around 22.9 per cent against the Swiss franc and 15.3 per cent against the SDR.



Imports

The fall in the dirham exchange rate against other currencies has been cited as one of the main reasons for soaring inflation in the UAE as the country is a major importer of goods and more than two thirds of its total imports come from non-dollar markets.

The surge in the currencies of those markets against the dirham allied with a sharp rise in the prices of most products worldwide to boost the UAE's import value by more than Dh100 billion last year. But this did not affect the balance of payments, which recorded its highest ever surplus because of a sharp rise in oil exports and capital inflow.

From Dh367.4bn in 2006, the UAE's total imports of goods jumped to a record Dh486.5bn in 2007, according to the Central Bank report, which also attributed the import surge to the rising population and the economic boom.



Population growth

"The sharp rise may be attributed to population increase, the need to meet the requirements of re-exports, a higher propensity to spend among individuals, increases in numbers of tourists," the Central Bank said.

"Another factor is the depreciation of the US dollar, and hence the UAE dirham against most major currencies and against currencies of major trade partners, in addition to the increase in prices of commodities in countries of origin."

A breakdown showed that the share of Asian countries in exports to the UAE increased slightly from 46.7 per cent in 2006 to 46.9 per cent in 2007.

The European Union's share slipped from 35.3 per cent to 35 per cent, while that of the Americas fell from 9.5 to 9.3 per cent. In contrast, the Arab share swelled from 5.5 to 5.9 per cent.

Depegging

Despite the continued drainage of the national currencies, the UAE and other Gulf states have maintained there were no plans at present for depegging or revaluation.

But speculation continued through 2007 and early 2008 that the UAE could opt for a one-time appreciation of the dirham following an acceleration in inflation and continued weakening in the US dollar.

Economists said the rising speculation was reflected in the sharp growth in the foreign deposits in dirham with the UAE banks through 2007.

From Dh177.6bn at the end of 2006, the foreign liabilities of the UAE's 52 banks rocketed to Dh320.9bn at the end of 2007, the Central Bank said.

Foreign deposits

The bulk of the increase was in deposits of foreign banks with the UAE's banks as they jumped from Dh96.7bn to a record Dh205.6bn in the same period.

It was the biggest ever annual increase in the UAE banks' foreign liabilities and it followed many years of relatively stability in both foreign assets and liabilities.

"Despite the steady decline in the dirham, deposits of foreign financial institutions with UAE banks in local currency have maintained their upward trend," an Abu Dhabi-based banker said. "This is because those institutions know very well the dirham decline is only nominal and its real value remains much higher…. don't forget the UAE currency is supported by massive cash reserves."

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