Dirham’s value being drained by dollar peg - Emirates24|7

Dirham’s value being drained by dollar peg




The UAE dirham continued its plunge against other major currencies in 2007 to match a steady decline in the dollar to which it is pegged.


But the decline was in sharp contrast with the surge in the country’s economy and has contributed to the worsening inflation problem, that has gripped the UAE and other Gulf oil producers over the past two years.


Figures by the Central Bank showed the dirham lost between two and seven per cent of its nominal value against other key global currencies in the first half of 2007 and continued its decline in the following months, in line with the dollar fall.


“As I said before, the decline in the local currency reflects another economy not the domestic economy,” said Nazim Al Qudsi, Investment Director at the government-controlled National Bank of Abu Dhabi.


“A weakening currency normally reflects a slowing economy and this is not the case with the UAE.”


Central Bank figures showed the dirham has stabilised at 3.6735 to the dollar over the past four years, while it plunged by 6.3 per cent against the pound, 5.5 per cent against the euro, two per cent against the Swiss franc and 2.4 per cent against the Special Drawing Rights Unit of the International Monetary Fund.


But it rose by 3.3 per cent against the Japanese yen and stabilised against all the currencies of the other Gulf Co-operation Council (GCC) countries. “There was a decline of between two and 6.3 per cent in the value of the  dirham against those currencies in the first half of last year,” the Central Bank said.


It stabilised against the dollar and the GCC currencies, but increased by around 3.3 per cent against the Japanese yen. From 7.1898 at the end of 2006, the British pound surged to 7.3531 against the dirham at the end of the first half of 2007. It continued its rise in the following months because of a decline in the dollar to reach 7.5174 dirhams at the end of September. Bankers said the pound’s rate had fluctuated against the dirham towards the end of 2007, but remained at one of its highest levels.


The euro also swelled from 4.8229 at the end of 2006 to 4.9408 dirhams at the end of June and 5.2403 at the end of September. The Swiss franc rose from 2.9966 at the end of 2006 to 3.1544 dirhams at the end of September.


The decline in the dirham and other GCC currencies pegged to the dollar has been cited as one of the main factors for soaring inflation rates in the region. Official figures showed the UAE’s imports from the US have traditionally accounted for only around 10 per cent of the country’s total imports, while imports from the European Union are as high as 30 per cent.


In 2006, EU exports to the UAE exceeded $35 billion (Dh128bn), nearly 30 per cent of the country’s total imports of around $123bn. No figures have yet been published for the whole of 2007 but in the first quarter, the UAE’s imports from the EU totalled Dh24.4bn, accounting for 29 per cent of the total import value of Dh84bn.


Imports from other non-dollar countries were also high as they accounted for nearly 43 per cent from Asia, including 12.3 per cent from India, 10.7 per cent from China and around 7.5 per cent from Japan. Economists said Japanese products were costlier in 2007 despite the rise of the dirham against the yen because of inflation in Japan.


“This is a real inflation problem,” said an economist at a UAE bank. “It is a two-fold decline in the UAE dirham and the continued rise in global prices, and since the UAE is a major importer, this problem is really complicated.”


Figures by the Washington-based IMF showed the UAE became the largest importer in the Middle East in 2006, after overtaking Saudi Arabia and was expected to have maintained that position in 2007, with projected imports of around $149bn. The surge in imports has been a result of a sharp growth in Dubai’s re-exports and an upswing in the UAE economy, which was expected to have jumped by nearly 17 per cent last year.