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Revaluation of the dirham could still surprise us

By Peter Cooper



Speculators have withdrawn from the scene and banks are quoting dollar to dirham rates not seen for some time. But the revaluation of the dirham is still something that could happen overnight, and the Central Bank has left the door open to do just that.

Governor of the UAE Central Bank Sultan Nasser Al Suwaidi was most recently quoted by Al Hayat newspaper as saying: “The decision not to de-link Gulf currencies to the US dollar is final.”

But at the same time he said: “Revaluation of domestic currencies is an option on the table for the Central Bank governors in the Gulf countries.” In other words, he can turn around and revalue the dirham against the US dollar at anytime, although he has promised not to do it in the “foreseeable future”.

Currency watchers say that Kuwait played a similar game of cat-and-mouse with speculators before it moved from a pegged exchange rate to a basket of currencies. There was speculation, disappointment and denial, and then the peg was gone.

But the UAE is clearly committed to keeping the peg which seems to have been a common decision by the remaining GCC currency-peg nations, almost certainly because they are worried about the impact this might have on the value of the US dollar in currency global markets. Destabilising the US dollar and sending the greenback into freefall would be dangerous indeed.

However, revaluation is a much less onerous move than de-pegging. The question is finding the right moment to do it, when the impact on global currency markets will be minimal. The coming holiday season could be just such an opportunity.

It will surely not have gone unnoticed at the UAE Central Bank that the US dollar has begun to strengthen in the past few weeks. If this trend accelerates then a revaluation of the dirham could be accomplished with very little collateral damage to the greenback or embarrassment to allies of the United States. If the revaluation takes place then it will be for sound reasons of domestic economic management. It is true, as the central bank argues that spiralling rents are the main cause of high inflation in the UAE.

But the artificially low valuation of the dirham due to the weakness of the US dollar is the second most important cause of inflation, and ought to be a target for economic management.

The UAE imports a great deal from non-dollar economies like Europe and the United Kingdom, and the weakness of the dirham means that these imports cost more.

This is a root cause of inflation and for once a policy fix is clearly available and obvious: instead of pegging the dirham at 3.67 to the US dollar there is an immediate revaluation by say five to 15 per cent, and the rate shifts to 3.49 or 3.12 dirhams to the greenback.

The government also needs to do this to keep the UAE internationally competitive. For example, skilled salaries in India are up by 15 per cent this year while the rupee also has gained around the same amount against the US dollar.

That means in order to stay competitive UAE companies need to pay around 30 per cent more for staff from India; few businesses can afford this kind of raise in staff salaries so the weak US dollar directly impacts on their ability to compete for staff.

In the past the UAE has followed a highly successful policy of economic diversification away from dependence on hydrocarbons. But maintaining an artificially weak exchange rate is going to distort economic development and damage the private sector at a time when the oil industry is booming.

It is also ridiculous that the spending power of nationals and residents should be falling overseas at such a time.

The dirham should be buying more and not less for people living here, and not financing super cheap holiday and apartment deals for foreigners in the Emirates.

The remedy is thankfully at hand, and this commentator would not therefore be surprised to see a revaluation of the UAE dirham sooner rather than later, and at a time designed to leave the currency speculators short.