Small change plays an important role

Dubai: When it comes to small coins in the UAE, inflation has proved to be a double-edged sword.

On the one hand, rising prices have rendered a great deal of the smaller denominations of coins useless — or at least difficult to obtain, as Gulf News' campaign has catalogued over the past few months — but on the other hand, it is inflation, economists say, that makes small coins essential.

"The proper thing to do is to keep the coins circulating even if they are not widely used," said John Sfakianakis, chief economist at Banque Saudi Fransi.

"Certainly, to do away with them has a possible inflationary impact. It will not be significant, but I still think coins serve a purpose."

The UAE is by no means alone in having to solve the problem of what to do with small denominations of coins.

In China, smaller coins — known as maos — are taped together in blocks of ten and used as a single yuan, while in Saudi Arabia customers are given packets of tissues or chewing gum at the till to make up for a few lost halalahs.

Phasing out

On the other hand, India and Australia have both done away with their smallest denominations. India announced in January that it would be phasing out the 25 paisa coin, while Australia scrapped 1 cent and 2 cent coins more than 20 years ago.

But as economists Thomas Sargent and Francois Velde point out in their book The Big Problem Of Small Change, small denominations play an important role — they can be used to purchase expensive items, while large denominations cannot be used to purchase cheap goods.

This may not be significant for those on higher and middle income, but it can be for those on the lowest wage brackets, argued Sana Toukan, research manager at Euro Monitor in Dubai.

"The fact that the UAE has no small change means that every consumer is having to pay a higher price for a product than is the marked price," Toukan said.

"Whilst this doesn't mean much for people on higher or middle incomes, especially locals, it makes a huge difference for labourers on limited wages for whom the 10 or 25 fils makes a difference between them opting to buy a product or not."

Indeed, it is this perceived price increase, Sfakianakis says, that is a worry for retailers.

"It helps the marking that retailers use, because they can say something is 9.99 or 9.98 and in return you get two fils, but in fact you don't get anything back or you get something else, some tissues or some chewing gum," he said.

Price control

"In general, you always need to have a certain amount of coins in any economy, even if the 1 cent or 10 cent coin is not used widely in the US as things have got more expensive, you still have them contributing as a function of controlling prices."

But Giyas Gokkent, chief economist at the National Bank of Abu Dhabi, said that the fear of prices being rounded up — and therefore having an impact on inflation — was academic, since currently in the UAE prices are rounded up anyway. "In terms of prices [these coins] are already done away with," he said. "Prices are already rounded up, so the beneficiaries are the companies and the consumers are the losers. If we did remove them I think it would have little impact, because people aren't using them anyway."