UAE should curb rising inflation

Davos: Inflation is the United Arab Emirates' biggest enemy and the country must control rising prices with steps such as curbing lending to overheated sectors, the country's advisory council head said on Friday.

Abdul Aziz Abdullah Al Ghurair, speaker of the UAE Federal National Council, told Reuters in an interview that revaluing the dirham exchange rate stirs speculation the government will change policies every time the dollar falls.

Inflation in the UAE hit a 16-year high in 2006 but the booming oil-based economy has limited means to control rising inflation as the dollar peg forces it to follow US monetary policy at a time when the Federal Reserve is cutting interest rates.

"Inflation is our enemy No. 1, particularly as it impacts the lower income segment of people. We really need to manage our control over inflation," said Al Ghurair, who also heads Dubai's second largest lender by market value, mashreq.

Asked about how the UAE could control prices without independent monetary policy, Al Ghurair said: "There could be other ways of controlling our lending. One is to set a ceiling for lending for sectors which are experiencing high growth. Since we cannot use interest rates to control inflation, we have to find other ways, basically limiting lending." The UAE is one of the six Gulf Arab countries preparing for monetary union as early as 2010. They have agreed to keep their dollar pegs but some officials have suggested Gulf oil producers might consider revaluing their currencies.

Al Ghurair said the government recently adjusted salaries for central government employees and added: "If you do revaluation, their income will be less.

"Should they adjust the [exchange rate]? This also sends some speculation that every time there is pressure on the dollar the government will step in to adjust."

Family-controlled mash-req plans to buy banks in the Arab region and spend at least $1 billion per purchase. "The current acquisition we are looking at, it will have to be over $1 billion because efforts taken in doing a small deal and big deal is the same," Ghurair said.

On fourth-quarter profit, Al Ghurair said it would be extension of the first nine months.

Comment: Dubai backs dollar peg

Dubai's government supports the United Arab Emirates' dollar peg and will resist a currency revaluation, Executive Council member Sultan Bin Sulayem said.

Central banks in six Gulf Cooperation Council states, including Saudi Arabia and the UAE, are under pressure to revalue their currencies as the dollar declines, stoking inflation to record levels.

"To change is very risky," Bin Sulayem said in an interview at the World Economic Forum in Davos yesterday. "It's important to continue with the dollar despite its weakness."

- Bloomberg