A modest revaluation will not help

Talk of revaluation is flying around now, and the markets are getting excited. Investors are even buying dirhams in anticipation of such a policy shift.

The decline of the dirham, and other Gulf currencies, in conjunction with a severely weakened dollar has assumed critical proportions.

Last week the UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi conceded that economic and even social pressure has been building for a change. That's a brave admission, but reflects the stark reality that a certain amount of havoc is in play.

This summer's international credit crunch turned expectations of US Fed interest rates right around, from pointing higher to heading lower. Consequently, the dollar has taken a pummelling. The systemic, global issue is too much credit, a problem aggravated in this region by the huge surpluses generated by soaring oil revenues.

Fast-growing economies usually experience inflation anyway. But here dollar pegs mean that interest rates, necessarily linked to US Fed rates, are much too low to contain demand. Investors have to look at property or stocks or gold or other instruments to try to maintain purchasing power.

Yet it's tough to adjust the peg. The GCC states are not all equally ready and willing. Saudi Arabia has announced its preference to limit any move, and to stick with the dollar, whereas others might move to a basket, as Kuwait already has. One thing is for sure: a modest revaluation will barely help. It would make hardly any inroad in inflation, particularly since interest rates would still be linked to the dollar's.

Any such decision, presumably taken together at the summit in Doha on December 3-4, would logically consider something more significant, perhaps ten per cent or more. That would be a stretch, but the circumstances are extraordinary.