Time for hush on revaluation

Speculation over the fate of the dirham built to a crescendo, with a local magazine recently going so far as to say that a revaluation of the local currency to the greenback could be just a few days away. That was last week.

Well, much to the disappointment of the economists, currency traders, and the large expatriate population, it has been laid to rest for the time being, as UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi told Reuters in Frankfurt that there is no need for revaluation, and the country will keep the peg unchanged for the foreseeable future.

In fact, the speculative frenzy led to the dirham surging to a 17-year high, subsequently provoking exchange houses and hotels to widen the spread against the dollar. That irked the Central Bank governor so much that he warned the market, which had been responding to the differing statements from the Central Bank and of course the tribe of economists, mostly of foreign banks.

The latest round of speculation was based on Al Suwaidi's statement last month that the UAE was under increasing social and economic pressure to have a fresh look at pegging. But then he also had said that it is up to the rulers of the GCC to decide. There was no indication as to the possibility turning soon into a reality.

Economists of various banks, sitting here and elsewhere, have been feeding us dates and figures for dirham revaluation for some time now. A foreign bank econ-omist once told me they derive their analyses from official statements of the UAE Central Bank, Finance Ministry, Ministry of Economy, and other GCC countries' high-ranking officials and ministers. A Reuters poll of analysts about the chances of revaluation suggested that the UAE would be first to move.

Foreign banks have become much more audible in their prediction of, even call for, a revaluation or switch to a basket of currencies, though they say they believe in a gradual approach. And there is no doubt that there is a case.

Contrast

In the West, notably the US, the central bank likes to develop a harmony of understanding and predictability with the market. Here, with monetary policy being effectively outsourced to the US, the governor has his hands tied relative to local conditions and cannot respond so much to the economic exigencies facing the country. Moreover, issues of practicality, politics and sovereignty are bound to be involved in any GCC-level discussion.

But one thing is for sure, Al Suwaidi suddenly sounds so much sterner. He was talking about social and economic pressure only a month back, and those pressures have not gone away - we know that very well. What could have irked him so much?

It could well be the fact that central banks anywhere don't like to be perceived as led by the market, and especially not speculators. For all our sakes, it might be better if the noisier economists would hold their tongue.