UAE central bank 'studies revaluation'

Dubai: The UAE's central bank has launched a study into a revaluation of the dirham, the Middle East Economic Digest (MEED) reported late on Friday, citing a bank official.

"There is a study group that has been looking at the effects a revaluation would have for several months now as part of the planning for the long-term strategic future of the bank," MEED quoted the official as saying.

The group is expected to report the findings at the end of 2008, according to the magazine.

The UAE, like other Gulf Arab countries, which peg their currencies to the dollar, is struggling to curb soaring inflation, driven by a five-fold increase in oil prices during the last six years and lower interest rates.

I agree with Kevin. One query - I was wondering if part of the hold up in depegging might have to do with the incredible inventory (read potential oversupply) of real estate on the current market throughout the Gulf and how foreign investors may be in less of a position to purchase such properties because of the current credit crunch situation, now in the USA but potentially spreading as more and more banks reveal their exposure? Now if depegging takes place then the price of all of this real estate inventory goes up further only making it still more expensive to purchase both with or without credit.
Jim
Abu Dhabi,UAE
Posted: March 16, 2008, 17:28

As a former Polish central banker I have the following advice. Study Polish experience of depegging from dollar. Move to a basket of currencies and create a band around this basket, then after few years move to inflation targeting and managed float. If in the meantime new GCC dinar/riyal is created, it should be a freely floating currency. No currency in the world will become important if it is pegged to another currency, but GCC economies should be ready for that. Dollar peg is not working well for Arab economies (inflation, people losing purchasing power), why holding onto the bad solution. And I agree with the comment above, there is no need to study it for nine months, options are fairly straightforward.
Rybinski
Warsaw,Poland
Posted: March 16, 2008, 15:15

Everything goes up except the salary. At this crucial stage we, the expatriates, find it very difficult to make both ends meet. As such we are nowhere and the amount we send home becomes smaller and makes things worse. Only a revaluation of the dirham, at least by 30 per cent, can help keep us alive and make our hopes colourful. People employed back home in India have better living conditions than us in all aspects of life. We love the UAE and also contribute whatever we can, to the best our ability for the progress and development of this country.
Bader
Dubai,UAE
Posted: March 16, 2008, 14:38

The term revaluation is becoming an old usage. I am a minimum-qualified Keralite and in my personal experience there was a time that we NRIs got respectful treatment fromour homeland. Now they are getting even more good living conditions than us (salary etc). So in simple meaning, the time of the Gulf is finishing. Whatever you try, the price increase of commodities cannot be controlled by the government because it is related to so many things such as oil prices etc.
Haridas
Dubai,UAE
Posted: March 16, 2008, 11:07

The only way to control the imported inflation (UAE doesn't have much importance to oil to count the domestic inflation as produced here not being imported) is to de-peg the dirham to USD and make it to a basket of currencies. The cost of living has gone up manifold, forcing the expatriates to rethink about going back home. The US recession may last 3-4 years, so the early revaluation would be more beneficial.
Suresh
Dubai,UAE
Posted: March 16, 2008, 09:49

Studying does not need 12 months. This is referred to as "gaining time". It is clear that the UAE does not have its exchange rate on the agenda. A big part of the inflation in the UAE is "imported", and is caused by a declining purchasing power in the international markets in a situation where we import most of our consumption. Setting-up a "consumer hotline" to fight rising prices, demonising importers for re-aligning prices with their replacement costs and 70% salary increments are not solutions to this crisis. The root cause of our problems is the peg to a declining currency, which is being treated with reducing interest rates. While this is effective in the US, because its economy is slowing down. It has a very negative effect in the UAE's economy which is not slowing down. Reducing interest rates in the UAE actually fuels inflation further. Many economists have studied de-pegging the dirham/dollar and have given their recommendations to the Central Bank. Why are we still studying it until the end of 2008?
Kevin
Dubai,UAE
Posted: March 16, 2008, 08:47

If there is any solution to depeg from the dollar temporarily, then the UAE should do it for combating hyper inflation. After a year or more until the world and in particular, the US recession is not over, the UAE should switch to basket of currencies. Banks should watch the US recession and make a calculative decision to lend to avoid credit crash.
A
Sharjah,UAE
Posted: March 16, 2008, 06:20

Reporting at the end of 2008 is a long time. By that time the weak dollar would have affected the UAE economy very badly. And by that time the dollar would have bottomed and might be in a reverse trend. So I think there is no use of this study. They have to decide either to continue with Dollar or delink with dollar rather than leaving the business community guessing for a long time.
Muneer
Dubai,UAE
Posted: March 16, 2008, 01:54