Currency peg: Free float as an option

Calls for a realignment of the Gulf currencies' peg have become the standard whenever the dollar goes through bouts of depression, as is the case now.

And with George Soros having given his verdict against the greenback, the compulsions for change appear to be far more pressing than ever before.

The issue is often not whether the Gulf currencies' dollar link should continue or not, but revolves around which currency should replace the dollar.

The views are generally arrayed on two sides: one calling for the euro as a replacement and the other preferring linkage to a basket of currencies, including the euro, and maybe the dollar itself in it.

Now there is a third option being proposed. And refreshingly it comes from the Dubai Chamber of Commerce and Industry (DCCI), which has of late shown considerable sophistication in dealing with issues of policy that concern the activities of its members.

The chamber is suggesting that the best option for the UAE, independently as well as within the GCC as an economic bloc, is probably not to link the currency either to the euro or the basket, but a free float.

Serious contender

The chamber's proposal comes in the context of the proposed Gulf Currency Union, which despite a number of setbacks seems to be on its way to hit the 2010 target.

GCC central banks have been considering various available options and also looking at the euro as a serious contender to replace the dollar, both as the currency peg as well as the unit for denominating oil price.

According to the chamber, the free float option might be the best choice to reflect market values and maintain independence in policy making.

The free float would insulate the dirham from the negative performance of other currencies, it argues.

The DCCI recently undertook a review of the impact of the euro's consistent appreciation against the dollar and its fallout on Dubai's non-oil trade.

The review showed that the trade weighted exchange rate index of the dirham fell by an annual average rate of 7.5 per cent during the period 2000-2004, with the year 2000 forming the base.

This meant that in trade-weighted terms, the dirham depreciated by 27 per cent against the euro and the yen at the end of 2004 relative to its value in 2000.

Economic reform

The chamber has suggested a series of structural changes in economic policies to overcome the consistent depreciation of the dirham.

It advocates the introduction of export promotion programmes, including a system of export subsidies, credit and guarantees, to develop new export opportunities for the trade as well as assistance to the private sector to explore less expensive import markets through new economic cooperation deals.

It also calls for the encouragement of non-distorting import substitution activities and economic reform to improve investment environment and the introduction of economic incentives for long-term risks.

Another suggestion relates to the creation of buffer stocks of strategic imports to deal with price fluctuation along with the introduction of joint import procurement programmes that give more negotiation power to local importers.

The chamber also called upon households to postpone their non-dollar foreign transfers and defer purchase of expensive non-dollar imports to a more favourable time.

The writer is a UAE-based journalist.