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A foreign currency dealer counts British pound bills at a remittance shop in Mirpur. Picture used for illustrative purposes. Image Credit: AFP

Let’s say a UAE resident has to send money to countries like Lebanon or Pakistan, where the currency is considerably weaker right now than it is in the UAE, which has a stronger currency pegged to the dollar.

Is it wise to remit or should he or she hold onto it? The answer is yes, and the logic is simple.

If you repatriate money to any country with a weaker currency, from abroad, you get more money in the country you are sending to for the same amount of dirhams.

But if you are exchanging currency with a currency that is currently higher than usual, you should rather wait rather than remit now.

So when the currency in Lebanon, Pakistan, India or any other country is in decline, you get more for the same amount dirhams, given the strength of the UAE dirham.

If you repatriate money to any country with a weaker currency, from abroad, you get more money in the country you are sending to for the same amount of dirhams.

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We will explore the perks to sending back home if the currency in the home country is in decline.

But let’s first see what makes the UAE dirham strong and go a bit in detail into why certain currencies fluctuate (and some don’t) and later we will be able to understand how to take advantage of this.

It would be helpful to also read this other article on remittance that walks through in detail the science behind currency exchange.

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remittance money transfer
Expatriates in the UAE transfer billions of dirhams to their home countries each year. Image Credit: File photo

Currency fluctuations

Currency fluctuations arise from the ‘floating’ exchange rate system, which is followed by most major economies.

Understanding what is an exchange-rate system!
An exchange rate system, also called a currency system, establishes the way in which the exchange rate is determined, i.e., the value of the domestic currency with respect to other currencies.

The currency system has significant repercussions on the flexibility of the exchange rate. Exchange rate systems are primarily of two types, ‘fixed’ and ‘floating’.

When it comes to a ‘floating’ exchange rate system, the exchange rate of currencies against others depends on various factors such as relative supply and demand for currencies, economic growth of countries, inflation outlook, capital flows, and so on. As these factors are continually changing, currencies fluctuate with them.

Most prominent Asian currencies like the Indian and Pakistani Rupee, South Korean Won and the Philippine Peso have seen intense volatility against the greenback (dollar).

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Investors have considered the UAE dirham to be among the world's most stable currencies in terms of exchange rate stability.

The reason for this is the country has imposed what you call a ‘fixed’ exchange rate system, which is where the price of a currency is “fixed” with respect to another currency.

Most GCC currencies are pegged to USD
All the GCC countries, excluding Kuwait, have their currencies pegged to the US dollar. The UAE dirham has been fixed at a rate of 3.6725 to $1 since 1997. The Kuwaiti dinar is pegged to basket of currencies, after scrapping its dollar peg in 2007.

Pakistani rupee in decline

Now that we have understood what causes currency fluctuations, we can look at how we can utilise a declining currency.

The Pakistani rupee, for example, has been consistently on a downward trend and is known to benefit overseas Pakistanis working in the UAE and other countries as they will be able to remit more money. 

A weaker rupee will also increase the buying power of overseas Pakistanis when it comes to investing back home.

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pakistan rupee
State Bank of Pakistan has ordered banks to disinfect, seal and quarantine currency notes for 15 days. Image Credit: Gulf News archives

Rupee depreciation would increase the country's competitiveness and exports from Pakistan would become cheaper. The pace at which the rupee is depreciating will have an effect on inflation levels in Pakistan. But even from the side of a UAE-based businessman this is good news.

The rupee's decline is good for UAE-based businessmen because its weakness will make imports cheaper from Pakistan.

The businessmen who let’s say import vegetables and fruits and other food items from some of the major cities in Pakistan, even after inflation adjustment, prices are almost still the same but they will be sending less dirhams now to purchase stuff from there.

How is inflation tied up in all this?
Inflation can lead to higher input costs for export which makes a nation's exports less competitive in global markets, which widens the trade deficit and causes the currency to depreciate.

This is the case for any country with a weakening currency. You will be able to get more currency back home for the same amount of UAE dirhams (meaning the exchange rate from UAE dirhams to Pakistani rupee will be higher).

But let’s now look at how we perceive the Lebanon currency with respect to exchange.

Lebanon goes ‘fixed’, but not for long

Lebanon made most of its income from foreign currency exchange with the help of millions of Lebanese living abroad. And with about 150,000 Lebanese living in the UAE, conversion and transfer of dirhams to Lebanese pounds were done in great numbers.

Lebanon has what we touched upon earlier, a ‘fixed’ exchange rate system. Here is how it came into being – this will help understand what makes the two exchange systems different and the better of the two.

Lebanon's currency evolution!
In 1980, the exchange rate was around 3 Lebanese pounds to 1 dollar. In just over a decade, this increased to over 2,500 pounds to 1 dollar.

This rapid change in the exchange rate deterred investors and led to a currency peg, fixing 1,507.5 pounds to 1 dollar by 1997, leading to an uptick in money transfers.

Lebanon's fixed exchange rate has been a pillar of stability for two decades, and there was no issues with regard to sending money to the country, up until now. The risk of a looming economic collapse back home has reduced inflows and have now threatened its sustainability.

But after a severe liquidity crisis, with hardly any dollars circulating in the country’s banking system, the government is making its move away from the country’s decades-old fixed currency peg regime.

As a result of which, if you were able to transfer currency to Lebanon before at a fixed rate, it may not be possible for long.

This has caused panic on the impact a potential devaluation of the Lebanese currency, fueled by concerns of economic and governmental instability.
Copy of Lebanon_Financial_Crisis_93801.jpg-28c7d~1-1574322538062
People stand outside a money exchange company, in Beirut, Lebanon.

Currency volatility depends on location

The location of remittance workers plays a significant role on the impact of volatile currencies on remittances.

For example, Nepalese workers based in Malaysia and Japan, where the value of some currencies like Ringgit (Malaysia) and Yen (Japan), is declining, which results in workers holding their earnings rather than sending it to their domicile nation, while wait for the currency to appreciate.

However, holding onto a currency makes sense only if there are enough reasons to believe that these currencies, for example, the Ringgit and the Yen are going to appreciate in the future.

But do you still hold onto your currency, if you believe the currency is going to decline in the future. The answer is no, because it is a pointless exercise to hold onto it. We explore further below the other routes you can take instead.

Likewise, many Nepalese workers in countries like Qatar and UAE whose currencies are pegged to the US dollar are remitting money on an urgent basis.

The level of the exchange rate matters because remitters take into account the value of the domestic currency when they remit.

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An appreciation of the domestic currency can reduce the remittances ratio because it presents a form of the cost for the remitter.

Even so, remittances might increase following an appreciation of the domestic currency when the remitter targets a specific and stable quantity of money. Thus, it can be noted that remittances expressed in the sending country currency increase with the appreciation of receiving country currency.

Depreciation of a currency helps in inward remittances.
For example, in India, where remittances are one of the significant contributors to the foreign exchange reserve and makes up nearly 25 per cent of total foreign exchange reserves in the country, the depreciation of the Indian rupee always has a positive impact on the remittances.

The country has witnessed 50 to 80 per cent growth in remittance activity from several nations, particularly the Gulf areas, during the recent months. A similar trend occurred in 2012, 2013 and 2014 when the rupee witnessed a sustained depreciation.
A man looks at a rate list at a currency exchange bureau
A man looks at a rate list at a currency exchange bureau, on a main shopping street in London, on Tuesday. Image Credit: AP

FAQs: Questions that you would have at this stage

• So, is it good or bad to send money home when the currency value is dropping in your home country?

It depends on your need. If the need to remit is urgent, there is no point in waiting for a better time to transfer money because the value of your currency at home is dropping by the minute.

So if you should transfer, send it now, and limit your losses. But if not, simply holding onto it isn’t wise either.

Keep in mind when holding onto currency!
Although getting more value per dirhams is ideal, it isn’t really beneficial as the decline in value of currency does impact your buying power.

Keep in mind that although getting more value per dirhams is ideal, it isn’t really beneficial as the decline in value of currency does impact your buying power.

• So, if you’re not remitting money earned overseas, what are your options?

One option is – if there is no immediate need for you to remit money in the near to long term – you can make your residing country’s currency work for you.

You can either open multi-currency accounts, where you can hold your money in multiple currencies all in one place – and switch between them when the rates are good.

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By opting for this, you may be able to make and receive transfers in foreign currencies for free or reduced fees compared to regular international bank transfers.

In some countries like India, NRIs can hold foreign currency (FCNR) accounts with banks in India that can be repatriated.

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Customers check forex rates at a money exchange in Dubai. The rising dollar has double-edged implications for oil prices, and growth prospects for GCC states. Image Credit: Gulf News Archives

If you are citizens of countries who have currencies that are under threat of inflation and persistent debasing (for whatever reasons), to save their money in any foreign currency that is stable and give some yield, you could always invest it in the residing country.

You can also choose invest the money in several savings schemes or deposits being availed in your residing country so that while your currency in your home country in decline, you are still making your money make returns at the base.