Pressure could return for a review of the dirham's peg to the US dollar next year as the UAE economy recovers from the global recession.
The shortcomings of mirroring US monetary policy under the fixed exchange rate are likely to be exposed if accelerating inflation returns to haunt consumers, economists and analysts say.
A convergence on monetary policy with the US suits the UAE at the moment, with both countries looking to keep interest rates low to spur economic recovery.
But as the UAE's economy emerges from the financial crisis at its own pace, the need for the Central Bank to diverge from Federal Reserve policy by raising interest rates to keep a lid on rising inflation may become greater. The Fed will keep interest rates at low levels for the remainder of this year.
Dr Nasser Saidi, the chief economist at the Dubai International Financial Centre (DIFC), said: "Now is not the time to do so but as soon as we are in recovery the UAE and the Gulf should review the strong dollar peg policy, which has led to a perverse monetary policy."
Among GCC states, only Kuwait has dropped the dollar peg. It moved in 2007 to pegging the dinar against a basket of other currencies.
Last year, a rapid appreciation of the dollar stoked inflation throughout the Gulf as prices escalated for property and consumer goods. Future inflationary pressures could rise if high oil prices return, driving up costs of imported goods
The Saudi Arabian oil minister, Ali al Naimi, said on Friday that he did not rule out another crude shock. "Anything is possible," Mr al Naimi said. "We will do our best to avoid that because I don't believe high prices are good nor too low prices."
The dollar fell close to a one-year low against the euro on Wednesday and to a seven-month low versus the Japanese yen on Friday.
The fall came after signs that the economic recovery was gathering momentum, prompting investors to sell the US currency and buy assets offering higher yields. Investors had fled to dollar-denominated assets as a safe haven during the financial crisis.
The dollar's drift lower against other leading world currencies has also pushed up the price of oil because it is denominated in the US currency.
The dollar could be weakened further after last week's summit of the Group of 20 leading and emerging economies, where leaders discussed the need to rebalance the global economy.
Simon Williams, HSBC's chief economist in Dubai, said: "Through 2010 and longer, growth in the UAE will pick up earlier and more rapidly than in the US and with it will come upward pressure on prices.
"But the monetary policy for the pegged currency may mean we find ourselves with a weak currency and weak interest rates when what we need is tighter monetary policy."
The boom years of the Gulf were fuelled in part by policy makers in the region following the lead of the Federal Reserve in the US by lowering interest rates, Dr Saidi said.
Eric Swats, a partner at Rasmala Investments in Dubai, said the current dollar weakness would help the UAE economy stabilise in the short-term. "The weak currency is what the UAE needs," Mr Swats said. "We know that there's been a huge deflation in the property sector. I think a weaker currency will help to bring foreign direct investment back to the sector."
The UAE has maintained a fixed exchange rate with the US currency since 1997, although its currency has tracked the dollar since 1978.
An alternative to the dollar peg could be the currency basket system adopted by Kuwait, although that is believed to be heavily weighted in dollars.
Jane Kinninmont, an economist at the Economist Intelligence Unit in London, said: "If they want more interest rate flexibility a stronger move would be towards a currency basket like in Kuwait."
Analysts see little chance of the dirham being cut loose from the dollar peg any time soon, but some can see discussions on the subject. "I think it's highly unlikely," said Robert McKinnon, the managing director of equity research at Al Mal Capital. "I do anticipate a discussion among policy makers, but the perception among them is that the dollar peg adds stability in the region, although I think that's a misconception."
Tim Fox, the chief economist at Emirates NBD, also believes the peg to the dollar is here to stay in the medium term. "The fact that the UAE resisted when inflation was much higher in 2008 when there was pressure to revaluate makes me think it will not be the case," he said. "The message has been strongly supportive of the dollar as a peg."
Sultan al Suwaidi, the Governor of the Central Bank, said in May that the UAE had no intention of diversifying its foreign currency reserves away from the dollar. Most Gulf nations, with their currencies pegged to the greenback, have to recycle surplus oil revenues into dollar-denominated assets. As a result, the region is among the world's largest buyers of US government bonds and corporate shares.
Previous speculation about a review of the currency peg has had an impact on UAE markets. Last year saw the withdrawal of an estimated Dh180 billion (US$49bn) in "hot money" invested in local markets on the expectation of a dirham revaluation, after it became clear that the currency peg would be maintained.
* additional reporting by Tamsin Carlisle
@Email:tarnold@thenational.ae
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
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UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
The Melbourne Mercer Global Pension Index
The Melbourne Mercer Global Pension Index
Mazen Abukhater, principal and actuary at global consultancy Mercer, Middle East, says the company’s Melbourne Mercer Global Pension Index - which benchmarks 34 pension schemes across the globe to assess their adequacy, sustainability and integrity - included Saudi Arabia for the first time this year to offer a glimpse into the region.
The index highlighted fundamental issues for all 34 countries, such as a rapid ageing population and a low growth / low interest environment putting pressure on expected returns. It also highlighted the increasing popularity around the world of defined contribution schemes.
“Average life expectancy has been increasing by about three years every 10 years. Someone born in 1947 is expected to live until 85 whereas someone born in 2007 is expected to live to 103,” Mr Abukhater told the Mena Pensions Conference.
“Are our systems equipped to handle these kind of life expectancies in the future? If so many people retire at 60, they are going to be in retirement for 43 years – so we need to adapt our retirement age to our changing life expectancy.”
Saudi Arabia came in the middle of Mercer’s ranking with a score of 58.9. The report said the country's index could be raised by improving the minimum level of support for the poorest aged individuals and increasing the labour force participation rate at older ages as life expectancies rise.
Mr Abukhater said the challenges of an ageing population, increased life expectancy and some individuals relying solely on their government for financial support in their retirement years will put the system under strain.
“To relieve that pressure, governments need to consider whether it is time to switch to a defined contribution scheme so that individuals can supplement their own future with the help of government support,” he said.
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
More on Quran memorisation:
Volvo ES90 Specs
Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)
Power: 333hp, 449hp, 680hp
Torque: 480Nm, 670Nm, 870Nm
On sale: Later in 2025 or early 2026, depending on region
Price: Exact regional pricing TBA
COMPANY%20PROFILE
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Why it pays to compare
A comparison of sending Dh20,000 from the UAE using two different routes at the same time - the first direct from a UAE bank to a bank in Germany, and the second from the same UAE bank via an online platform to Germany - found key differences in cost and speed. The transfers were both initiated on January 30.
Route 1: bank transfer
The UAE bank charged Dh152.25 for the Dh20,000 transfer. On top of that, their exchange rate margin added a difference of around Dh415, compared with the mid-market rate.
Total cost: Dh567.25 - around 2.9 per cent of the total amount
Total received: €4,670.30
Route 2: online platform
The UAE bank’s charge for sending Dh20,000 to a UK dirham-denominated account was Dh2.10. The exchange rate margin cost was Dh60, plus a Dh12 fee.
Total cost: Dh74.10, around 0.4 per cent of the transaction
Total received: €4,756
The UAE bank transfer was far quicker – around two to three working days, while the online platform took around four to five days, but was considerably cheaper. In the online platform transfer, the funds were also exposed to currency risk during the period it took for them to arrive.
If you go…
Emirates launched a new daily service to Mexico City this week, flying via Barcelona from Dh3,995.
Emirati citizens are among 67 nationalities who do not require a visa to Mexico. Entry is granted on arrival for stays of up to 180 days.
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What is graphene?
Graphene is extracted from graphite and is made up of pure carbon.
It is 200 times more resistant than steel and five times lighter than aluminum.
It conducts electricity better than any other material at room temperature.
It is thought that graphene could boost the useful life of batteries by 10 per cent.
Graphene can also detect cancer cells in the early stages of the disease.
The material was first discovered when Andre Geim and Konstantin Novoselov were 'playing' with graphite at the University of Manchester in 2004.
Keane on …
Liverpool’s Uefa Champions League bid: “They’re great. With the attacking force they have, for me, they’re certainly one of the favourites. You look at the teams left in it - they’re capable of scoring against anybody at any given time. Defensively they’ve been good, so I don’t see any reason why they couldn’t go on and win it.”
Mohamed Salah’s debut campaign at Anfield: “Unbelievable. He’s been phenomenal. You can name the front three, but for him on a personal level, he’s been unreal. He’s been great to watch and hopefully he can continue now until the end of the season - which I’m sure he will, because he’s been in fine form. He’s been incredible this season.”
Zlatan Ibrahimovic’s instant impact at former club LA Galaxy: “Brilliant. It’s been a great start for him and for the club. They were crying out for another big name there. They were lacking that, for the prestige of LA Galaxy. And now they have one of the finest stars. I hope they can go win something this year.”
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The smuggler
Eldarir had arrived at JFK in January 2020 with three suitcases, containing goods he valued at $300, when he was directed to a search area.
Officers found 41 gold artefacts among the bags, including amulets from a funerary set which prepared the deceased for the afterlife.
Also found was a cartouche of a Ptolemaic king on a relief that was originally part of a royal building or temple.
The largest single group of items found in Eldarir’s cases were 400 shabtis, or figurines.
Khouli conviction
Khouli smuggled items into the US by making false declarations to customs about the country of origin and value of the items.
According to Immigration and Customs Enforcement, he provided “false provenances which stated that [two] Egyptian antiquities were part of a collection assembled by Khouli's father in Israel in the 1960s” when in fact “Khouli acquired the Egyptian antiquities from other dealers”.
He was sentenced to one year of probation, six months of home confinement and 200 hours of community service in 2012 after admitting buying and smuggling Egyptian antiquities, including coffins, funerary boats and limestone figures.
For sale
A number of other items said to come from the collection of Ezeldeen Taha Eldarir are currently or recently for sale.
Their provenance is described in near identical terms as the British Museum shabti: bought from Salahaddin Sirmali, "authenticated and appraised" by Hossen Rashed, then imported to the US in 1948.
- An Egyptian Mummy mask dating from 700BC-30BC, is on offer for £11,807 ($15,275) online by a seller in Mexico
- A coffin lid dating back to 664BC-332BC was offered for sale by a Colorado-based art dealer, with a starting price of $65,000
- A shabti that was on sale through a Chicago-based coin dealer, dating from 1567BC-1085BC, is up for $1,950