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United Arab Emirates Mulls Abandoning the Dollar
by
findingDulcinea Staff
The UAE has its currency pegged to the flagging U.S. dollar. But high inflation is forcing the Gulf nation to reconsider that arrangement.
30-Second Summary
The United Arab Emirates, long a beacon to expatriates seeking a plush lifestyle, is considering removing its longstanding currency peg to the U.S. dollar in a move to rein in inflation rates.
The Wall Street Journal writes that, in the UAE, the U.S. dollar “contributes 40 percent of total inflation. The National Bank of Abu Dhabi estimates UAE inflation at 10.9 percent in 2007.”
Local distributors report price increases of some 20–30 percent. “A 20-liter tin of a popular brand of cooking oil was available at 47 dirhams ($12.80) in 2006. But now a 10-liter tin of the same oil brand is costing 47 dirhams,” an Abu Dhabi restaurateur told the Khaleej Times.
Said UAE Central Bank Governor Nasser al-Suweidi in November, “There is pressure, strong pressure, in the UAE because of higher inflation and an unexpected further deterioration in the dollar.”
Similar woes prompted fellow Gulf nation Kuwait to unpeg its currency from the dollar in May of last year.
Eirvin Knox, the chief executive director of the Abu Dhabi Commercial Bank, told Gulf News, “The dollar peg has served the economy well, historically, but it may be wise to reconsider it in light of the long-term growth prospects in the region.”
Stephen Corley, writer for Arabian Business, disagrees. Although expats in the emirates may not have as much wiggle room as before, “it is inconceivable that the relentless suggestion of a one-off revaluation will do much to counteract the inflationary spiral.”
The Wall Street Journal writes that, in the UAE, the U.S. dollar “contributes 40 percent of total inflation. The National Bank of Abu Dhabi estimates UAE inflation at 10.9 percent in 2007.”
Local distributors report price increases of some 20–30 percent. “A 20-liter tin of a popular brand of cooking oil was available at 47 dirhams ($12.80) in 2006. But now a 10-liter tin of the same oil brand is costing 47 dirhams,” an Abu Dhabi restaurateur told the Khaleej Times.
Said UAE Central Bank Governor Nasser al-Suweidi in November, “There is pressure, strong pressure, in the UAE because of higher inflation and an unexpected further deterioration in the dollar.”
Similar woes prompted fellow Gulf nation Kuwait to unpeg its currency from the dollar in May of last year.
Eirvin Knox, the chief executive director of the Abu Dhabi Commercial Bank, told Gulf News, “The dollar peg has served the economy well, historically, but it may be wise to reconsider it in light of the long-term growth prospects in the region.”
Stephen Corley, writer for Arabian Business, disagrees. Although expats in the emirates may not have as much wiggle room as before, “it is inconceivable that the relentless suggestion of a one-off revaluation will do much to counteract the inflationary spiral.”
Headline Links: UAE to reconsider dollar peg
UAE Central Bank Governor Nasser al-Suweidi has hinted that the country is considering unpegging the dirham, its national currency, in light of its interest rate cuts and lower forex rates. “There is pressure, strong pressure, in the UAE because of higher inflation and an unexpected further deterioration in the dollar,” he said in November 2007.
Source: AME Info
The United Arab Emirates established a task force this week to determine whether unpegging the dirham from the dollar is a good idea. Saudi Arabia, Qatar, Bahrain and Oman also currently peg their currencies to the dollar. According to The Wall Street Journal, some economists estimate that the dollar’s “imported inflation contributes 40 percent of total inflation. The National Bank of Abu Dhabi estimates UAE inflation at 10.9 percent in 2007.”
Source: The Wall Street Journal (registration required)
Background: The UAE deals with inflation
The price of staple goods in the emirates has gone up 20–30 percent over the past few months while wages have stabilized. About 85 percent of commodities need to be imported into the country, making the economy privy to external shocks such as a weakening currency.
Source: Khaleej Times
Historical Context: Kuwait unpegs its currency
In May 2007, Kuwait ceased to maintain a fixed relationship between its currency and the U.S. dollar, instead pegging it to a basket of currencies.
Source: Forbes
Opinion & Analysis: Inflation in the Gulf
The third consecutive year of sky-high inflation has “killed the golden goose” for expats in the United Arab Emirates, writes Stephen Corley for Dubai-based publication Arabian Business. The plush lifestyle that used to beckon financiers and engineers to the Gulf nation “is beset by significant asset price inflation that borders on a price bubble … It is inconceivable that the relentless suggestion of a one-off revaluation will do much to counteract the inflationary spiral.”
Source: Arabian Business
Eirvin Knox, the chief executive director of the Abu Dhabi Commercial Bank, said on March 3 that the United Arab Emirates should consider unpegging the dirham from the U.S. dollar after it fell to an all-time low against a basket of currencies. "The dollar peg has served the economy well, historically, but it may be wise to reconsider it in light of the long-term growth prospects in the region," said Knox.
Source: Gulf News
Reference: The United Arab Emirates
An index of the UAE’s key economic indicators is available from the World Bank.
Source: World Bank
Related Topics: The United Arab Emirates’ global brand
Troubled banking giant Citigroup sold a portion of the company worth $7.5 billion to the state-run Abu Dhabi Investment Authority late last November. This is just one of many investments made by Gulf nations as the dollar tumbles and oil prices rocket.
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Dubai International Capital (DIC), a sovereign investment fund owned by Sheikh Mohamed bin Rashid al-Maktoum, the ruler of Dubai, bought a 1 percent stake in Japanese technology manufacturer Sony on Nov. 26, 2007.
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Abu Dhabi’s Masdar City is to be the world's first zero-waste, zero-carbon development city. But environmentalists cast doubt on the motives behind its construction.
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As part of its continuing effort to position itself as a luxury brand, the emirate of Dubai is spending billions of dollars on remarkable construction projects that have divided architectural critics.
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Dubai continues to market its World Cup horse race, held in late March, to equestrian enthusiasts the world over.
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