Economists said yesterday there was no compelling reason to abandon the US dollar currency peg amid sliding oil prices.
While the peg to the dollar compels the UAE and other Arabian Gulf economies to follow US monetary policy, it has the benefit of giving it the strength and stability of tracking the world’s de facto currency – especially as the greenback firms against other currencies like the euro and the yen, making imports from Europe and Japan cheaper.
The UAE dirham has been officially pegged at 3.6725 to the US dollar since 1997.
"The peg to the dollar supports currency stability", said Monica Malik, the chief economist at Abu Dhabi Commercial Bank. "Moreover, the strong dollar will partially help to maintain the UAE's international purchasing power amid a backdrop of lower oil prices, alongside keeping imported inflation weak."
The nature of the country’s crude oil-dominated exports also favour the peg to the greenback, economists say.
“The main export commodity is priced in US dollars and it’s therefore logical to have the currency pegged to the dollar,” said Srishailan GS, vice president treasury and capital markets at Invest AD. “If oil were priced in another currency, there would have been a case for a basket or float. A smaller economy can always manage a pegged regime better than a larger economy, especially when more than 60 per cent of revenues are from oil.”
He added: “GCC countries have weathered many ups and downs in the oil market and the currency peg has been more than helpful in maintaining a stable economy. There is no reason for the GCC to abandon the peg now, when most of the GCC countries are sitting on huge reserves and can manage any short-term market fluctuations.”
But the question of the peg arises perennially when there are sharp drops in the price of crude, like in 2009, and in the past week when the price of oil plummeted by about 10 per cent on Thursday and Friday alone. The Central Bank of the UAE has defended the dirham's peg to the US dollar following media reports that suggested that the country would study the currency arrangement.
“The governor of the Central Bank of the UAE emphasised on Saturday evening that the recent media reports regarding a study on the dirham’s peg to the US dollar are not true,” the official Wam news agency reported yesterday.
“He further reiterated in a statement that fixing and safeguarding the official exchange rate of the dirham falls by law within the purview of the Central Bank’s board of directors, and that the policy of the fixed peg of the dirham against the US dollar will remain in place.”
Wam said that economic indicators strongly support the continuation of the fixed peg regime, which has provided economic stability and bolstered investor confidence.
“We would concur with this view, seeing an adjustment to USD pegs at the current time as unlikely and unwarranted, as any benefit of a change would be outweighed by the additional uncertainties it would throw up,” said Tim Fox, the chief economist at Emirates NBD.
mkassem@thenational.ae
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