New bank advisers may dispute dirham's connection to US dollar

Debate about the UAE's fixed exchange rate regime is likely to be reignited after the appointment of a team of international advisers to the Central Bank, says one of the financial experts on the panel.

David Dodge, an economist and the former governor of Bank of Canada (BoC), said the International Advisory Council (IAC) would be likely to offer advice on the pros and cons of loosening the dirham's peg to the US dollar.

A more flexible exchange rate would give officials greater room to adopt a more autonomous system of monetary policy.

"There's a whole grey area between operating a fixed exchange rate or a floating exchange rate. [The council] will have different views on this and that's what [the Central Bank is] looking for," he said.

Mr Dodge is one of four international experts appointed to the newly formed council to offer advice about both the structure of the regulator and future policy.

Also on the council are the Nobel-prize winning economist Professor Robert Mundell, Dr Joseph Yam, the former chief executive of the Hong Kong Monetary Authority and Sir John Bond, the former group chief executive and chairman of the UK banking giant HSBC.

The council was set up as the Central Bank looks to sharpen its policymaking skills and fine-tune its regulatory framework after the global financial crisis.

The management consultancy Oliver Wyman recommended the Central Bank appoint a team of independent advisers after the company was hired last year to review the regulator's operations and help it restructure in line with international best practice.

The body last week held its first meeting in Abu Dhabi, attended by Sultan al Suwaidi, the governor of the Central Bank, at which the new members were briefed about the workings of the Central Bank.

Three further meetings are scheduled next year, starting in January, at which the members are likely to discuss the regulator's structure and policy in more detail.

Monetary policy of the Central Bank at the moment is largely determined by what action is taken by the US Federal Reserve because of the dirham's peg to the dollar.

Although the peg offers stability in times of economic turmoil and is viewed as sensible given oil's pricing in dollars, it can also lead to skewed monetary policy at times.

As the US maintains low interest rates to help stimulate its economy, persisting with similar measures in the UAE if growth picks up faster may run the risk of stoking inflation.

Nonetheless, Mr al Suwaidi has previously made it clear the country has no plans to de-peg the dirham from the dollar.

Mr Dodge, who served as the governor of BoC for seven years until 2008, said the Central Bank also seemed keen to receive advice about how the regulator could help to develop a dirham-based bond market.

He said it was too early to say how much influence the council would have in the decision-making process.

"My sense is that both members of the board and staff from the bank are genuinely searching to see if there are ways to improve policies after the events of 2008," he said.

"Whether we are making recommendations or whether we will be engaged in decisions with the board and its members of the Central Bank I'm not sure. My sense is that we will feel our way in that."

Each adviser receives a fee for every meeting attended at the Central Bank.