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Threat of 'financial loss' keeps UAE pegged
The International Monetary Fund (IMF) has given its support to the UAE's commitment to the dollar peg, supporting senior UAE officials who said serious financial losses, and a loss of credibility would be the fall out of a move to a basket of currencies.
The report, published on Tuesday, made its findings after consultation with the UAE Minister of State for Finance and Industry, Sheikh Hamdan bin Rashid Al Maktoum, and the Governor of the Central Bank, Sultan bin Nasser Al Suweidi, among other senior officials from the public and private sectors.
According to the report: "The authorities indicated that moving the peg to basket of currencies might entail sizable financial losses, not to mention the risk of loss of credibility if the market were to expect some instability in exchange rate policy during the transition to monetary union."
The IMF's panel of respondents added that a nominal revaluation of the current exchange rate would not be beneficial for the UAE economy, "given that most UAE exports and imports were denominated in US dollars and a large share of the country’s sizable official foreign assets was invested in US dollar instruments".
It is the first time that UAE officials have referred to the fact that a repegging of the dirham would have a sizable financial cost to the UAE.
The report will come as a blow to many of the country's expatriates - approximately 80% of the total population - who have seen the value of their earnings fall in relative terms as the dollar has declined in value.
The news also will not help employers who have been struggling to attract employees to a country with double-digit inflation, in combination with a weakening currency.
According to the report, UAE authorities claim a move away from the dollar would not arrest inflation, stating much of the increase in inflation is due to housing shortages that have caused sharp increases in rents.
In its notes the IMF backed the UAE's present policies. It pointed out commitment to the dollar had "provided the UAE economy a credible nominal anchor" and that it remained "appropriate for the UAE given its trade pattern and the large share of dollar-denominated financial assets".
The IMF report also argued that the value of the dirham was "in line with fundamentals", and that there was no concern regarding its effect on the country's competitiveness, "especially given improvements in the business climate and the UAE’s access to expatriate labour at competitive wage rates."
Going forward, priority should be to step up structural reforms to improve the economy's efficiency, the IMF said
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Posted by Mufeed Rawashdeh, dubai, uae on 18 October 2007 at 17:00 UAE time
I just want to comment on what the IMF’s panel of respondents said:
“ .. The IMF's panel of respondents added that a nominal revaluation of the current exchange rate would not be beneficial for the UAE economy, "given that most UAE exports and imports were denominated in US dollars and a large share of the country’s sizable official foreign assets was invested in US dollar instruments".
I think the whole argument of whether the UAE imports are denominated in US dollars or not is irrelevant. The US dollar, here, is just a medium of exchange. The relevant question should be on how much of the total imports are from the USA and how much from the rest of the world. When the US dollar depreciates against other currencies, all currencies pegged to the dollar will also depreciate relative, to other currencies. Accordingly, imports from the rest of the world, other the US, will automatically become more expensive for all countries whose currencies are pegged to the US dollar. Let me use a small numerical example to explain that.
Let us say that an Indian manufacturer used to sell one unit of his product to an UAE buyer for 10 US dollars which used to be equivalent to, let us say, 130 Indian rupees. Now that the dollar has depreciated and is equal to, let us say, 9 Indian Rupees, the 10 US dollars will make only 90 Indian Rupees. The Indian seller may/will not accept the 10 US dollars as a price for his product any more; especially, that his costs of production were in Indian Rupees and still are. Such a reduction in price will be hard for the Indian manufacturer to swallow. Ultimately, he will have to raise his dollar prices to may be 12 or 13 US dollars.
As you see the transaction is still denominated in dollars but the cost of imports has increased.