The United Arab Emirates said exchange-rate reform would be one of the ways of containing inflation driven by higher import costs resulting from a currency peg to the tumbling US dollar.
Gulf currencies extended gains, with the Qatari riyal hitting a five-year high, on expectations that central banks in the world’s biggest oil-exporting region would not be able to maintain their currency pegs and control inflation.
Kuwait, which broke ranks with its neighbours in May and dropped its dollar peg, let the dinar rise for the first time in a week on Tuesday. The dinar has gained 4.76% since Kuwait switched to a currency basket to curb rising import costs.
UAE Central Bank Governor Sultan Nasser al-Suweidi said last week he was under growing social and economic pressure to follow Kuwait’s lead, although he would only act in concert with Saudi Arabia and three other states preparing for monetary union.
“The UAE government is serious about containing inflation,” the Ministry of Economy said in a report released on Monday.
A third of the country’s imports are paid for in euros and sterling, the ministry said. The dollar hit a record low against the euro and a 26-year trough against sterling this month.
“The prices of imports from these countries has risen in UAE dirhams, leading to imported inflation,” the ministry said.
Soaring rents are also driving inflation in the second-biggest Arab economy, it said. Inflation hit a 19-year high of 9.3% last year.
Abu Dhabi and Dubai, two of seven emirates in the UAE federation, capped rent increases at 7 percent a year to rein in housing costs.
“Inflationary pressures are likely to subside primarily when the residential and non-residential units are occupied, and if the U.S. dollar stops declining vis-a-vis other international currencies or if a change in the exchange-rate regime is contemplated,” the ministry said.
“Until then, everyone will simply have no option but to weather the storm,” it said.
Inflation has accelerated across the Gulf as a near fivefold rise in oil prices since 2002 fuels economic growth.
The dollar pegs force Gulf central banks to track US monetary policy to maintain the relative value of their currencies at a time when the Federal Reserve is cutting interest rates.
Fed policy moves in the wake of a US mortgage crisis no longer suited the rapidly expanding economies of the Gulf, Suweidi said, making the case for currency reform.
In September, inflation accelerated to a 16-year high of 7.09% in Oman and a 10-year high of 4.89 % in Saudi Arabia, which has held its riyal at 3.75 per dollar since June 1986.
The riyal surged to a 21-year high on Monday after a source familiar with Saudi policy told Reuters the kingdom could consider a currency revaluation, although it would not drop its dollar peg.
Forwards showed investors betting on a 2.5% appreciation in the Saudi riyal and a 3% rise in the UAE dirham in a year at 0620 GMT. (Reuters)
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