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Wed 17 Oct 2007 01:00 PM

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Threat of 'financial loss' keeps UAE pegged

UAE admits repegging of dirham will have a sizable financial cost to country, IMF reveals.

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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