ABU DHABI, (Reuters) – The United Arab Emirates has no plans to drop or revalue its currency peg to the dollar, and any decisions on currency policy will be taken collectively by Gulf states, the UAE central bank governor said on Monday.
“There will be no revaluation, no dropping the dollar peg,” Sultan Nasser al-Suweidi told reporters in Abu Dhabi.
One of the UAE’s top businessmen with close links to Dubai’s rulers also said he did not expect a government committee that is studying currency policy to recommend any change to the peg.
“Nobody expects them to come out and say let’s change,” Sultan Ahmed Bin Sulayem, chairman of the sprawling state-owned Dubai World conglomerate, told reporters. Sulayem is seen as one of the key economic lieutenants of Dubai ruler and UAE Prime Minister Sheikh Mohammed bin Rashid al-Maktoum.
Sheikh Mohammed said last week that the UAE had set up a committee to report to him after considering whether the peg should be retained.
Many analysts expect the UAE and its Gulf neighbours to eventually cave in to economic pressures and drop or revalue their currency pegs to the dollar.
Despite strong inflationary pressures, Gulf states with dollar pegs have to cut interest rates in line with the U.S. Federal Reserve, which has been sharply easing monetary policy.
Kuwait dropped its dollar peg last year, switching to a basket of currencies, dealing a major blow to plans by Gulf Arab states to achieve monetary union by 2010.
A meeting of Gulf central bank governors in Qatar on Sunday reaffirmed the aim of monetary union in 2010 — even though Oman has said it will not join, and Kuwait has a different currency policy from the rest of the Gulf.
Suweidi said on Monday that the Gulf countries would “push ahead with the implementation of monetary union on time in 2010”. But many analysts regard this as an impossible goal — and Suweidi had said himself in the past that a delay was likely.
Suweidi said last year that he was facing strong social and economic pressure to drop the UAE’s peg to the dollar.
Inflation in the UAE, a federation of seven emirates, hit a 19-year peak of 9.3 percent in 2006 and probably accelerated to 10.9 percent last year, according to an estimate by the National Bank of Abu Dhabi. The combination of the UAE’s rising prices and falling purchasing power has triggered riots by migrant workers in Dubai and Sharjah.
But on Monday he said surging inflation would not have an impact on any decision about currency policy. He said about 35 percent of UAE inflation was attributable to the decline in the dollar, with the rest due to domestic and other factors.
The head of the central bank of Oman, another of the six nations that make up the Gulf Cooperation Council (GCC), said on Monday that Oman also had no plan to change the dollar peg.
“For a small open economy like Oman, the U.S. dollar is the strongest source of stability for promoting trade and investment and CBO will continue to keep the current peg to the U.S. dollar,” Hamood Al Zadjali, executive president of the Central Bank of Oman (CBO), told Reuters.
He added that the dollar was “key to exchange rate stability and CBO remains firmly committed to defending the peg”.
But Zadjali repeated that Oman would not join with other Gulf states in monetary union.
Unable to use interest rates to tackle inflation, Gulf countries have tried to use other means to cool their overheating economies.
Traders said on Monday that Saudi Arabia had last week raised bank reserve requirements to 12 percent from 10 percent, the third time the rate has been raised since November.
“The government is opting not to decrease spending and to contain money supply. Money supply will continue to grow at a more measured pace but enough to create inflationary pressures, in addition to high government spending,” said John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi subsidiary.
The move forces banks to keep more money in their vaults, slowing growth in money supply.