Saturday, March 10, 2007

Revaluation of the UAE Dirham getting closer?

From the UAEinteract site:

The UAE will not revalue its currency ahead of other GCC states, the Central Bank governor said yesterday. The continued decline of the dollar has weakened Gulf currencies, which are pegged to the greenback.

Sultan Nasser Al Suwaidi said Gulf states will discuss whether to revalue their currencies at the April meeting of central bank governors. "We will not act unilaterally," Al Suwaidi said. "But if [the governors] come to the conclusion that we should go in this direction or that direction, we will go along."

Gulf nations pegged their currencies to the dollar in 2003 under a plan to unite under a single currency by 2010. However, with questions of a possible delay to the union, and with the dollar falling 10 per cent against the euro last year, speculation of a Gulf-wide currency revaluation has risen in recent weeks.

Last month, investors betting on revaluation drove the UAE dirham and the Kuwaiti dinar to record highs.

The UAE Central Bank maintains that inflation is due to rent and property price rises and will subside this year as more supply comes to market. That's not what Emaar and the various well connected property developers are saying - in public the sales shill is just the same - that property will continue to rise in price impressively forever. They'd have a job shifting the stuff otherwise of course...

But they cannot both be right. For a central bank to put its inflation hopes on the supply/demand balance of property shifting towards the end of 2007 smacks of ostriches sticking their heads in the sand. And if the prices don't stabilize this year, what next? Do they have a plan B?

If the UAE wants long term stability and to establish itself as a business-friendly environment, the first step is to set an inflation target of 2-3% and stick to it. But we may well find in April that the other GCC countries take the decision that Dubai really needs and revalue the GCC currencies anyway.

1 comment:

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