UAE bank governor defends dollar peg

UAE bank governor defends dollar peg

By Simeon Kerr in Dubai

Published: April 8 2008 14:57 | Last updated: April 8 2008 14:57

The central bank governor of the United Arab Emirates yesterday reiterated that the oil-rich state would maintain its peg to the US dollar, scotching speculation that the government may take control of monetary policy in a bid to tame soaring inflation.

Sultan al-Suwaidi was speaking after a closed session of the UAE’s parliament, in which he and the finance minister were questioned about the dollar peg and its impact on inflation levels that are expected to reach record highs.

The parliament questioned the officials amid increasing domestic dissent at rising prices. The hundreds of thousands of foreign labourers in the UAE have seen their remittances plunge as their home currencies appreciate against the dirham, sparking increasing outbursts of violent unrest in labour camps of Dubai and neighbouring Sharjah.

The partially-elected advisory body to the hereditary government occasionally questions ministers and officials on matters of public policy, but this is the first time that the dollar peg had come up for scrutiny.

A government official said the central bank governor outlined his reasoning for maintaining the dollar peg, presenting previously-stated arguments such as the negative impact on the UAE’s vast overseas dollar holdings in the event of a revaluation. Inflation, too, is seen as a result of a multitude of factors, mainly property rental increases, which would not be affected by revaluing the dirham in a bid to reduce import-led inflation.

”They explained that the advantages of the peg outweigh the disadvantages,” he said.

The government continues to study the issue, but chances seem to be receding that the five Arab Gulf states pegged to the weakening dollar are willing to take the politically-sensitive decision to change to a trade-weighted basket or to revalue their currencies.

At a meeting in Doha over the weekend, the Gulf Cooperation Council states said they would endeavour to implement monetary union by 2010, despite increasing scepticism that the six-member group can meet the self-imposed deadline.

Kuwait last year abandoned its peg to the dollar in a bid to tame inflation, putting the 2010 deadline under pressure. Interest rate cuts in the US as the world’s largest economy slips into an apparent recession have to be reflected by GCC states pegged to the dollar, further stoking regional inflation.

Sheikh Mohammed bin Rashid AL Maktoum, the UAE prime minister and ruler of Dubai, on last week’s trip to China said the country would maintain its dollar peg. Influential Dubai businessman and government official, Sultan bin Sulayem said earlier this week that the ”all recommendations” to the central bank’s committee studying the dollar peg called for maintaining the current foreign exchange regime.

International investors have been reducing bets that the UAE and Qatar may shifting their stance on the dollar peg as officials remain largely unified in backing the peg.