UAE decision favours single GCC currency

UAE decision favours single GCC currency

Khaleej Times - 01/01/2008

(MENAFN - Khaleej Times)The decision by the UAE government to retain the dirham peg to the US dollar demonstrates its commitment to achieving a GCC monetary union, according to a note by UAE-based firm HC Brokerage. GCC monetary union had been slated to come into effect by 2010, but the deadline has been extended indefinitely.

"The UAE is very dedicated to achieving a GCC monetary union, which was evident in its decision of not de-pegging its dirham from the US dollar," the note states. Speculation about a possible currency de-pegging has driven the dirham up to a 17-year high and increased pressure on the peg.

And although the note acknowledges the success of the fixed exchange rate system for attracting foreign investors and "maintaining stability in the market," HC Brokerage advocates the need for a more independent monetary policy.

"The GCCs/UAE's path and that of the US has recently diverged, restraining monetary policy instruments from controlling escalating inflation in the UAE," it says. While also noting the official claim that skyrocketing house prices is the main reason for the high rate of inflation and that officials in Dubai are trying to find ways to tackle this problem, HC Brokerage states: "It is important to note that without free monetary instruments it is difficult to control inflation especially since last year's (2006) 15 per cent ceiling set on Dubai rent rates did not stop prices going up."

However, the report concedes: "Economic growth is growing at unprecedented rates and even with high inflation rate many foreign investors are still showing interest. The UAE attracts the largest amount of foreign direct investment (FDI) in the GCC. Officials are not resting on their laurels and are still working on facilitating and encouraging foreign investments in the country like foreign ownership in the UAE."

But recent figures show "that some other GCC economies seem to be catching eyes, with FDI increasing at higher rates than that of the UAE," comments the brokerage firm. "The GCC attracts only 3.9 per cent of the FDI invested in the world."