DPE calls for review of Gulf currency peg.
It said the dollar peg had served the GCC countries well for decades, but the global economic realities have changed.
"This pegging was adopted when oil prices were low and the greenback was at the height of its strength. Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies," the department said in a weekly report.
It urged the GCC to peg against a basket of currencies, taking into account the region's strong trade volumes with the euro zone and Asia.
"The dollar has been depreciating against major currencies, setting in motion a global trend to move away from the greenback. During the last five years, central banks around the world have gradually been getting rid of the dollar in a bid to stem losses from the declining dollar exchange rate," the report stated.
For months, economists and analysts based in the region have been advocating a review of the dollar peg, which forces the Gulf states to track the US Federal Reserve's interest rate cuts at a time of high liquidity and growing inflation in the Gulf.
"We have been quite adamant in our analysis that currency reforms in the GCC are a way to mitigate inflation. A change in the currency policy will give them control over their monetary policy," said Standard Chartered Bank economist Mary Nicola.
She said since Gulf countries are big importers, the dollar's weakness has had a "dramatic impact" on food prices in the GCC.
Gulf officials have repeatedly said that they are in favour of keeping the US dollar peg.
The Abu Dhabi report also noted some "positive" effects of the policy during the last three years.
"Thus, to drop the dollar peg would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate," it said.
The department recommended that the UAE should take steps to come out of the "dilemma."
"While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of the local economy," the report said.
At the GCC level, it suggested a unified stand to deal with the dollar's decline.
"That the GCC states continued to have fixed dollar exchange rate even as the dollar continues to decline, causes a greater harm to the GCC countries which are paying millions of dollars in commodity price differences. The GCC states have been able to pay price differences due to availability of cash," the report said.
Exchange rate in UAE
- The Gulf rupee replaced the Indian rupee in 1959.
- Gulf countries adopted their own monetary system in 1966
- Bahraini Dinar, Qatari Riyal, and Dubai Riyal replaced Gulf Rupee
- The UAE joined the World Bank and IMF in 1972
- The board of monetary council was formed in 1973
- On May 19, 1973, the dirham was adopted as the UAE official currency.
- The dirham was pegged to the dollar at the rate of 3.9474
- In 1978, the dirham was de-pegged.
- The UAE Central Bank was formed to replace the Monetary Council
- The dirham's exchange rate against the dollar was raised to 3.671
- In 1998, the exchange rate was adjusted to 3.672
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