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Experts urge shift away from dollar peg

Dr Roland McDonald, professor of economics, University of Glasgow, the UK, recommends that the UAE should move towards a more flexible exchange rate in a gradual way.

He is among those monetary experts who argue that de-pegging the dirham from a sinking dollar would help restore UAE currency’s intrinsic value and position the economy to better withstand the impact of imported inflation.

“Currency Union and Exchange Rate Issues: Lessons for the Gulf States,” a book launched on Tuesday by The Dubai Economic Council, or DEC, argues the case for and against de-linking dirham from the greenback by examining the pros and cons of such a move.

The book edited by Dr McDonald along with Professor Abdulrazak Alfaris of DEC, brings together cutting-edge research on exchange rate regime and monetary union issues. It comprises a selection of papers that focus on these important issues for the UAE and other Gulf countries, written by leading academics and currency experts.

Speaking to Khaleej Times, Hani R. Al Hamli, Secretary General of DEC, said the book did not reflect the official stance of the council on the much-debated topic whether the UAE should opt out of the single currency peg and go for more flexible exchange rate regime.

“Our position is that of the UAE Central Bank which advocates for dollar peg regime. However, we facilitate debate on the issue whether the UAE should or should not de-link from the single currency peg and go for a more flexible exchange rate regime.” This book is one such attempt, he added.

Asked if a uniform dollar peg by GCC currencies a prerequisite for the eventual currency union, Dr Roland McDonald said he did not believe so. The book consists of two parts — the first part deals with the currency union, and the second part is devoted to the issue of exchange rate.

One chapter focuses on the political economy aspects of monetary integration and reviews the different arguments for and against the proposed union. The author finds out that given the lack of economic integration between the members in terms of exchange of goods and services, capital and labor mobility, they are still far from forming an optimal currency area. The author concludes that monetary integration will happen only when

it is perceived as part of a broad and ambitious project targeting political integration.

Another chapter attempts to draw some lessons from the successful European monetary integration.

The author of this chapter insists on the pre-requisites in terms of institutional building to any monetary integration experience. He argues also that the European Monetary Union criteria in terms of interest rate or fixed exchange rate requirement are useless and that GCC countries have nothing to learn from them.

In the second part of the book, experts focus on the exchange rate regime adopted by the UAE and other GCC countries. “This regime, which is based on a rigid peg to the USA dollar, is a straightforward one with a capacity to overcome the complexities and requirements of an alternative anchor. It provides also a credible nominal anchor for the different expectations about exchange rate behavior and the subsequent relevant monetary policy.”

One chapter focuses on the case of the UAE and the author argues that, although pegging to the US dollar has served the economy of this country, moving away to a more flexible regime where the Dirham is pegged to a basket of currencies may be justified mainly by the asymmetric nature of UAE and US economies.

“Moreover, an appropriate basket of currencies is likely, not only, to provide stability and credibility to the economy, but also to develop the non-hydrocarbon sector considered as strategic priority,” the author argues.

The book also looks at the implications of adopting alternative exchange rate regimes and insists on the development of a foreign exchange interbank market as an important step in the reform process.

issacjohn@khaleejtimes.com