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Dubai: The sharp decline of the dollar is hurting UAE residents, as the dirham's exchange rate has taken a major hit against most global currencies.
Following the recent US interest rate cut, currency markets dumped dollar in favour of other stable currencies resulting in dollar's sharp decline. Dirham's exchange fell proportionately due to its peg to the dollar.
UAE residents already reeling under the rising cost of living are now facing the prospect of sharp value erosion of their earnings and a drop in their savings potential. In the UAE, they are losing heavily on purchasing power as well.
Last year the UAE's inflation hit a 19-year high of 9.3 per cent. A larger number of expatriates working in the country are losing a major share of their earnings to inflation and currency depreciation.
"The Indian rupee has gained more than 14 per cent against dirham from the beginning of the year. The exchange rate losses combined with the domestic inflation in the UAE is wiping out more than one third of the earnings of Indian expatriates working in the UAE," Sudhir Shetty, General Manager of UAE Exchange Centre, told Gulf News.
European, British, Swiss and Canadian expatriates too have suffered heavily from the dirham's fall. The dirham fell 17 per cent against the euro from December 2005 to end of August 2007 and a 16 per cent against sterling.
With the US economic outlook appearing bleak, economists are anticipating more US rate cuts that could result in further decline of the dollar.
Serhan Cevik, an economist at Morgan Stanley, told Gulf News that the weaker dollar would worsen the already high inflationary pressures in the Gulf countries. "Imported inflation is becoming a bigger threat, as currencies pegged to the dollar keep weakening," Cevik said.
The impact of exchange rate loss is heavy on those who have loans to pay and bills to settle in their home countries. Small and middle-income groups are more vulnerable to the decline of the dirham.
Sinking exchange rate
"With the exchange rates of dirham falling against their home currencies, salary earners who have fixed commitments such as mortgages, bank loans and college fees are forced to dip into their savings or borrow to send money home," said Shetty.
Despite the growing financial pressure on residents, the Central Bank insists that the UAE will stick to the peg. Economists and analysts said depegging or at least revaluing dirham is long overdue as the declining currency is hurting common man the most.
The sinking exchange rate of dollar is also seeping into the UAE's domestic prices through imports. More than 70 per cent of the UAE's imports are from Europe, UK and Asia where currencies have appreciated against dollar.
Quick view: How the dirham went on a downswing
- Dollar on a perennial decline due to heavy US external debts
- Credit crunch due to mortgage crisis hurts the US economy
- US decides to cut interest rates to ease domestic credit squeeze
- Low interests make dollar less attractive in currency markets
- Dollar falls against a basket of major global currencies
- The UAE decides to stick to dirham's peg to the dollar
- Dirham slips against other currencies along with dollar due to its dollar peg.
Your comments
The UAE and all other GCC countries should immediately de-peg their currencies to the US dollar in order to combat rising inflation. They are not going to benefit in any way by sticking to the US dollar. Whatever benefit they think they will get will be minimal.
Mohib
Reading,United Kingdom
Posted: September 23, 2007, 13:36
The continuous decline in the value of dollar has hit expats hard who are already under pressure due to the continued rise in the cost of living - mainly the rents. I feel the government should take immediate steps to ensure that expats do not suffer any further. Revaluation of the dirham to the dollar may be taken as an immediate step.
Irfan
Dubai,UAE
Posted: September 23, 2007, 12:59
Good analysis.
Shali
Dubai,UAE
Posted: September 23, 2007, 12:53
Expatriates constitute the major share of population of the UAE. Most people come to the UAE for better working experience and savings. From the last year due to the continuous weakening of dollar and imported inflation, savings have been reduced phenomenally. Lower income people are worst hit as they send money every month to cover the basic necessities of their families back home. One thing the government has to realizes is, that for most of the people in UAE, every single dirham counts. Currency appreciation like Kuwait's will avoid the exodus of technical and construction labour from the UAE and will help in attracting a fresh influx of technical people to the UAE.
Kapil
Dubai,UAE
Posted: September 23, 2007, 12:48
I have been in the UAE for the last 12 years and the UAE dirham's rate against the USD has not changed by a single fil. The USD we used to send to our family back home lost its value by almost 20%. If the Government resists the pressure of revaluation, then a 20% general increase in salaries in all sectors will help.
Bal
Abu Dhabi,UAE
Posted: September 23, 2007, 12:42
I think it is weak sense to still have a peg with the dollar, the UAE should reconsider its policy as in the near future the dollar will be in crisis.
Shahzad
Ajman,UAE
Posted: September 23, 2007, 12:34
Pegging currency with USD could only benefit USD. In my opinion UAE Govt. should either peg its currency with Euro (major importing countries), Basket of currencies or revalue its currency against USD.
Mukarram
Dubai,UAE
Posted: September 23, 2007, 11:02
I think the dollar peg should be maintained as it is more important than the UAE's economy well being. Even if the dollar collapses and every country in the region abandons it, we should hold on fast to the dollar peg.
Mohammad
Dubai,UAE
Posted: September 23, 2007, 10:49
The UAE's decision to keep its dollar peg is essential in attracting foreign investment. Foreign investment is required in the reigion in order to boost economic growth.
Rohan
Dubai,UAE
Posted: September 23, 2007, 10:17
Revaluing Dirham to Dollar Peg or Pegging the Dirham to a basket of currencies is the need of the hour. Expatriates in UAE were already discouraged with internal inflation in terms of high rents, etc and now importing inflation from US has shattered the expatriate hopes and plans of living in UAE on a long term.
Prem
Dubai,UAE
Posted: September 23, 2007, 10:05
High cost of living in UAE combined with the lower exchange rate for the Indian Rupee is driving most of the indian expatriates to think on lines of going back to India. Speculations are that the situation will worsen if the dollar falls even more.
Reji
Dubai,UAE
Posted: September 23, 2007, 08:53
I don't really know what is the basic idea of UAE to still peg for dollar. We are losing lots as the Indian currency is going up day by day. Everyday there is a fall in the rate. Better go back to India and look for something else.
Kapil
Dubai,UAE
Posted: September 23, 2007, 08:32
Is it sheer loyalty to a system that is causing government, businesses and household a great deal of losses. The CB may at least say what measures it plans to take to combat an already rampant inflation. Another thing to consider is its potential effect foreign direct investment businesses. Would they still be willing to come knowing their earnings would lose up to 17% of their values once transferred outside of the country? Something to think about.
Shruooq
Dubai,UAE
Posted: September 23, 2007, 08:11
I think the UAE decides to stick to dirham's peg to the dollar is right.
Mubeen
Mumbai,India
Posted: September 23, 2007, 07:49
It is high time UAE Government should revalue its currency against USD. The population in the country is a "basket of nationalities" who are all suffering due to dirhams peg with USD, which continues to decline. Hope the Government looks into the matter, and saves the community from imported inflation, and saves the expat residents for over stretching their commitments back home.
Ghalley
Vancouver,Canada
Posted: September 23, 2007, 07:36
What kind of monetary policy is the UAE implementing? This dollar peg is so bizarre and doesn't make any economic sense!
Zak
Dubai,UAE
Posted: September 23, 2007, 07:16
It is high time that UAE and all other GCC countries should immediately depeg their currencies to the US dollar in order to combat against rising inflation and dwindling savings of their people.
Aamir
St. Louis, Missouri,USA
Posted: September 23, 2007, 03:30
Its a good idea to revalue the UAE dirham against US dollar as this would decrease the already built up inflation pressure on the local population. This directly effects the cost of living as most of the products are imported from other countries into UAE and increasing exchange rates of euro and GBP would adversely effect the inflation rate (which is already quite high) directly. The biggest hit would be on expat population who would lose a lot of money as the basis good like food, shelter and clothing would tremendously increase. State bank should take immediate action and should follow in the footsteps of kuwait and saudi and Oman to revlaue dirham to decrease the pressure on the population. That would be the most sensible action at this point in time.
Jawad
Dubai,UAE
Posted: September 23, 2007, 00:31
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