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رغبة منا بالتعرف على مستوى رضاكم عن موقعنا وبهدف تطويره وتحسينه، فقد قمنا بتصميم استبيان سريع لقياس مدى الرضا عن موقع دولة الإمارات العربية المتحدة روعي في تصميم الاستبيان أن يكون قصيرا وسريعا كي لا نطيل عليكم، وعليه نرجو منكم التكرم باستكماله عن طريق الرابط التالي
استبيان رضا المتعاملين عن موقع دولة الإمارات العربية المتحدة

Riding into a sandstorm

posted on 15/09/2007: 740 views

It's not always easy being an economic policymaker, even when the economy seems strong, internal and external accounts are in surplus, and monetary decisions are almost automatic. The UAE and the Gulf countries are cases in point.

The problem of inflation in the GCC is viewed by many as an imported phenomenon. In other words, since GCC currencies (except the Kuwaiti dinar) are pegged to the dollar and the dollar has been losing value for several years, imports from the rest of the world are more expensive for GCC consumers.

To some extent it is true that a weak currency may contribute to inflation, but, at the same time, we cannot attribute UAE inflation to a weak currency alone. There are other factors we should consider.

To be more precise, let's talk about the surplus in the UAE balance of payments. According to the latest IMF numbers, that amount was around $36 billion as of December 2006. As some of this surplus is injected in the domestic economy, aggregate demand increases, raising prices along the way. This occurs because aggregate supply does not respond fast enough to consumer and investment spending. Thus we find ourselves in a situation where we have too much money in the economy chasing too few goods, and the result is inflation.

Currency appreciation is normally an effective tool, although not necessarily the most effective, to combat inflation when it is the result of balance of payments. As the dirham appreciated, the $36 billion would buy fewer dirhams to be invested in the domestic economy. That would produce less inflation.

However, if a country that has a large external surplus (due, for instance, to high oil prices) is severely limiting imports by direct control, the removal of such controls is likely to be a more effective strategy.

By allowing more imports we minimise the problem of too much money chasing too few goods. If the removal of import restrictions is not sufficient to remove the external surplus, then currency appreciation is an appropriate supplementary measure.

Controlling imports

It should be emphasised that I am not saying the UAE has a system to directly control imports, but we need to look at that side of the economy to see whether we are doing enough in our quest to reduce inflation.

Deutsche Bank has said that the UAE should allow the dirham to appreciate against the dollar, but such improvement in the terms of trade will not be necessarily of any value in reducing inflation, for the reason just mentioned.

Then, obviously the issue becomes how the appreciation of the dirham will affect the UAE economy in this early stage of diversification and with a relatively large tourist sector.

As we get ready to receive several million tourists per year with the new Dubai airport, and as other large tourist projects are finalised, are we sure we want to make the visit to the UAE more expensive for them?

Yet lack of growth generally is not a problem right now. In a recent interview with a Syrian reporter, the Governor of the UAE Central Bank hinted that interest rates in the UAE could fall if the US Feds cut interest rates in the US.

Central banks usually cut interest rates when there is a threat of a recession. So far there are no indications of possible recession in the US, other than the mere speculation caused by the problems in the subprime mortgage market.

But the Fed may cut interest rates to allow mortgage holders to refinance at lower interest rates, to alleviate the rate of mortgage default.

But lowering interest rates in the UAE would bring additional inflationary pressure, as cheaper money means an increase in consumer and investment spending.

Actually, there are monetary tools at the Central Bank's disposal that could be used to decrease the money supply circulating in the UAE economy in an attempt to reduce the level of inflation.

One is to increase the reserve requirements for banks, and the other is to sell government securities to the public (open market operations). In both cases, market interest rates increase. Increasing the cost of borrowing is not something that the real estate sector would take quietly, since consumers need to borrow to buy what has been built.

On the other hand, if interest rates fall in the US, the dollar will likely lose more value, as investors pull their money out of the US by selling and flooding the international foreign exchange market with dollars. This, of course, would bring more pressure for re-evaluation of the UAE dirham.

Distant dream

In the meantime, GCC monetary union remains a distant dream for now. While the main benefit would be enhanced price stability, the main cost would be higher business-cycle volatility if each member country's output (or GDP) is not sufficiently correlated with that of the GCC as a whole. Because of their oil-dependence, each of the region's economies is viewed as being correlated with the overall GCC economy, but is the GCC an 'optimum currency area'?

It is too early to say yes, since the Gulf countries have so much yet to accomplish in terms of economic development. Yet, in order to do that, they need to be monetarily independent and with sufficient fiscal (government budget) flexibility.

Monetary independence is lost with a monetary union, and fiscal tools may not be enough to attain, at least for now, higher levels of economic growth. All together, these policy puzzles create a challenge for the authorities as the UAE and regional economies move forward.

The writer is Associate Professor of Economics, American University of Sharjah.


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