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Abu Dhabi: The UAE reiterated yesterday its commitment to pegging its currency to the US dollar, maintaining the same exchange rate.
Governors of GCC central banks met in Doha on Sunday and agreed to maintain the peg and to continue striving toward the common currency by October 20, 2010.
"We have no intention whatsoever to depart from the peg or to revalue the currency in any manner," Sultan Bin Nasser Al Suwaidi, governor of the UAE Central Bank, told Gulf News yesterday.
"Looking into history, the dollar has been appreciating for about ten years from 1992 to 2002, and we maintained the peg throughout, and now it has been depreciating since 2004 for only about three and a half years, and it can rise again.
"Hence we will not change our policies according to short-term currency fluctuations," he told the reporters on the sidelines of the seventh plenary meeting of the Middle East and North Africa Fin-ancial Action Task Force (MENA-FATF), which opened in the capital yesterday.
Several prominent business figures have recently expressed serious concern about the impact of the peg on the inflation rate and eventually doing business in the UAE.
"These businessmen miss the link. The overall effect of the dollar's rate on inflation is about 35 per cent. But the real reason behind rising prices worldwide, not only in the UAE, are the record-high energy prices spreading via the multiplier effect to all other segments and commodities," he added.
Measures
Some GCC countries, like Saudi Arabia, try to tame the effect of lower interest rates by raising the reserve requirements for commercial banks to limit domestic credit and hence inflation.
"Our situation is totally different from that of the Saudis, as we maintained safe margins for reserves before them, standing at 14 per cent for current, savings and call accounts, and 1 per cent for fixed deposits," the governor said, defending the increase in the money supply as a natural phenomenon resulting from globalisation.
The central bank has concluded a study on the relationship between the money supply and inflation over the past 25 years.
"What we found out is that the correlation is very weak indeed, where we had periods of increasing liquidity and contracting inflation rates, and vice versa," he said.
"As a growing economy, a five per cent increase in prices is not considered inflation in the UAE, whereas if we take the effect of the weakening dollar alone which is about 4.5 per cent, we find it less than that figure," he said, emphasising that the UAE is not under any political pressure from GCC countries or others in setting its monetary and economic policies.
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