Currency Union and Exchange Rate Issues

Currency Union and Exchange Rate Issues

Lessons for the Gulf States

New Horizons in Money and Finance series

Edited by Ronald MacDonald and Abdulrazak Al Faris

This book – written by leading academics and practitioners in the field – brings together cutting edge research on exchange rate regime and monetary union issues. There is a particular focus on the implications for member states of the Gulf Cooperation Council which is itself working towards forming a monetary union for the Gulf States.

Chapter 6: International Experiences in Operating Exchange Rate Regimes: Drawing Lessons from the United Arab Emirates

Ronald MacDonald

Subjects: economics and finance, financial economics and regulation, international economics, social policy and sociology, migration


Ronald MacDonald INTRODUCTION In addressing the appropriate exchange rate regime for the United Arab Emirates (UAE) it is clearly important to recognize the unique nature of this federation of Emirates, particularly in terms of its external trade. Abu Dhabi accounts for approximately 95 per cent of the UAE’s oil and natural gas resources, while Dubai is a leading example of economic diversification away from the hydrocarbon sector as it has become an important and leading business hub in the world economy. The remaining Emirates – Sharjah, Ajman, Ras al-Khaimah, Umm al-Qaiwain and Fujairah – rely on a mix of trade and light manufacturing, and they depend on financial support from the federal government and Abu Dhabi and Dubai governments. Since the Emirates of Abu Dhabi and Dubai account for about 85 per cent of the country’s total GDP it is immediately clear that the exchange rate policy has to be predominantly focused on their needs. Yet this immediately raises a potential dilemma, since an exchange rate regime that is best suited to the hydrocarbon sector is unlikely to be well suited to the diversification attempts of the rest of the economy, or equally an exchange rate regime designed for the non-hydrocarbon sector is unlikely to be suitable for the hydrocarbon sector. The current exchange rate regime in the UAE consists of pegging the dirham to the US dollar, and as noted in the most recent IMF Article IV consultation (2007) this has served the country well and the UAE authorities have reiterated...

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