UAE Vice-President and Prime Minister Sheikh Mohammed bin Rashid al-Maktoum has confirmed the federation is considering removing the dirham’s peg to the US dollar, while saying he is confident that inflation in the federation will solve itself.

The annual inflation rate is running in excess of 10 per cent in the UAE. Speaking while on a state visit to China, Sheikh Mohammed, who is also ruler of Dubai, said inflation would “level off by itself” and “would solve itself”.

Record rates of inflation, caused by high levels of liquidity, a weak dirham and soaring food and housing costs, are a major issue in the federation as wages fail to keep up with the cost of living. There has been a series of strikes by low-paid labourers demanding pay rises in recent months, while white-collar workers have seen their housing costs double over the past three years.

One option to fight inflation is for the GCC states to depeg their currencies from the weakening US dollar. Sheikh Mohammed confirmed that a committee had been set up by the government to look at whether the dirham should be revalued.

“The study will focus on the benefits of staying with the peg or not,” he said, without giving a timeframe for the study’s conclusion. “The depeg is not an easy thing - it requires close study.”

MEED reported in mid-March that the Central Bank of the UAE had formed a committee to look at revaluing the dirham, although this was subsequently denied by the bank (MEED 14:03:08).

'Prepared'

Sheikh Mohammed also said he was confident the UAE would emerge unscathed from the sub-prime crisis currently affecting the US and Europe.

“It [the crisis] will not affect us, because we are prepared for it,” he said.

Within the Gulf, Bahrain-based banks, including Gulf International Bank and Arab Banking Corporation, have been the most badly affected by the sub-prime crisis.

Sheikh Mohammed was in China on an official visit to strengthen economic and political ties between the two countries. During the visit, he signed several accords with Beijing covering education, customs controls and military co-operation, while UAE firms such as Etisalat and Emaar Properties signed a series of investment agreements.

During the visit, Sheikh Mohammed said the UAE would look at hosting the summer Olympic Games “if we get a chance”.

The International Monetary Fund (IMF) has predicted that, although economic growth is likely to continue across the GCC this year, inflation will remain above 7 per cent on average.

Speaking in Abu Dhabi on 1 April, Mohsin Khan, director of the IMF’s Middle East & Central Asia department, said rising inflation was probably the most important economic issue facing the GCC.

“There is a need to reduce supply constraints and contain demand growth,” he said.

However, he added that government’s have a limited range of policy instruments at their disposal, other than revaluation.