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UAE

The document discusses Gulf states debating moving away from pegging their currencies to the US dollar. Currently Saudi Arabia and the UAE peg their currencies to the dollar due to low inflation and oil revenues. However, pegging a currency can import inflation from other economies. Some argue Gulf states should consider floating exchange rates to gain exchange rate flexibility.

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Bo Wen Zhang
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62 views2 pages

UAE

The document discusses Gulf states debating moving away from pegging their currencies to the US dollar. Currently Saudi Arabia and the UAE peg their currencies to the dollar due to low inflation and oil revenues. However, pegging a currency can import inflation from other economies. Some argue Gulf states should consider floating exchange rates to gain exchange rate flexibility.

Uploaded by

Bo Wen Zhang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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–4– N15/3/ECONO/HP2/ENG/TZ0/XX

2. Study the extract below and answer the questions that follow.

Gulf banks debating currency peg to US dollars

Qatar’s central bank suggests some Gulf States* should consider moving from a
rate, with their currencies pegged to the US dollar, to a exchange rate
system. Bankers and economists throughout the region are debating this issue.

Qatar’s central bank governor said the country planned no change to its peg to the dollar,
with the exchange rate now at QAR3.64/US$1. However, “with increasing integration in
international trade, services, and asset markets, a higher degree of exchange rate
may become more desirable” he said. Qatar is battling against higher rates of in
2013. is at the highest level since 2009.

Saudi Arabia and the United Arab Emirates (UAE) have pegged their currencies to the dollar
for decades. They have been able to do this because their rates have been low
and stable, and they have had substantial oil export revenues giving them large reserves of
foreign currency.

As a result there has been no need to change exchange rates, said the
chief economist at National Bank of Abu Dhabi: “Fixing the currency gives stability and
visibility for business contracts”. There are good arguments for pegging the currency to the
US dollar. However, it can result in imported from other economies. In 2007,
the US was cutting interest rates. This meant that, in order to maintain the exchange
rate, the UAE also had to cut its interest rates. This was at a time when the UAE was
booming and experiencing high .

Currently there is no pressure on the pegged rate and if necessary a central bank can
revalue or devalue its currency when required. It is commonly agreed that the best time to
change a currency regime is when there is no pressure.

A senior economist at a commercial bank agrees that the UAE should consider dropping its
currency peg to the US dollar and moving to a exchange rate for the dirham (the UAE
currency). He says that the US dollar’s weakness relative to other currencies was a positive
stimulus for economic growth. However, growth in the UAE is already quite strong and so
having its currency pegged to a weak currency could harm the economy by leading to
higher .

[Source: Albawaba extract: Republished with permission from Albawaba,


http://www.albawaba.com/business/qatars-currency-peg-here-stay-514355, ’Qatar’s currency peg here to stay’,
18 August 2013, permission conveyed through Copyright Clearance Center, Inc.
Extracts from The National
peg-to-us-dollar-says-economist#ixzz2cfjYpl71, 22 November 2011

7 June 2013]

* Gulf States: include Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia,
United Arab Emirates

(This question continues on the following page)


–5– N15/3/ECONO/HP2/ENG/TZ0/XX

(Question 2 continued)

(a) (i) the term rate indicated in bold in the text


(paragraph ). [2]

(ii) the term economic indicated in bold in the text


(paragraph ). [2]

(b) Using an exchange rate diagram, explain how the United Arab Emirates (UAE)
could maintain a value of its dirham to the US dollar if there were upward
pressure on the dirham. [4]

(c) Distinguish between a devaluation and a depreciation of a currency. [4]

(d) Using information from the text/data and your knowledge of economics,
discuss the view that some Gulf States “should consider moving from a
exchange rate” to “a exchange rate system” (paragraph ). [8]

Turn over

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