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There has been a substantial amount of rumour, speculation on the UAE Dirham and press coverage lately concerning the UAE Dirham’s peg to the US Dollar and whether there will be an imminent revaluation, a peg to a basket of currencies or a free float. So much so in fact that the Central Bank has had to make public announcements about their policy in this regard, including comments about the GCC countries’ views on the matter. Such comments have been made to quell uncertainty and currency speculation.
This issue appears to have been driven by the tumbling US Dollar, combined with US economic setbacks resulting in continued cuts in US interest rates, which the UAE is forced to follow due to the currency peg at a time when the UAE is experiencing an economic boom together with much published inflation, estimates of which vary quite widely. The falling US Dollar has also been blamed for bringing imported inflation as many products are denominated in other currencies that have been strengthening against the Dollar.
However, when considering the inflation issue, and hence the need for a revaluation or a different peg or, indeed a float, one needs to consider one of the major expenditures that companies and individuals face on a monthly basis – and that is property rentals, whether it be commercial or residential space. Increasing residential rents have an indirect impact as employees feel the pinch and make increasing demands on their employers, thus driving down profitability and leading to compensatory price rises. The falling Dollar does not directly contribute to rising rents.
In the face of a rapidly growing population due to robust economic growth, rents have been spiralling upwards due to a surfeit of demand and so the Government has introduced a policy of rent caps over the last two years or so. This form of market intervention is thought of by many as a short-term measure only and cannot be sustained in the long term. Generally there should be a return to market forces. This means that it is imperative that the many projects presently under development begin to be delivered to absorb the pent up demand and provide for the ever-increasing population. Any revaluation policy is likely to need to take account of this major aspect of the economy in which we operate.
We have an update from PKF International Ltd., who has been named amongst the first full members of the Forum of Firms after meeting international quality and ethics requirements. ..We have articles on contingency planning for hotels, contributed by PKF UK and on the increased complexity of acquisition accounting as well as our usual offshore and free zone updates.
Please feel free to write (update@pkfuae.com) if you would like to express an opinion on any matter inside.
GRAHAM MARTINS
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