The Debate of Connecting the UAE Dirham with the US Dollar - Essay Example

Debate of Connecting UAE dirham with the US dollar Name Institution Date Introduction Debate of Connecting UAE Dirham with the US Dollar Dirham is the local currency for the United Arabs Emirates. On the international front, however, the United Arabs Emirates’ dirham has remained connected with the United States dollar. The reason being that the international air transport, among other global transactions call encourage the use of one common global reserve currency, which is the US dollar. The adoption of the US dollar as a global reserve currency has therefore, called for most of the major airports, to have many banking and currency exchange facilities that are open twenty four hours a day. They are opened in the United Arabs Emirates for the simple task of concerting the international currency of the United States dollar into the local currency of dirham. Despite the fact that the presence of an international currency may be true, this paper claims that the economy is rapidly changing and with it comes new changes. These new changes should not spare the issue pertaining to the global reserve currency and the local currencies. Particularly, the changes shake the connection between the United Arabs Emirates dirham and the United States dollar. This connection is shaken for a couple of reasons that are going to be explained in this paper. Therefore, the paper disagrees with the idea of connecting the local currency in UAE, dirham with the United States dollar. First, it should be agreed that the connection between the United Arabs Emirates dirham and the United States dollar should only last as long as the United States dollars has enough strength to reign as the global reserve currency. In this note, the US dollar initially did reign. However, with the growth of different economies, the strength has continued to be compromised and weakened. This can be shown by the nations that are using their own local currencies while they are forging bilateral trade agreements. One of these agreements forged using the nations’ own currencies is the bilateral trade agreement between Japan and China. Recently, China, the second largest economy on planet and Japan, the third largest economy on the planet struck a deal aimed at promoting the use of their own local currencies instead of the United States dollar when it comes to trade between them. The motive of by-passing the United States dollar was healthy. Consequently, according to the United Nations Conference on Trade and Development (2009) reports that Japan and China unveiled the plans of promoting the direct exchange of their local currencies for the good reason of cutting costs for businesses and companies and boosting bilateral trade. The deal was also good since it would give firms the privilege of converting Japanese and Chinese currencies directly into one another. Before the deal was in place, businesses in both nations had to purchase the United States dollars first, and then convert them into the preferred currency. This conversion, according to the United Nations Conference on Trade and Development (2009) was significant since it ensured that the countries evaded the extra costs. However, Bennett (2008) has the opinion that while such a bilateral trade agreement could enable the evasion of extra costs, it is only to the advantage of the two of the biggest economies and not many other economies. This still supports the fact that the UAE dirham should still be pegged to the US dollar since it still has to trade with most of the weaker economies whose currencies are still pegged on the US dollar. Second, according to Clark (2005), the smaller or the growing economies are also resorting to the use of their local currencies while doing business with each other. One good example is the BRICS. BRICS consists of five main emerging economies, which bring together the countries of Brazil, Russia, India and South Africa. According to the United Nations Conference on Trade and Development (2009) these emerging economies are planning to insert more economic momentum into their union by signing two agreements for boosting intra-BRICS trade. By facilitating the credit facility and currency exchange in local currency for firms of BRICS nations, the two pacts are expected to raise the intra –BRICS trade whose growth has been at a rate of twenty eight percent over the past few years. This growth has been much lower than potential or capability the five economic powerhouses. This indicates that like the situation of BRICS, the United Arabs Emirates will continue to operate below its potential or capability as long as its currency is connected with that of the United States dollar. Like in the case of the first point, BRICS still represent a small fraction of all the countries whose currencies are pegged to the United States dollar. Therefore, this still supports the fact that the UAE dirham should still be pegged to the US dollar since it still has to trade with most of the weaker economies whose currencies are still pegged on the US dollar. Third, the United Arabs Emirates should also emulate the decision of Russia and China to use their local currencies in bilateral trade. The main reason for this has been the call from the leaders from both of these nations for a new world reserve currency. According to the United Nations Conference on Trade and Development (2009), this call has been necessitated by the weakening strength of the United States dollar in the international front. As this strength weakens, it becomes unprofitable to do business or bilateral trade using the US dollar. United Nations Conference on Trade and Development (2009) claims that this is why Russia and China have, for more than a year now, joined other nations in using their local currencies while doing business with each other. As the other nations are shifting towards the use of their local currencies therefore, the United Arabs Emirates should not be left tied to the US dollar that is being abandoned. However, since Russia and China represents just but a few economies, and more so, the leading economies, their bilateral trade cannot justify the ditching of the US dollar by the rest of the world economies, including the UAE. Fourth, it is true that United Arabs Emirates has strong ties with a number of African nations. In the same note, Lorca-Susino (2010) asserts that the United States dollar had a huge influence in the very African nations. Therefore, the United Arabs Emirates had to remain connected with the US dollars for trade purposes. However, the tables have been turned. The current situation is that the Chinese currency is gaining popularity in Africa. Its use is growing in Africa. Lorca-Susino (2010) further claims that the United States used to be the biggest trading partner in Africa. However, China, in 2009, became the biggest trading partner in Africa. Apart from becoming the biggest trading partner, China is also aggressively in quest of expanding the use of its currency on the Africa continent. There are clear indications that China is very determined to alter the manner in which the international trade is conducted. That is why about seventy thousand Chinese firms are using Chinese currency while conducting cross-border transactions. This being the situation, Lorca-Susino (2010) concludes that the United Arabs Emirates should think of complying to the change by disconnecting its local currency with the US dollars. Otherwise, it will be overtaken by the change and by the time it realizes that it is being left by the world economy, it will be too late. However, it is yet to be confirmed whether the African nations will give a nod to the idea of accepting the Chinese currency, since they have gotten used to the US dollar, having used it for a long period of time. The fifth reason is that according to Clark (2005), the United Arab Emirates and China have recently agreed to use their own local currencies in sealing their bilateral trade. The two countries have agreed to sideline the United States dollar for the sake of using their local currencies in oil trades with each other. Clark (2005) further claims that despite the fact that the United Arabs Emirates is a small player, it still poses a great threat to the existing petrodollar system. However, Bennett (2008) argues that this kind of bilateral trade is only in favor of the petroleum industry. With the UAE need for machinery, and other products from different other countries, the idea of ditching the US dollar is not justified. The sixth reason is that more nations are, according to Cheung & Ma (2011), ditching the use of United States dollar. India for instance has begun using gold to purchase oil from Iran. For a fact, Iran has become one of the most aggressive countries in the international trade when it comes to drifting away from the United States dollar. This has compelled India to start using gold while buying oil from Iran. Apart from India, Cheung & Ma (2011) further asserts that there are also higher chances that Saudi Arabia would abandon the use of Petrodollar system when dealing with China. There is enough evidence that that China not the United States of America, imports most oil from Saudi Arabia. In the same line, Black (2012) argues that China and Saudi Arabia have teamed up in constructing a huge new oil refinery plant in Saudi Arabia. For this simple reason, it is true that Saudi Arabia will no longer stick to the petrodollar system since China is most significant customer. However, China could be the most significant partner in this case, but there are many other important customers as well, whose currencies are pegged on the US dollar. The seventh reason is that the main international bodies are pushing for a new global Reserve currency. The two good examples are the International Monetary Fund and the United Nations. According to United Nations & United Nations Conference on Trade and Development (2010) the United Nations have been issuing reports and messages that openly advocate for an alternative global reserve currency apart from the United States dollar. In one of these reports, the United Nations envision that they need a new world reserve system that does not rely on the US dollar as the single main reserve currency. At the same time, the International Monetary Fund has continued publishing a number of reports that call for the replacement of the United States dollar with other currency as far as the global reserve currency is concerned. Bennett (2008) points out that through the paper called “Reserve Accumulation and International Monetary Stability” the International Monetary Fund proposed that a future world currency be called the “Bancor.” At the same time, the International Monetary Fund proposed the establishment of a future world central bank which will be issuing the proposed global currency. This is an indication that even the major international bodies are of the idea of ditching the US dollar. If this is the case, what should the United Arabs Emirates do but also ditch the connection between the US dollar and its dirham? In any case, the use of US dollar as a reserve currency comes with a lot of implications. According to Bennett (2008), the major implication is that the US dollar cannot serve as a stable international store of value. This is because its value is tied to the prevailing conditions of the United Sates. As finance and trade continue to grow fast and world integration increases, the significance of this wider view of having a different international currency is projected to continue rising. Last, according to Fiorentini & Montani (2012), the United States has received lots of global sentiment and hatred. The nation was, decades ago, one of the most cherished nations on the planet. However, things have changed and the nation is now one of the most hated. This hatred can be seen when an American does some international traveling. Fiorentini & Montani (2012) further claims that it is so sad that even in places where Americans are supposed to be having friends, like Europe, the Americans are being treated like dirt. This has compelled most of the American travelers to put on Canadian pins to avoid the unfair treatment. Black (2012) concludes that with this in mind, it means that the rest of the world are no longer interested in or are happy with the use of the United States dollar as a reserve currency. However, even with this dissatisfaction, there is no alternative currency in place yet. This stops the United Arabs Emirates from disconnecting its currency from the US dollar. Therefore, it is true that the United Arabs Emirates should consider the idea of dropping its currency connection with the United States dollar for the sake of switching to another currency or floating the dirham independently. The main benefit of pegging one currency to another according to economics experts is singly to piggyback off the monetary stability of a stronger country. Therefore, considering the state of the United States economy as well as the weakened United States dollar, that according to the economist, is no longer making sense, it is true that the United Arabs Emirates should drop its connection with the United States dollar. Monetary discipline is important if it is obtained from a stronger neighbor. However, when the stronger economy of the neighbor is not performing, then there will be no incentive to bother. Several examples discussed above have shown that the US dollar has weakened relative to other local currencies. This weakening, according to economist is a positive stimulus or boost for economic growth. However, for such countries as United Arabs Emirates, whose economic growth is already steady and strong, the weakening US dollar may not serve well as a positive stimulus. Instead, it can lead to a higher inflation in the United Arabs Emirates economy. However, while most people are questioning the idea of tying the local currencies to the United States dollar, there is no clear currency yet, that these local currencies should be pegged to. References Bennett, L. (2008). Dubai. London: New Holland. Black, K. (2012). Business statistics: For contemporary decision making. Hoboken, NJ: Wiley. Blanchard, O. J., Blanchard, O. J., SaKong, I., & International Monetary Fund. (2010). Reconstructing the World Economy. Washington, D.C: International Monetary Fund. Cheung, Y.-W., & Ma, G. (2011). Asia and China in the global economy. Singapore: World Scientific. Clark, W. R. (2005). Petrodollar warfare: Oil, Iraq and the future of the dollar. Gabriola, B.C: New Society Publishers. Fiorentini, R., & Montani, G. (2012). The new global political economy: From crisis to supranational integration. Cheltenham, Glos, UK: Edward Elgar. Lorca-Susino, M. (2010). The euro in the 21st century: Economic crisis and financial uproar. Farnham, Surrey, England: Ashgate Pub. United Nations Conference on Trade and Development. (2009). Trade and development report: 2009. New York: United Nations. United Nations., & United Nations Conference on Trade and Development. (2010). World economic situation and prospects 2010. New York: United Nations. Read More