Why the UAE currency is weaker than Kuwait's and Oman's currency "power point content"

Different countries have their currencies’ strength determined at the current foreign exchange market. The foreign exchange market offers an avenue where currencies of countries are traded globally. The price of a currency, relative to the other are normally determined by the market forces, under flexible foreign exchange market regimes. In other countries such as China, the government uses fixed foreign exchange regime, where the regulator fixes currency prices.

The strength or weakness of a currency is determined by the price at which the currency is bought relative to another currency. If more units of a currency is required to less units of a currency, the former is said to be a stronger currency relative to other other. On the other hand, if fewer units are required to purchase more units of a currency, the latter is said to a weaker currency relative to the former.

Several factors can be attributed to the weakness of the UAE currency relative to Kuwaiti Dinar and Omani Currency. According to Yahoo Finance (2012),  1 Kuwaiti Dinar is currently exchanging for about 13 UAE Dirham (AED). This shows that in the foreign exchange market, the Kuwaiti Dinar is 13 times stronger than the UAE Dirham. On the other hand, 1 Omani Rial (OMR) currently exchanges for about 9 UAE Dirham (Yahoo Finance, 2012).

Several factors can be attributed to this factor. These are;

Higher inflation in UAE economy

Unlike the two countries, the level of inflation is consistently higher in UAE. Due to lower levels of inflation in Omani and Kuwait, their currencies have consistently grown in strength thus surpassing the strength of UAE currency.  Since the countries are trading partners, the interaction between the currencies at the forex market, during international trade, have led to the depreciation of the value of the UAE Dirham.

Higher prices of UAE exports

It is possible that the prices of the exports that UAE make to both Omani and Kuwait are higher relative to the imports that Omani and Kuwait make to UAE. As a result, the export and import price ratios are not favorable to UAE, thus eroding its balance of payment accounts. On the other hand, the UAE economy relatively takes in more of import than export values, and this leads to more demand for the Omani and Kuwait currencies to pay  for the imports. On the other hand, the demand for UAE currency relative to the other countries decreases, leading to depreciation of its currency.

Current Account

It is likely that the current account that records trade with Omani and Kuwait is in deficit. As such, UAE spends a lot more money on its trade with Omani and Kuwait relative to what the county is earning. This leads to more demand for the two currencies to pay for the goods and services leading to lowering of the value of UAE currency.

High Public Debts

It is likely that the UAE government has been spending more of money borrowed in infrastructure development compared to money generated internally. As such, the level of foreign investment has lowered. This has allowed inflation to creep in, lowering the currency’s value. Specifically, the CIA (2012) puts the public debt of UAE, Oman and Kuwait as a percentage of the GDP at 45.9% , 3.8%  and 7.5% respectively. As such, UAE has more public debt relative to its GDP.

Economic Performance

It is possible that, the UAE economy has not performed better relative to that of the other countries. As such, more investors have preferred Kuwait and Omani. This shows confidence in the currency of the two countries. Based on the statistics by CIA (2012), the 2011 UAE  real growth rate was 5.2% , position 61 in the world . on the other hand, corresponding figures for Oman and Kuwait respectively are  5.4% , position  57 , and 8.2% (2011 est.) and position 19.

In conclusion, the weakness of the UAE currency can be attributed to the 2008 global financial crisis, that the economy is recovering from. While the emerging economies were mildly affected by the crisis, UAE bore its brunt than any other country in Asia. According to Bah, Rao and Zaki (2012), the UAE registered “losses of 36% on its market capitalization, Dubai at -32% , Abu Dhabi,  -18 Kuwait  13% and Qatar -15% in  2008. This is because UAE has a bigger capital market thus suffered the largest loss. As such, its currency suffered more, leading to its weakening in the foreign exchange market. 

Reference

Bah, R. Rao, A. and Zaki, E.(2012). ‘Analysis of Financial Crisis in UAE Financial Markets’.

International Research Journal of Finance and Economics,  Issue 83, 120-133.

CIA (2012). ‘World FactBook’. Retrieved from https://www.cia.gov/library/publications/the-

world-factbook/geos/ae.html

Yahoo Finance (2012). ‘Currencies Center’ . Retrieved from http://finance.yahoo.com/currency-

converter/#from=AED;to=KWD;amt=13.0113