Since 1981, the UAE's currency, the Emirian dirham, has been linked directly to the U.S. dollar at a rate of Dh3.67 to $1. The connection reflects the fact that crude oil—the UAE's chief export and the driving force in its economy—is denominated and sold in U.S. dollars. It also reflects the desire of the UAE government to ensure that domestic interest rates will move in sequence with those prevailing in the United States.
|Exchange rates: United Arab Emirates|
|Emirian dirhams (Dh) per US$1|
|Note: Central bank mid-point rate of 3.6725 has been in effect since 1998.|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
The UAE has achieved this stability through a tight monetary policy that regulates domestic liquidity under an open exchange and payments system: there are no prohibitions on the import or export of currencies into the UAE except for Israeli currency and countries subject to United Nations sanctions. The UAE Central Bank also adjusts the stock of domestic liquidity through the issuance of certificates of deposit (CDs) to the federation's commercial banks. The UAE is currently considering introducing an auction system for these CDs. The UAE government has no external debt , and its private debt-to-service ratio has been improving steadily since the 1980s.
Generally the dirham linkage has helped the UAE maintain macroeconomic stability and relatively low rates of inflation , generally between 4 percent and 5 percent annually. The principal problem for the system occurred in the late 1980s and again in the mid-1990s as the U.S. dollar dropped in value against the Japanese yen. This process created balance of payments concerns for the UAE since its principal trading partner at the time was Japan. There have been periodic discussions over the last decade of linking the dirham to a "basket" of currencies, including the U.S. dollar, the Japanese yen, and leading European currencies.
Dubai Financial Market (DFM), the UAE's first fully-regulated stock exchange, and its sister exchange, the Abu Dhabi Financial Market, both opened in 2000. Although initial interest in the stock exchanges was light, the UAE Central Bank expects that investors will flock to the 2 markets over the next decade. There have been discussions between representatives of DFM and the U.S. NASDAQ about a possible link up of the bourses (stock exchanges). The UAE Central Bank also has encouraged the development of a local bond market but has been hindered by several high-profile fraud cases involving large UAE investors.