Pegged currencies lead to trade growth and can increase real incomes, especially when the fluctuations in the money are low and display no changes in the long term. The nation benefits from specialization freely and can conduct trade without the risks of high tariffs and exchange rates. Here, the theory relating to comparative advantage applies as everyone can spend more time doing what they excel at.
Kavan Choksi gives an insight into currency pegging and what it means
Business and finance expert Kavan Choksi states that pegging GCC-nation currencies to the USD has existed for several decades, and it has multiple advantages for nations like the UAE. Saudi Arabia and the United Arab Emirates currencies have been pegged to the US dollar since the 1980s, and this practice continues for a more extended period than expected. Some financial experts conclude that while considering the complications of the international economies of the world, some studies have revealed that it is high time to reconcile the pegging of the US dollar after evaluating the volatility of the global economy before moving on.
How is the region getting affected?
IMF has observed that the Dirham’s stability depends upon the pegging of the USD for maintaining economic balance in the region. Here, the fixed exchange rate is also supported. This combination has resulted in a more robust pace in the economy of the UAE, offering several advantages to the banking industry and leading to a high inflow of foreign investments into the nation. All these factors are playing a significant role in affecting the economy of the region.
Boosting the exchange rate of the region
The pegging of the US dollar with the Dirham of the UAE boosts the exchange rates in the region. The demand for oil from the other nations of the UAE has led to a rise in the wealth of these regions. The capital they gain through the sales of this oil can be re-invested back into companies in America, leading to more returns on investment. This action gradually builds wealth in the region, and the pegging of the Dirham of UAE with the US dollar is also helping the area control inflation.
GCC nations will earn more profits due to the pegging of the US Dollar and UAE Dirham
Since the price of oil trade is in dollars in the global market, these GCC-oil export countries might peg their currencies to USD to get better profits. For getting even more returns, the practice of re-investing back into the companies of the USA will become familiar. With this dollar pegging being performed over time, inflation in the region will be under control in the GCC nations.
According to experts like Kavan Choksi, the above practice of pegging the Dirham of UAE to the American dollar will boost the region’s wealth based on its oil industries. It will help to decrease the export volatility as well. However, to maintain this peg, the nation’s accounts and economic indicators should be kept at optimal levels.
