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Understanding UAE’s Currency Policies

For more than 30 years, the United Arab Emirates (UAE) has experienced economic growth, largely due to the country's reliance on oil and gas to drive its imports and exports.[1] In fact, the UAE has the seventh largest oil reserves and third largest natural gas reserves in the world, attracting many foreign investors and international businesses looking to expand internationally.

But to succeed in the UAE market, an international business owner must understand how the country's official currency, the dirham (AED), works and how foreign currency policies impact the process of managing foreign exchange.

History of the Dirham

In 1973, the Central Bank of the UAE put the dirham into circulation for the first time, replacing the Bahraini dinar and the Qatari/Dubai riyal as the UAE's national currency. At this time, the dirham's currency exchange rate was pegged to the U.S. dollar (USD) at a rate of 3.947 per dollar. In late 1980, the Central Bank was given primary responsibility over the UAE's monetary and banking policies, as well as supervision of its currency.

“They were trying to form a currency in the same way as the euro, a common currency for the GCC. But the UAE no longer wants to be a part of that movement.”

— Dr. Jay P. Chandran, professor and chair of the International Business Department at Northwood University

While the UAE currency has seen change since the dirham, the Central Bank still pegs it to the USD.[1] "The dirham has a managed float, which means the Central Bank only allows it to fluctuate within a specific limit," says Dr. Jay P. Chandran, professor and chair of the International Business Department at Northwood University, Midland, Mich.

Current and Future Policy Issues

While the UAE's seven emirates - Abu Dhabi, Dubai, Sharjah, Umm al-Quwain, Ajman, Fujairah and Ra's al-Khaimah - currently operate under the same currency policy, steps have been taken to unite the entire Middle Eastern region under one common foreign currency.

In 2001, the Gulf Cooperation Council (GCC), an alliance made up of the UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait, agreed to implement a monetary union by January 2010. But the UAE, the largest economy in the GCC, opted out in 2009, after Riaydh, Saudi Arabia, was selected as the headquarters of the future GCC Central Bank. "They were trying to form a currency in the same way as the euro, a common currency for the GCC," Chandran says. "But the UAE no longer wants to be a part of that movement."

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Implications for International Businesses

Since opting out of the GCC monetary proposal, the UAE is expected to maintain its current policy and keep the dirham attached to the USD, Chandran says. Fortunately, this presents a viable foreign exchange situation for American business owners who are pursuing the UAE market. In fact, Emirates International Exchange, a leading exchange house in the Middle East, has taken extra steps to ensure that international payments are received. In 2011 it partnered with Western Union Business Solutions to launch its international business payments service, which provides foreign-exchange tools to small- and medium-sized businesses worldwide, in the UAE. Calculating exotic foreign currency exchange rates like dollars to dirhams and making international payments is now quick and easy when using a trusted online FX service. "We're offering peace of mind and the awareness that [businesses are] partnering with a reputable, trusted brand," says Steven Hunter, head of small enterprises at Western Union Business Solutions.

[1] The World Factbook, Middle East: United Arab Emirates, last updated March 7, 2013, United States Central Intelligence Agency (CIA)

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