The United Arab Emirates dirham (AED) is the official currency of the United Arab Emirates (UAE), including Dubai and other Emirates. Its symbol is the Dhs or DH. One dirham is divided into 100 fils. It is pegged to the US dollar which makes it one of the most stable currencies globally. In this article, we will look at its history, the economic significance of the UAE, the Central Bank of the United Arab Emirates’ monetary policy, as well as the latest news on the dirham.
History of the AED
The name “Dirham” comes from the Greek coin “drachmae,” which was circulated by the Byzantine Empire in its trades with Arabia, before being adopted as a Persian word and, eventually, at the end of the 7th century, becoming an Islamic currency with the name of the sovereign inscribed on it.
The United Arab Emirates dirham became the official currency of the UAE on the 19th of May, 1973, when it replaced the Qatar riyal. Before that, the Qatar riyal was widely used in all the Emirates except Abu Dhabi since 1966.
Since the 28th of January, 1978, the dirham has been pegged to the International Monetary Fund’s special drawing rights, but in practice, it is tied to the US dollar, ensuring a stable exchange rate.
Pegged to the US dollar
Because of the country’s close connection to, and dependence on, the oil industry, it was seen as advantageous to peg the dirham to the US dollar. With oil prices being denominated in US dollars, the UAE government decided that pegging its currency against the greenback could help manage the volatility of its exports.
The economic power of the UAE
The United Arab Emirates (UAE) ranks second in the Gulf Cooperation Council (GCC) and relies on exporting natural gas and petroleum to boost economic growth. Its dynamic economy is also supported by the service and industry sectors which together contribute almost half of the country’s GDP. Additionally, construction is a big part of the economy, with infrastructure projects valued at over $400 billion. The UAE’s global market position in international trade is facilitated by its membership in the WTO and OPEC. For the last 12 years, the UAE has been the biggest US export market in the Middle East and Africa region and is a global hub for over 1,500 American companies providing services and products across the Middle East, Africa, Europe, and Asia. As one of the world’s fastest-growing economies, UAE remains an attractive destination for investors and businesses.
UAE central bank monetary policy
The UAE Central Bank, like most central banks in Gulf Co-operation Council countries, follow the Fed’s policy rate path since their currencies are pegged to the US dollar. Kuwait is the only exception as its dinar is linked to a basket of currencies.
The UAE Central Bank kept its benchmark borrowing rate, its base rate for the overnight deposit facility, at 5.15 per cent in June as the US Federal Reserve paused its tightening cycle.
Latest news: Rupee-Dirham payment mechanism
India and the United Arab Emirates are expected to announce a rupee-dirham payment mechanism to encourage bilateral trade during the Indian Prime Minister Narendra Modi’s visit to Abu Dhabi. The central banks of both countries are in advanced talks, and the mechanism could potentially start soon. The new arrangement will facilitate the purchase of oil and other imports from the UAE, which is India’s fourth largest oil supplier.
At the moment, India pays for UAE oil in dollars, but the new mechanism will reduce transaction costs by eliminating dollar conversions. The bilateral trade between India and UAE in 2022/23 was $84.5 billion. Last month, India’s trade minister said that India and the United Arab Emirates are planning to increase non-petroleum bilateral trade to $100 billion by 2030.