I have been living in the United Arab Emirates for the last 15 years and have been around when they shrunk the 1 dirham (28.5 mm to 24 mm) and 50 fil (25 mm to 21 mm) coins, and have enjoyed collecting the old 1 dirham coins and new 1 dirham commemorative coins. Was also around when they introduced the 20 dirham note and when they reintroduced the 200 dirham bill.
At that point in time, I hadn’t figured out what the need for this was, but now know that this is one of the signs of inflation. As the 1 dirham coin began to purchase less and less, it was necessary to have more 1 dirham coins to carry round, so reducing its size is the best way to go. Before the 20 and 200 dirhams bills came along, there were no bills between the 10 and 50 or the 100 and 500, but as the currency devalues, its more convenient to hold two 20 dirham notes over four 10 dirham notes and what use to cost 100 dirhams is now getting closer and closer to cost 200 dirhams.
After learning that the US dollar has lost over 95% of its value over the last 100 years, I was curious to find out what the UAE central bank decided what the value of 1 AED was worth when it was established. When the first reminisce of the UAE Central Bank came into effect in 1973, it was setup in order to create a currency for the 2-year old nation and to replace the currencies currently in circulation (Bahraini dinar, Qatari riyal, and Dubai riyal). After the currency was setup in May 1973, fully backed by gold and foreign currencies, the dirham was worth 0.186621 grams of gold and pegged to the US dollar at 3.94737. So over the last 38 years since the UAE currency was setup, the dirham has lost over 97% of its value, as 1 dirham in 1973 is worth over 37 dirhams today.
As the UAE Dirham is pegged to the dollar today, any money printing (aka inflation) being created in the United States is imported here and as a result prices of things are going up. As the UAE central bank doesn’t disclose the amount of gold it holds in reserves, though many believe it to be negligible, its hard to tell whether they would be ready for the upcoming financial/monetary collapse and to de-peg from the dollar. In the GCC, Kuwait holds 12 percent of its reserves in gold, Saudi has 2.7%, Qatar has 2.3%, Bahrain has 4.7 tons, and Oman has none, while the states have historically maintained less than 5% in gold and instead have been heavily invested in US Treasury notes and bonds. With all the gold purchase by countries like Russia, China, Mexico, and India since the 2008/9 financial collapse, and Dubai being such a heavy player in the gold market in the region and Abu Dhabi having the largest sovereign wealth fund in the world, I am hoping the UAE central bank has a reasonable weighting of gold in its foreign reserves, if it didn’t before the collapse. I will continue to purchase gold and silver as it is not effected by US inflation and hopefully when the UAE de-pegs from the dollar, I wont mind converting my precious metals into dirhams.
Inflation in your Grocery Bag
Since the end of last year, I’ve known that food inflation was coming. And little by little, I’ve seen the prices rise on products like sugar, rice, etc., while other products have tried to hide inflation by reducing the product quantity or quality. My first encounter with inflation was with the large bottled water I use with the water dispenser, as they had upped the price from 3 to 5 dirhams, so now I take my bottles to the company’s location and get it at 2.50. I hadn’t bothered doing this years ago, though I knew I could get it for 1.50 instead of 3, because in my mind I thought it was a waste of time and gas. My next encounter was with 2-litre bottles of juice that I regularly buy. The grocery store nearest to me carries 3 brands of these 2-litre juice bottles and each of the brands did something different. Al Rawabi decided not to change the quantity of juice, so the price went up 50 fils. Al Maria decided to slim down their bottle and decreased it to 1.75 liters. Nadec decided to slim down their bottle and decreased it to 1.8 litres. Its possible that the companies have also changed their ingredient quantity in their juice, but that’s something that I wasn’t paying attention to. Other encounters include hidden inflation in bread, hidden inflation in custard deserts (125g to 100g), price inflation in sugar (2kg from 4 to 8 AED), price inflation with fruit yogurts (1 to 1.5 AED) and price inflation in soft drinks like Pepsi (1 to 1.5 AED). So as inflation continues, I have been advising people to purchase extra now for storage, as prices are only going to be going up.