Dubai: A move to de-peg from the US dollar will not only impact the UAE dirham’s value against other currencies, it might also hurt expatriates’ incomes in one way or another.

According to an economist, the UAE dirham will become vulnerable to market fluctuations and likely depreciate in value against other currencies if the country decides to break away from the greenback and allow the dirham to either float or have it pegged to a basket of currencies.

There have been speculations that the UAE and other countries in the Gulf Cooperation Council (GCC) region will rethink their monetary policies after China opted to devalue the yuan and Kazakhstan dropped control of its exchange rate.

If the UAE follows China or Kazakhstan’s example, there is a likelihood that the local currency will drop in value, with the oil prices still on a downward path.

“If a free-floating regime is introduced, the AED will most fluctuate with respect to oil prices. Considering the current market conditions, and oil price, the AED will definitely depreciate with respect to the US dollar,” said Alp Eke, senior economist at the National Bank of Abu Dhabi.

How much money expatriates are able to send to their home countries each month is tied to the exchange rates. A stronger dollar or dirham often brings good news to the expatriate community as it can mean more funds remitted to their dependents.

A dollar peg, however, only works to expats' advantage if the greenback is outperforming other currencies.  A weakness in the American currency could erode foreign workers' sending power.

Eke said that even if the GCC nations decide to adopt only a regionwide one-time devaluation of between five per cent and ten per cent, imports will become more expensive and inflation will rise further.

“In July 2015, UAE registered 4.53 per cent year-on-year inflation, the highest since 2009. A devaluation would cause inflation to rise to 6 to 7 per cent within a few quarters,” said Eke.

“In a region that relies so much on importing skilled and unskilled labour, this would harm the competitiveness of the economy. Saudi Arabia is reported to have more than 10 million expatriates. UAE is reported to have 8 million.”

Currencies in the GCC have been fixed to the US dollar for several years now. Aside from the UAE, Saudi Arabia will also feel some negative impact if it opts for a “free floating regime”, especially under the current economic and socio-political conditions.

Eke said the move will “expose” Saudi Arabia to oil price fluctuations and the uncertain economic conditions will likely disrupt socio-political order.

“With military operations continuing in Yemen, and high unemployment in the local population (12 to 13 per cent), the timing is completely off.”

The UAE dirham, in real effective exchange rate (REER), is about 22 per cent over-valued, while Saudi's currency is 16 per cent over-valued.

Eke, however, said that the possibility of a currency de-peg or one-time devaluation is "very very low". There is also a low probability that the UAE or other GCC countries will follow Kuwait's example to fix the exchange rate to a basket of currencies.