Dollar peg to take centre stage at GCC summit


Leaders of Gulf Cooperation Council to decide whether to stick to target date for launch of single currency.


By Omar Hasan - KUWAIT CITY

Leaders of the oil-rich Gulf Arab states, holding their annual summit next week, are faced with mounting pressure either to end their currencies' peg to a sliding dollar or revalue.


The six-member Gulf Cooperation Council (GCC) will also have to decide whether to stick to a self-imposed 2010 target date for the launch of a single currency, which appears more and more unrealistic as inflation keeps rising.


Around 90 percent of public revenues in the GCC countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — come from oil, which is priced in dollars.


Oil powerhouse Saudi Arabia pegged its riyal to the dollar in 1986 and most other countries made the link to the greenback more than 14 years later in preparation for monetary union and a single currency.


But the plan has started to unravel due to rising inflation, which is hitting these countries hard.


Oman has already pulled out, saying it cannot meet the monetary union criteria, while Kuwait in May became the first to move away from the dollar and reverted to a basket of currencies with the aim of fighting high inflation.


GCC secretary general Abdulrahman al-Attiyah said the leaders, who meet on December 3-4 in Doha, will discuss a detailed report on the monetary union, as well as proposals from finance ministers and central bank governors.


"Any joint action is bound to face (different) opinions which require more study and time," Attiyah said, asked if some states had proposed to delay the launch of the single currency.


Some member states, notably the UAE, have openly said the 2010 launch is not possible due to technical, legislative and fiscal hurdles.


Although the GCC has agreed on key convergence factors like budget deficit and public debt, it has so far failed to agree on a common figure for inflation and other institutional infrastructure needed for the single currency.


"I believe that available indications are not encouraging. Some countries have pulled out while others are hesitating. The 2010 date appears to be unrealistic," Saudi economist Abdulaziz al-Daghestani said.


"GCC states are faced with the problem of the sliding dollar and there are differences among their monetary policies," said Daghestani, head of the Economic Studies House.


Saudi Arabia and Bahrain have clearly said they are not planning to change their monetary policies, including the dollar peg.


The UAE and Qatar, which have faced double-digit inflation rates, appear more inclined towards adopting a basket of currencies, but they want a consensus.


"It is not a matter of de-pegging. You need first to have a currency basket at least. And I suggest that this be a basket agreed by Gulf states," UAE Finance Minister Sheikh Hamdan bin Rashid al-Maktoum said last week.


The issue of ending the link to the dollar has gained urgency after the US Federal Reserve cut interest rates twice in recent weeks to stimulate a slowing US economy, leaving the Gulf in a dilemma.


"Whilst the US is cutting interest rates in response to a slowing economy, the Gulf needs a tighter monetary policy to curb inflation," Standard Chartered Bank said in a report.


The bank said Gulf states need to revalue their currencies by as much as 20 percent "now" and prepare for a change to a basket of currencies to give them flexibility in monetary policy.


But if the Gulf wants to keep the dollar peg, "then there will certainly be the need for a large revaluation, we calculate of the order of 20 percent versus the dollar, and this needs to take place now," Standard Chartered said.


Not all countries however agree with this assessment, as some believe moving away from the dollar will not be the magical remedy for economic ills.


The International Monetary Fund (IMF) believes that de-pegging Gulf currencies from the dollar will not reduce inflation as price pressures are mostly domestically generated.


"These countries don't believe that inflation is imported. I think they are right... 70 percent of their imports are priced in dollars... They don't stand to gain very much" from depegging their currencies, IMF Middle East and Central Asia chief Mohsen Khan said last month.


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