By IANS
Dubai : Currencies of the Gulf Cooperation Council (GCC) member-states have depreciated by over 37 percent in nominal terms since 2002 because they are pegged to the US dollar, according to a new report.
The report, published by NCB Capital (NCBC), the investment subsidiary of Saudi Arabia’s National Commercial Bank, stated that the most appropriate policy response would be to change the peg to a basket of currencies, simultaneously accompanied with a small one-time revaluation to offset part of the sharp loss in value of local currencies.
“Any move towards a change of the peg to the US dollar needs to be conducted in a transparent manner, with the components and weights publicly disclosed, in order to avoid speculative pressures,” Bryan D’Aguiar, NCBC’s head of equity research said in a statement.
The Gulf countries have seen skyrocketing inflation in recent times because their currencies are pegged to the plunging dollar.
The currencies of five GCC countries – Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Oman and Qatar – are pegged to the dollar.
Kuwait de-pegged its dinar from the dollar in July last year and linked itself to a basket of currencies.
“We estimate that the Saudi riyal, UAE dirham and Qatari riyal have effectively depreciated 40 percent, 37 percent and 47 percent respectively in nominal terms since 2002, in a period in which the US dollar slipped 78 percent against the euro,” D’Aguiar said.
“In contrast, the Kuwaiti dinar’s peg to a currency basket has limited its depreciation to 23 percent,” he added.
Explaining how significant changes in the macro environment in recent years have changed key conditions required for hard currency pegs, the report – titled “GCC Currencies – A Square Peg For A Round Hole” – stated that a larger revaluation would be counterproductive, as it would impair budgetary balances and current account surpluses.
In addition, it stated, it would result in translation losses on the large pool of dollar denominated assets that oil revenues have bought into.
According to the report, a move to a free float would not be advisable at this time as the region lacks a well-developed debt market that helps transmit interest rate signals – an important pre-requisite for monetary policy to function effectively in a floating-exchange rate regime.
Interestingly, the report suggested that any revaluation would not have a material impact on cushioning inflation in the short term, but would help achieve greater currency flexibility, a critical pre-condition for monetary policy manoeuvrability.
“More importantly the current situation is an opportunity to push forward a structural change. In the event that a global slowdown materialises and oil prices decline, GCC surpluses will shrink,” it stated.
It added that the burgeoning wage-bills and subsidies that have helped ward off inflation thus far would become increasingly difficult to sustain thus making currency flexibility a critical policy tool.
Any revaluation would benefit global investors, capital-intensive industrial projects, companies with external liabilities, GCC importers and regulators, according to the report.
In contrast, central banks would stand to lose as would exporters, investors, sovereign wealth funds, financial institutions and companies with dollar-assets, investments or foreign subsidiaries, it stated.
In February this year, former US Federal Reserve chairman Alan Greenspan had said floating the Gulf currencies would be the best way to check inflation.
“It (de-pegging from the US dollar) is probably the most useful thing that can be done to stop the increasing influence of foreign assets on the monetary system and therefore the monetary base which is basically the major force in inflationary pressures,” he said during the course of a speech at a forum in Abu Dhabi.
Meanwhile, governors of the central banks of the six GCC nations have agreed to give fresh impetus to efforts to create a single currency for the region by 2010.
During the course of a meeting in Doha Sunday, they also decided to resist pressure to revalue currencies or drop their dollar pegs unilaterally to offset soaring inflation.
“We are going to review the date in 2009,” reports here quoted Qatari Central Bank Governor Sheikh Abdullah bin Saud Al-Thani as saying after the meeting.
Stating that the 2010 target was realistic, he said: “We are committed to working towards that target.”