By Aroonim Bhuyan, IANS
Dubai : Even as the Gulf Cooperation Council (GCC) countries mull moving to a single currency mode, the debate over whether to depeg the currencies of these countries from the tumbling US dollar continues to rage, given the skyrocketing inflation across the region.
The currencies of five GCC countries – the United Arab Emirates (UAE), Saudi Arabia, Oman, Bahrain and Qatar – are pegged to the dollar.
Only Kuwait’s dinar, which delinked from the dollar in July last year, is linked to a basket of currencies.
Though the economies of the six GCC nations are booming thanks to ever-rising oil prices, inflation in all these nations has gone sky-high.
Former US Federal Reserve chairman Alan Greenspan is the latest to join the pro-depeg bandwagon.
On a visit to the region, he said that floating the Gulf currencies would be the best way to check inflation.
“It (depegging 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,” Greenspan said, speaking at the Abu Dhabi Corporate Leadership Forum.
Earlier, speaking at a conference in Jeddah, he said that though depegging would not completely dissipate inflationary pressure in the short term, it would still significantly do so.
Inflation in Saudi Arabia, the Gulf’s largest economy, hit a 27-year high of 7 percent in January.
In the UAE, latest data put the figure at 9.3 percent, a 19-year high.
Asia editor of the Economist magazine Pam Woodall told the Arabian Business website that it was no longer viable for the Gulf nations to continue with their dollar peg as the US economy was spiralling into recession.
“All countries pegged to the dollar are suffering rising inflation. Abu Dhabi is growing at an amazing rate; it does not make economic sense for booming economies to peg their currencies to a country that is about to go into recession,” she was quoted as saying.
With further rate cuts by the US Federal Reserve expected to fuel more inflationary pressure, Woodall said the dollar peg debate would continue to dog the Gulf states for at least the next one year.
The Federal Reserve has cut interest rates by 225 basis points to 3 percent since September last year to stave off recession.
Meanwhile, the New York Times, in an article, has said that the rising oil prices itself is a reason for the rise in prices of food and basic goods.
“Inflation has many causes, from rising global demand for commodities to the monetary constraints of currencies pegged to the weakening American dollar. But one cause is the skyrocketing price of oil itself. It is helping push many ordinary people towards poverty even as it stimulates a new surge of economic growth in the Gulf,” the article said.
Saudi Arabia’s Central Bank governor Saud Al Sayyari is, however, of the opinion that floating the Saudi riyal would not be a good idea for an economy that relied on oil exports.
“Floating is beneficial when the economy and exports are diverse… as for the kingdom, it remains reliant on the export of a single commodity,” he was quoted as telling Arabiya Television.
One option to check the situation is to go for revaluation of the respective pegs of the currencies to the dollar.
The UAE’s central bank has said that the revaluation of the UAE dirham’s peg with the dollar “can’t be ruled out”.
According to Giyas Gokkent, head of research at the National Bank of Abu Dhabi, revaluation would be the most palatable of a number of options available to the central bank.
The UAE central bank is set to publish annual inflation figures next month.
Meanwhile, Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr Al-Thani has called upon all GCC nations to resolve their differences over a single Gulf currency.
In a published interview, he said that monetary union was the only way to check the soaring inflation across the region. He said that the GCC “should have a currency with a good weight internationally”.
“The GCC now is capable to do this and have a separate currency,” he was quoted as saying.
He added that Qatar always preferred to act along with all the other GCC nations.
While Saudi Arabia and some of its Arab partners are planning a monetary union as early as 2010, Oman has opted out of the single currency mode.
“Oman is not going to join the currency union. This is a government decision,” Oman central bank governor Hamood Sangour al-Zadjali said early this month, adding that his country might lose more than it would benefit if it reformed its currency.
He was of the opinion that maintaining stability in the dollar peg would help attract foreign investment.
Meanwhile, the governor of the Central Bank of UAE, Sultan bin Naser Al Suweidi, has said that monetary union in the Gulf would have to be implemented in three phases, culminating in the launch of a single currency.
“The first and second stages will bring two benefits to GCC economies as it will reduce or eliminate the foreign exchange transaction cost between our countries’ currencies and will improve the efficiency of capital flows between our economies,” he said, speaking at the Abu Dhabi forum.
Stating that a single currency is a long-term issue of the GCC, he said that the countries of the region would have to first have to agree on the very foundations, which would be very different from the European Union model.
(Aroonim Bhuyan can be contacted at [email protected])