UAE Prime Minister Sheikh Mohammed bin Rashid Al Maktoum said in rare comments to the media that the state had set up a committee to reconsider its fixed exchange rate. “They are seriously considering currency reform and it’s right that they do,” said Simon Williams, regional economist at HSBC in Dubai.
“The shortcomings of the dollar peg that tie the monetary policy of the booming Gulf to the troubled U.S. economy are plain to see,” he said. While the United States tries to ward off a recession by cutting interest rates, economies of Gulf oil producers are surging on a five-fold rise in oil prices in the last six years.
Dollar pegs restrain Gulf states in their fight against inflation by forcing them to cut interest rates when they should be raising them, while the dollar’s drop to record lows against the euro and a basket of currencies drives up import costs.
A committee reporting to the UAE government would study “the benefits of staying with the peg or not”, Sheikh Mohammed said during a visit to China, adding the peg would stay in place for the foreseeable future.
Qatar’s Prime Minister and Foreign Minister H E Sheikh Hamad bin Jassem bin Jabor Al Thani said in February that the state was also studying currency reform among options to tackle inflation.
But Gulf states are reluctant to follow Kuwait’s lead and sever their dollar pegs as they prepare for a single currency as early as 2010. Speculation that the UAE and some of its Gulf neighbours will cut their currencies’ link to the tumbling US dollar has mounted since Kuwait’s move last May to start tacking its dinar to a basket of currencies.
Kuwait has allowed its dinar to rise almost 9 percent in order to fight imported inflation. “If there is any change about the dollar peg, it has to be done at the GCC level,” UAE Central Bank Governor Sultan Nasser Al Suweidi said at a seminar in Abu Dhabi yesterday. “De-pegging needs a lot of studying and consideration and the matter is more complicated than you can imagine.”
In November, Suweidi made a fervent call for Gulf currency reform to fight inflation. He has since repeatedly backtracked on those remarks, arguing that inflation was being driven by rents and that the peg helped attract foreign investment. Average inflation in the Gulf could rise to 8 percent this year from 7 percent last year on rents, government spending and higher global food prices, the International Monetary Fund said.
“At the moment since inflation is not driven by dollar depreciation, focusing on de-pegging or revaluation is not the solution,” IMF regional director Mohsen Khan said. As they grapple with inflation and economies falling out of step with the United States, Gulf states have tightened bank lending curbs, raised subsidies, slashed customs levies and introduced rental caps.
