“There’s a lot of value that comes with remaining pegged to the dollar,” Mohsin Khan, the IMF’s regional director for the Middle East and Central Asia told the news agency at the fund’s Washington headquarters.
Five out of six currencies in the Gulf Cooperation Council, or GCC, are pegged to the dollar at a fixed rate, forcing the region’s central banks to follow US Federal Reserve policy at a time when their booming economies are in danger of overheating.
“The peg provides confidence and stability, but the cost of that stability is you lose a policy instrument to control inflation,” he added.
Rising prices across the economic block, which pumps a fifth of the world’s oil, are undermining the benefits of buoyant economic growth in the region, adding to pressure on governments to sever ties with the greenback.
A move by Gulf states, which are estimated to hold dollar assets worth more than $ 1 trillion overseas, to change their foreign exchange policies could add pressure to the greenback at a time when it continues to hit new record lows.
“If the GCC de-peg it will have a significant short-term downward effect on the dollar,” said John Sfakiankis, economist at SABB, the Saudi Arabian banking arm of HSBC Holdings PLC.
Kuwait ended its currency peg to the dollar in May in an attempt to end the country’s rising inflation which it said was mainly caused by the weakening dollar.
Central bankers from the UAE, Saudi Arabia, Qatar, Oman and Bahrain, are struggling to follow US Fed moves to head off an economic recession as the region’s oil-rich economies continue to boom. The Fed has lowered the federal funds rate 225 basis points since September, including 125 basis points last month alone.
Inflation: The UAE and Qatar, two of the largest states in the Gulf, are expected to record “double digit” inflation throughout 2008, Khan said.
Qatar recorded inflation at 12.2 per cent in 2007, and in December Saudi inflation hit 6.5 per cent -the highest in more than 12 years. Oman’s inflation figure for November was a 16-year high of 7.6 per cent and analysts put UAE inflation at above 10 per cent for the same year.
Saudi’s Minister of Trade Hashim bin Abdullah Yamani resigned on Monday amid mounting criticism over rising prices in the Middle East’s largest economy.
The IMF, in its Regional Economic Outlook report last year, had estimated that inflation in the UAE would fall to eight per cent in 2007 and 6.4 per cent this year. In Qatar, the IMF said inflation would reach 12 per cent in 2007 from 11.8 per cent in 2007. So far this hasn’t happened.
“Our estimates were wrong. Inflation in the UAE was much higher than we predicted in 2007 so this shifts our base for 2008 when it will probably remain in double digits again,” Khan said.
“In Qatar, inflation was around 14 per cent in 2007 and this year it will presumably stay the same, or if it comes down it will be between 10 and 12 per cent,” he added.
Khan said that while rising inflation in Qatar and the UAE is partly due to high government spending, a shortage of housing and rising food prices have also helped drive up the cost of living.
“We thought inflation in the Qatar and UAE would fall as more housing units came onto the market, but while new housing has been built, it has been kept for investment purposes and not rented out so this hasn’t eased the pressure,” Khan said.
