Saudi Arabia, the United Arab Emirates and three other states in the world’s biggest oil-exporting region have agreed to keep their dollar pegs intact until they achieve a single currency by an increasingly unlikely 2010 deadline. But as oil prices soar, the dollar tumbles to record lows against the euro and a basket of major currencies and inflation spirals, maintaining this policy has become problematic, the Abu Dhabi Department of Planning and Economy said in a report.
“This pegging was adopted when oil prices were low and the greenback was at the height of its strength,” the department said.
“Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies.”
The department urged nations within the Gulf Cooperation Council (GCC) to peg to a basket of currencies instead, taking into account the region’s big trade exposures to the euro. Kuwait broke ranks with its neighbors in 2007 and severed its dollar link in favor of a basket of currencies partly to fight imported inflation.
“GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns, which tend to be bent toward the euro zone and Asia,” the department said.
“That the Gulf states continued to have fixed dollar exchange rates even as the dollar continues to decline, causes greater harm to the Gulf countries,” it said.
The report, which also weighed the pros and cons for the UAE to keep its currency pegged to the dollar, reiterated that the second-largest Arab economy was standing by a currency peg that has helped attract foreign investment.
The UAE’s foreign currency reserves are denominated mostly in dollars, another reason for maintaining the peg, the department added, saying currency reform alone would not ease inflation that hit a 20-year peak of 11.1 percent last year.
“It is difficult to claim that any one particular monetary policy would be ideal for the UAE. However, if the US dollar continues to decline, the UAE’s economy will continue to pay the price,” the department said.
The Gulf monetary union project was pushed off the rails after Oman decided in 2006 it would not join, and Kuwait dropped its dollar peg.
