Article Date: 18:59 2010/05/05
Article ID: 0054
Riyadh, May 05 (QNA) - Finance and Economics ministers of the Gulf Cooperation Council (GCC) are meeting at the GCC Secretariat in Riyadh, Saudi Arabia on Saturday. GCC Secretary General Abdurrahman bin Hamad Al-Attiyah highlighted the particular importance of this meeting, which will precede the 12th consultative meeting of GCC leaders, due to be held in Riyadh on Monday. He explained that the meeting will focus on the recommendations and outcomes of the joint meeting of the GCC Customs General Managers and the customs union''s committee, pursuant to the resolution adopted by the 30th session of the GCC Supreme Council hosted by Kuwait on December 14-15 2009. It will further discuss the economic aspects of Qatar''s Vision to activate the GCC council, including the establishment of a joint bank for development and joint investment in all sectors, particularly in education and health, H.E. Al-Attiyah said. The meeting will also consider the economic side of the Bahrain Vision to develop the GCC council and its proposal to establish a special fund for financial and economic stability, he added. On the same context, H.E. Al-Attiyah pointed out that the meeting will study means of implementing the Supreme Council''s decisions in response to the financial crisis and its impact on GCC countries. Concluding, the GCC Chief said, the meeting will as well focus on GCC the committees of joint economic action, including the GCC common market, the Committee of Governors of GCC Monetary Institutions and Central Banks and the GCC joint railway network. (QNA) f l/OM
Sunday, May 9, 2010
Arabic (& Asian) Currency Union Plans
http://www.ecb.int/paym/groups/pdf/FXCG_arab_asien_currency_unions_080909.pdf?42ab8d64afcc73031bb2df65c3e28c2d
Philipp Nimmermann
BHF-BANK Financial Markets
Philipp Nimmermann
BHF-BANK Financial Markets
Monday, September 29, 2008
NBK report says gcc monetary union faces two main challenges / 1
NBK report says gcc monetary union faces two main challenges
Article Date: 13:56 2008/09/28
Article ID: 0028
Kuwait, September 28 (qna) -The National Bank of Kuwait (NBK) said Sunday that two main challenges faced the GCC Monetary Union, the first being that economic diversification in the coming years will begin altering GCC countries'' underlying economic similarities. In a report issued here today, NBK said that while this increased economic diversity should help foster intra-regional trade, it could also subject the region to asymmetric economic shocks and generate the need for different monetary and fiscal policy responses among member states.
As for the second challenge, NBK said that the rise and divergence in inflation rates among the GCC nations in recent years will, at a minimum, complicate and probably delay the implementation of a monetary union. Averaging just 0.4 percent from 1997-2002, GCC inflation has risen sharply to a rate of 6.9 percent in 2007, with its rate of increase more than doubling between 2005 and 2007. After hitting a recent low of 3.0 percent in 2003, the difference between the highest and lowest inflation rate in the GCC had quickly widened to 10.4 percent in 2007.
The report noted that excluding Qatar, income inequality (as measured by per capita GDP) within the GCC is relatively modest. Significant gaps in per capita incomes need not necessarily be a problem for a well functioning monetary union. When the Euro was first introduced in 1999 (as a virtual currency), for example, both Greece and Portugal, had per capita incomes one quarter that of Luxembourg''s. The degree of economic convergence to achieve monetary union within the GCC is already quite advanced. It has already achieved considerably more economic integration than the Eurozone currently possesses after more than half a century of working toward integration.
However, given their vast differences in fossil fuel endowments, the economic structures between GCC member states will increasingly become less homogeneous in the coming years. Even states well endowed with energy reserves are likely to achieve differences in the pace and scope of their economic diversification. For example, given their relatively small reserves, the need for diversifying away from hydrocarbons is clearly most paramount for Bahrain and Oman. In terms of monetary convergence, the NBK report said that the economic obstacle in both forming and maintaining a well functioning monetary union is cyclical in nature. The economic boom that started in 2003 coinciding with the rise in oil prices has dramatically increased the rate of inflation throughout the region. The inflation criterion for monetary union stipulates that the inflation rate for each member should not exceed by more than 2.0 percent the GCC weighted average rate. As for fiscal convergence, GCC government revenues, expenditures and budget balances all exhibit a high degree of co-movement due to their high degree of dependency on energy revenues. Hydrocarbon revenues as a share of central government revenues for the GCC countries in 2007 ranged from a low of 76 percent for Bahrain, Qatar and the UAE to a high of 94 percent for Kuwait.
Article Date: 13:56 2008/09/28
Article ID: 0028
Kuwait, September 28 (qna) -The National Bank of Kuwait (NBK) said Sunday that two main challenges faced the GCC Monetary Union, the first being that economic diversification in the coming years will begin altering GCC countries'' underlying economic similarities. In a report issued here today, NBK said that while this increased economic diversity should help foster intra-regional trade, it could also subject the region to asymmetric economic shocks and generate the need for different monetary and fiscal policy responses among member states.
As for the second challenge, NBK said that the rise and divergence in inflation rates among the GCC nations in recent years will, at a minimum, complicate and probably delay the implementation of a monetary union. Averaging just 0.4 percent from 1997-2002, GCC inflation has risen sharply to a rate of 6.9 percent in 2007, with its rate of increase more than doubling between 2005 and 2007. After hitting a recent low of 3.0 percent in 2003, the difference between the highest and lowest inflation rate in the GCC had quickly widened to 10.4 percent in 2007.
The report noted that excluding Qatar, income inequality (as measured by per capita GDP) within the GCC is relatively modest. Significant gaps in per capita incomes need not necessarily be a problem for a well functioning monetary union. When the Euro was first introduced in 1999 (as a virtual currency), for example, both Greece and Portugal, had per capita incomes one quarter that of Luxembourg''s. The degree of economic convergence to achieve monetary union within the GCC is already quite advanced. It has already achieved considerably more economic integration than the Eurozone currently possesses after more than half a century of working toward integration.
However, given their vast differences in fossil fuel endowments, the economic structures between GCC member states will increasingly become less homogeneous in the coming years. Even states well endowed with energy reserves are likely to achieve differences in the pace and scope of their economic diversification. For example, given their relatively small reserves, the need for diversifying away from hydrocarbons is clearly most paramount for Bahrain and Oman. In terms of monetary convergence, the NBK report said that the economic obstacle in both forming and maintaining a well functioning monetary union is cyclical in nature. The economic boom that started in 2003 coinciding with the rise in oil prices has dramatically increased the rate of inflation throughout the region. The inflation criterion for monetary union stipulates that the inflation rate for each member should not exceed by more than 2.0 percent the GCC weighted average rate. As for fiscal convergence, GCC government revenues, expenditures and budget balances all exhibit a high degree of co-movement due to their high degree of dependency on energy revenues. Hydrocarbon revenues as a share of central government revenues for the GCC countries in 2007 ranged from a low of 76 percent for Bahrain, Qatar and the UAE to a high of 94 percent for Kuwait.
Monday, September 8, 2008
Gulf currency union could measure core inflation
Gulf currency union could measure core inflation
by Daliah Merzaban on Monday, 08 September 2008
CURRENCY BASKETS: Only Kuwait has so far ditched the dollar peg ahead of monetary union. (Getty Images)Gulf Arab oil producers are discussing modifying the inflation criterion of their monetary union plan to measure core inflation, which strips out the impact of soaring rents, a Qatari official said on Sunday.
Five Gulf states, including Qatar and Saudi Arabia, are preparing for monetary union - including a single currency - by a 2010 deadline that many policymakers have said would be very difficult to meet.
An inflation target of no more than 2 percent above the regional average has been the most contentious of the European Union-style convergence criteria agreed by Gulf states.
Consumer price inflation (CPI) ranges from 3.1 percent in Bahrain to almost 15 percent in Qatar.
Under a proposal discussed by a regional technical committee on Sunday, the inflation target would measure core inflation, which strips out the housing and rental costs that have driven inflation in some states.
"Consumer price inflation is not a good measure for the purposes of monetary policy because it contains volatile components that we want to get rid of," said the Qatari official involved in the talks.
"We are proposing looking at the underlying long-term inflation, the components of CPI that create persistent inflationary pressures," the official said, declining to be identified.
The benefits of measuring core inflation would be discussed on Sunday by officials of the six Gulf Cooperation Council (GCC) states, according to an opening speech prepared by the Qatari central bank.
Prices have been soaring in the Gulf as governments invest windfall oil revenues into economic diversification, which has created a mismatch between supply and demand for housing, especially in Qatar and the United Arab Emirates.
The Qatari central bank completed a study that showed housing prices were the most-volatile component of inflation in the country, the official said. "CPI has been creating more divergence, and we want convergence."
Gulf Arab states should consider dropping their pegs to the US dollar to have more tools to control inflation and achieve single currency criteria, Dubai International Financial Centre (DIFC) economists said in August.
In 2007, the weighted average Gulf inflation rate was 6.9 percent, a level exceeded by the UAE and Qatar, the DIFC said.
States in the world's biggest oil-exporting region are giving a renewed push to completing monetary union after the project was thrown into question when Oman decided in 2006 it would not join and Kuwait dropped its dinar's dollar peg in 2007.
In June, Gulf central bank governors finalised a draft monetary union deal and agreed on the rules for setting up a monetary council that will form the nucleus of a regional central bank.
Gulf central bank governors and finance ministers will meet next week in Jeddah, and are likely to finalise both agreements, which would then be taken to Gulf Arab rulers at a meeting in November or December.
Several policymakers, including the Saudi and UAE central bank governors, said this summer meeting the 2010 deadline would be challenging. (Reuters)
by Daliah Merzaban on Monday, 08 September 2008
CURRENCY BASKETS: Only Kuwait has so far ditched the dollar peg ahead of monetary union. (Getty Images)Gulf Arab oil producers are discussing modifying the inflation criterion of their monetary union plan to measure core inflation, which strips out the impact of soaring rents, a Qatari official said on Sunday.
Five Gulf states, including Qatar and Saudi Arabia, are preparing for monetary union - including a single currency - by a 2010 deadline that many policymakers have said would be very difficult to meet.
An inflation target of no more than 2 percent above the regional average has been the most contentious of the European Union-style convergence criteria agreed by Gulf states.
Consumer price inflation (CPI) ranges from 3.1 percent in Bahrain to almost 15 percent in Qatar.
Under a proposal discussed by a regional technical committee on Sunday, the inflation target would measure core inflation, which strips out the housing and rental costs that have driven inflation in some states.
"Consumer price inflation is not a good measure for the purposes of monetary policy because it contains volatile components that we want to get rid of," said the Qatari official involved in the talks.
"We are proposing looking at the underlying long-term inflation, the components of CPI that create persistent inflationary pressures," the official said, declining to be identified.
The benefits of measuring core inflation would be discussed on Sunday by officials of the six Gulf Cooperation Council (GCC) states, according to an opening speech prepared by the Qatari central bank.
Prices have been soaring in the Gulf as governments invest windfall oil revenues into economic diversification, which has created a mismatch between supply and demand for housing, especially in Qatar and the United Arab Emirates.
The Qatari central bank completed a study that showed housing prices were the most-volatile component of inflation in the country, the official said. "CPI has been creating more divergence, and we want convergence."
Gulf Arab states should consider dropping their pegs to the US dollar to have more tools to control inflation and achieve single currency criteria, Dubai International Financial Centre (DIFC) economists said in August.
In 2007, the weighted average Gulf inflation rate was 6.9 percent, a level exceeded by the UAE and Qatar, the DIFC said.
States in the world's biggest oil-exporting region are giving a renewed push to completing monetary union after the project was thrown into question when Oman decided in 2006 it would not join and Kuwait dropped its dinar's dollar peg in 2007.
In June, Gulf central bank governors finalised a draft monetary union deal and agreed on the rules for setting up a monetary council that will form the nucleus of a regional central bank.
Gulf central bank governors and finance ministers will meet next week in Jeddah, and are likely to finalise both agreements, which would then be taken to Gulf Arab rulers at a meeting in November or December.
Several policymakers, including the Saudi and UAE central bank governors, said this summer meeting the 2010 deadline would be challenging. (Reuters)
Sunday, September 7, 2008
nice article: Time for change: Revaluation will not stop future inflation
06 September 2008
Straight talk from Chief Economist at al khalijial khalijiAl Khaliji Commercial Bank
Al Khaliji
Businesses will gain from a de-pegging of the Qatari Riyal, according to the first ever business optimism survey of Qatar by Dun & Bradstreet, sponsored jointly by al khalijial khalijiAl Khaliji Commercial Bank
and the Qatar Financial CenterQatar Financial CenterQatar Financial Centre
According to the survey of 340 businesses spread across a range of sectors in Qatar, 46% overall will benefit from a de-pegging of the Qatari Riyal. The underlying reason is simple. Businesses that import raw material, machinery and labor from non-dollar countries like Europe, Japan, India and China, have to pay more in Riyals as it depreciates in line with the dollar because of the fixed exchange rates.
The Riyal peg is a key driver of inflation in the region Broadly speaking, inflation in the region has four sources:
A global liquidity driven boom has pushed commodity, agriculture and construction materials prices sky high. The IMF's commodity price index has risen by a cumulative 10 percent in 2008 after having increased by about 30 percent between December 2006 and December 2007.
The weak dollar has been one of the key reasons for rising global commodity and energy prices. Suppliers raised prices of their products (for things like steel, food, energy) as a weakening dollar eroded their profits. In addition, commodities that also serve as assets (e.g., gold and other precious metals, oil) saw their prices rise because a weaker dollar made them more attractive for financial investors and speculators.
A falling US dollar combined with the dollar-based pegs have transmitted the global price increases to the GCCGCCCooperation Council for the Arab States of the Gulf, in a phenomenon called "imported inflation". The falling dollar has caused the QAR to depreciate by as much as 20-30% in the past few years. The combined contribution of this, with the commodity price inflation above, may have added as much as 60-70 percentage points to the rise in the price of products imported from Europe, Japan and other non-dollar countries.
The fixed dollar peg is fueling inflation further through an indirect effect that maybe even greater. It is forcing the GCCGCCCooperation Council for the Arab States of central banks to cut interest rates in line with the US Fed, thus causing money supply to increase. But, what is needed instead is to tighten money supply and raise interest rates. Qatar, for example, has lowered its key policy interest rates to 2.00% in line with the US Fed, from 5% only a few months ago. As a result, we are seeing money supply growth at double-digit rates in recent years (on top of the already 37% growth in 2006).
Too much liquidity caused by the dollar peg policy is driving domestic private and public spending to excessive levels thus generating unsustainably high growth in demand for locally produced goods, services and housing. Combined with supply bottlenecks it takes time to build new manufacturing facilities, or build new housing this has fueled inflation in certain sectors. The biggest culprit in this area are rental, housing and property prices.
The Riyal peg is directly responsible for two of the above four causes of inflation (nos. 2 and 3), and indirectly responsible in the two remaining cases.
Why is inflation bad?
Inflation, in general, hurts the economy by reducing the purchasing power of consumers and wage earners, and by increasing the cost of business for companies.
Inflation begets further inflation. It is a disease that spreads easily. As prices of raw materials and consumer goods rise, businesses will raise their own prices and workers will demand higher wages to compensate. Thus, what may have started in particular sectors (e.g., oil, property), spreads to other segments of the market.
What Economists dread most in this context is if inflation gets built into people's expectations and thus become a self-fulfilling prophesy. When businesses expect inflation to continue, they incorporate it into their business and pricing decisions. Similarly, when workers expect inflation to stay, they incorporate that into their wage demands. The combined end result is not just inflation, but spiraling inflation.
This is what happened in the US in the 1970s ever increasing double-digit inflation combined with high unemployment - giving rise to the term 'stagflation'. The world is again in the throes of yet another phase of stagflation, and, as in the 1970s, the solution is to raise interest rates to high levels. In the US, the then-Fed Chairman, Volcker, raised interest rates to double-digit levels, and only then succeeded in killing inflation and inflationary expectations. Unfortunately, raising interest rates is an option not available to the GCCGCCCooperation Council for the Arab States of the Gulf given their fixed pegs.
Unchecked inflation will have further consequences for the GCC
Inflation in the GCCGCCCooperation Council for the Arab States of the Gulf labor force are expatriates and continued inflation makes it less desirable for them to come or continue staying in this region. Inflation and the dollar peg hurts expatriate labor in two ways: it erodes the local purchasing power of their wages and salaries, and they are hit with a double whammy when the value of their remittances in their home countries fall because of the Riyal depreciation. Continued inflation thus will threaten the growth potential of the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC
if, as some countries are finding out, it starts drying up the supply of labor from abroad and creates unrest locally.
The
-variety of inflation, driven as it is by excessive liquidity, is also responsible for an asset price bubble, that has other troubling consequences. Asset price bubbles are not good not only because they end up bursting eventually but also because they distort economic signals and divert too much of the economy's wealth and resources into the bubble sectors. Unfortunately, too often policymakers tend to ignore asset price bubbles before it is too late because many people get enriched (albeit, at the expense of others) and it creates an aura of success.
Can a revaluation stop inflation?
There are really only two ways that GCCGCCCooperation Council for the Arab States of the Gulf countries can eliminate inflation. Either, they cut government spending, or they pursue an independent monetary policy and raise interest rates.
Unfortunately, the second option is not available to the GCCGCCCooperation Council for the Arab States of the Gulf AGCC as long as their currencies are tied to the dollar (or any currency). This means, cutting spending is the only option left, and most GCCGCCCooperation Council for the Arab States of the Gulf governments are unwilling to do that either because it means slower growth or it is difficult given the large oil revenues.
However, doing nothing is not a good option either because it means continued high inflation. Even worse is what some GCCGCCCooperation Council for the Arab States of the Gulf countries are doing, namely, subsidy and salary increases because they will actually end up fueling inflation and result in further demands for salary and subsidy increases in the future.
A one-off revaluation will not eliminate future inflation, but it will eliminate the impact of past inflation, without fueling more inflation. A 20-30 percent revaluation will restore the purchasing power of expatriate wages and the consumers. Given the policy dilemma, it buys time for the authorities to come up with more durable solutions. And, it demonstrates to the public that the authorities take market signals and concerns seriously.
Hold your breath, the dollar is strengthening Naysayers, i.e., those who say that the dollar is already coming back up, will say that a revaluation is no longer necessary. However, they may not want to hold their breath for long. The life history of the euro, which has been in existence since January 1, 1999, shows little cause for optimism in a sustained dollar recovery, given the underlying fundamentals. Of course, one can never say never, but the chart shows that the dollar has been declining against the euro for most of the latter's life, starting as far back as 2001. In fact, the latest bout of dollar strength doesn't even register as a big blip in the chart, and it shows a number of previous failed attempts.
That the dollar's decline has been long and sustained suggests fundamental forces at work against the dollar, which are no mystery at all huge US government budget deficits as a succession of US presidents cut taxes to the bone, bloated further by the massive spending on the "war on terror', an almost "enforced" globalization of the world by none other than the US itself that, ironically, has moved jobs and manufacturing away from America to the emerging world, and has come back to haunt it in the form of a massive US trade deficit (reaching as high a $800 billion in recent years), that together with interest rates so low that no one wants to hold dollars anymore.
But a more fundamental issue is at stake here. Any currency will always have ups and downs. Why should the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC which has become an economic might in its own right in recent years, tie its currency and its economic fortunes to any other currency, let alone a falling one? The dollar may have been mighty at one time, but now there is also the Euro.
The Puzzle
In our view, there is really little economic justification for not revaluing the GCCGCCCooperation Council for the Arab States of the Gulf
currencies, the recent strength of the dollar notwithstanding. Economist would never say that a price set decades ago is still right except by pure accident. Businesses would never last if they kept their prices fixed for decades. This should also be true of the price of currencies.
The pegging of GCCGCCCooperation Council for the Arab States of the Gulf currencies to the dollar in the mid-1980s made sense for a number of reasons, but those reasons are now mostly gone. Back in the 1980s, the GCCGCCCooperation Council for the Arab States of the Gulf was a minor economic player in the world. Their currencies and their central banks were untested, inexperienced and globally insignificant.
The main issue for them at the time was to preserve the global purchasing power of the single-most important asset they owned at the time oil, and to build up currency credibility and stability. Thus, it made sense to tie oil prices and their currencies to the dollar, the currency of global trade. Now, the situation has changed: the dollar is no longer the king, the GCCGCCCooperation Council for the Arab States of the Gulf has diversified its wealth significantly away from oil, together the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC
Region currency prices fixed against a falling dollar has hardened in recent months. Authorities have instead put their resolve back into the GCCGCCCooperation Council for the Arab States of the Gulf monetary union by the original 2010 deadline. Until recently, this was thought to be almost impossible by most observers, given that Oman had already voted to opt out and Bahrain and Kuwait were having reservations. In fact, it may have become even harder to achieve given that Qatar, the UAE, and even Saudi Arabia, much to the latter's consternation, will fail to meet the existing convergence criterion on inflation (i.e. no more than 2% away from the GCCGCCCooperation Council for the Arab States of the Gulf average, which is currently around 6.9%).
Some red herrings on the road to monetary union
A number of "red herrings" (i.e., myths) have been floated around about why a revaluation or de-pegging will not work:
Disturbing the pegs now will cause difficulty on the road to monetary union.
But, all the major currencies of the European Monetary Union were floating in the run up to the Euro and it did not hurt the euro monetary union. All that is required for monetary union, as for the euro, is for the GCCGCCCooperation Council for the Arab States of the Gulf currencies to set a fixed ratio among themselves, NOT a fixed ratio to currencies outside.
The Riyal peg is not the main reason for inflation. But, it is directly behind two of the four main reasons and indirectly behind the other two.
A fixed exchange rate regime has served us well. This is fine, but this is not the same as saying that the same rate established decades ago still serves us well. Moreover, it is time for the GCCGCCCooperation Council for the Arab States of the Gulf to stand on its own feet, as a new emerging global economic bloc, and establish its own future course.
Kuwait has revalued its currency but still shows rising inflation. The Kuwaiti revaluation was too little too late, and unlikely to blunt inflation anyway because they still continue to match US Fed rate cuts (so the currency does not revalue too much?).
We see four possible reasons for the GCCGCCCooperation Council for the Arab States of the Gulf resolve against revaluation:
Political, i.e., do not hit the dollar when it is already down.
Revaluation will erode the value of US dollar assets held by the GCCGCCCooperation Council for the Arab States of the Gulf.
GCCGCCCooperation Council for the Arab States of the Gulf
oil revenue, and hence, government budgets, will be worth less in local currencies, thus, forcing governments to cut expenditure. But, this is actually good because it will cut back on inflation pressure.
GCCGCCCooperation Council for the Arab States of the Gulf
non-oil exports will be hurt if the local currencies are allowed to appreciate.
Inflation is benefitting some segments of society, e.g. asset-owners and businesses.
There is no place to hide
The uncertainty regarding the dollar peg and inflation is making life difficult for businesses, workers, consumers and financial institutions alike. Market expectations of a revaluation and speculation will not die down as long as inflation continues and a credible anti-inflationary policy is not implemented and explained.
By Khan zahid
© The Peninsula 2008
Straight talk from Chief Economist at al khalijial khalijiAl Khaliji Commercial Bank
Al Khaliji
Businesses will gain from a de-pegging of the Qatari Riyal, according to the first ever business optimism survey of Qatar by Dun & Bradstreet, sponsored jointly by al khalijial khalijiAl Khaliji Commercial Bank
and the Qatar Financial CenterQatar Financial CenterQatar Financial Centre
According to the survey of 340 businesses spread across a range of sectors in Qatar, 46% overall will benefit from a de-pegging of the Qatari Riyal. The underlying reason is simple. Businesses that import raw material, machinery and labor from non-dollar countries like Europe, Japan, India and China, have to pay more in Riyals as it depreciates in line with the dollar because of the fixed exchange rates.
The Riyal peg is a key driver of inflation in the region Broadly speaking, inflation in the region has four sources:
A global liquidity driven boom has pushed commodity, agriculture and construction materials prices sky high. The IMF's commodity price index has risen by a cumulative 10 percent in 2008 after having increased by about 30 percent between December 2006 and December 2007.
The weak dollar has been one of the key reasons for rising global commodity and energy prices. Suppliers raised prices of their products (for things like steel, food, energy) as a weakening dollar eroded their profits. In addition, commodities that also serve as assets (e.g., gold and other precious metals, oil) saw their prices rise because a weaker dollar made them more attractive for financial investors and speculators.
A falling US dollar combined with the dollar-based pegs have transmitted the global price increases to the GCCGCCCooperation Council for the Arab States of the Gulf, in a phenomenon called "imported inflation". The falling dollar has caused the QAR to depreciate by as much as 20-30% in the past few years. The combined contribution of this, with the commodity price inflation above, may have added as much as 60-70 percentage points to the rise in the price of products imported from Europe, Japan and other non-dollar countries.
The fixed dollar peg is fueling inflation further through an indirect effect that maybe even greater. It is forcing the GCCGCCCooperation Council for the Arab States of central banks to cut interest rates in line with the US Fed, thus causing money supply to increase. But, what is needed instead is to tighten money supply and raise interest rates. Qatar, for example, has lowered its key policy interest rates to 2.00% in line with the US Fed, from 5% only a few months ago. As a result, we are seeing money supply growth at double-digit rates in recent years (on top of the already 37% growth in 2006).
Too much liquidity caused by the dollar peg policy is driving domestic private and public spending to excessive levels thus generating unsustainably high growth in demand for locally produced goods, services and housing. Combined with supply bottlenecks it takes time to build new manufacturing facilities, or build new housing this has fueled inflation in certain sectors. The biggest culprit in this area are rental, housing and property prices.
The Riyal peg is directly responsible for two of the above four causes of inflation (nos. 2 and 3), and indirectly responsible in the two remaining cases.
Why is inflation bad?
Inflation, in general, hurts the economy by reducing the purchasing power of consumers and wage earners, and by increasing the cost of business for companies.
Inflation begets further inflation. It is a disease that spreads easily. As prices of raw materials and consumer goods rise, businesses will raise their own prices and workers will demand higher wages to compensate. Thus, what may have started in particular sectors (e.g., oil, property), spreads to other segments of the market.
What Economists dread most in this context is if inflation gets built into people's expectations and thus become a self-fulfilling prophesy. When businesses expect inflation to continue, they incorporate it into their business and pricing decisions. Similarly, when workers expect inflation to stay, they incorporate that into their wage demands. The combined end result is not just inflation, but spiraling inflation.
This is what happened in the US in the 1970s ever increasing double-digit inflation combined with high unemployment - giving rise to the term 'stagflation'. The world is again in the throes of yet another phase of stagflation, and, as in the 1970s, the solution is to raise interest rates to high levels. In the US, the then-Fed Chairman, Volcker, raised interest rates to double-digit levels, and only then succeeded in killing inflation and inflationary expectations. Unfortunately, raising interest rates is an option not available to the GCCGCCCooperation Council for the Arab States of the Gulf given their fixed pegs.
Unchecked inflation will have further consequences for the GCC
Inflation in the GCCGCCCooperation Council for the Arab States of the Gulf labor force are expatriates and continued inflation makes it less desirable for them to come or continue staying in this region. Inflation and the dollar peg hurts expatriate labor in two ways: it erodes the local purchasing power of their wages and salaries, and they are hit with a double whammy when the value of their remittances in their home countries fall because of the Riyal depreciation. Continued inflation thus will threaten the growth potential of the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC
if, as some countries are finding out, it starts drying up the supply of labor from abroad and creates unrest locally.
The
-variety of inflation, driven as it is by excessive liquidity, is also responsible for an asset price bubble, that has other troubling consequences. Asset price bubbles are not good not only because they end up bursting eventually but also because they distort economic signals and divert too much of the economy's wealth and resources into the bubble sectors. Unfortunately, too often policymakers tend to ignore asset price bubbles before it is too late because many people get enriched (albeit, at the expense of others) and it creates an aura of success.
Can a revaluation stop inflation?
There are really only two ways that GCCGCCCooperation Council for the Arab States of the Gulf countries can eliminate inflation. Either, they cut government spending, or they pursue an independent monetary policy and raise interest rates.
Unfortunately, the second option is not available to the GCCGCCCooperation Council for the Arab States of the Gulf AGCC as long as their currencies are tied to the dollar (or any currency). This means, cutting spending is the only option left, and most GCCGCCCooperation Council for the Arab States of the Gulf governments are unwilling to do that either because it means slower growth or it is difficult given the large oil revenues.
However, doing nothing is not a good option either because it means continued high inflation. Even worse is what some GCCGCCCooperation Council for the Arab States of the Gulf countries are doing, namely, subsidy and salary increases because they will actually end up fueling inflation and result in further demands for salary and subsidy increases in the future.
A one-off revaluation will not eliminate future inflation, but it will eliminate the impact of past inflation, without fueling more inflation. A 20-30 percent revaluation will restore the purchasing power of expatriate wages and the consumers. Given the policy dilemma, it buys time for the authorities to come up with more durable solutions. And, it demonstrates to the public that the authorities take market signals and concerns seriously.
Hold your breath, the dollar is strengthening Naysayers, i.e., those who say that the dollar is already coming back up, will say that a revaluation is no longer necessary. However, they may not want to hold their breath for long. The life history of the euro, which has been in existence since January 1, 1999, shows little cause for optimism in a sustained dollar recovery, given the underlying fundamentals. Of course, one can never say never, but the chart shows that the dollar has been declining against the euro for most of the latter's life, starting as far back as 2001. In fact, the latest bout of dollar strength doesn't even register as a big blip in the chart, and it shows a number of previous failed attempts.
That the dollar's decline has been long and sustained suggests fundamental forces at work against the dollar, which are no mystery at all huge US government budget deficits as a succession of US presidents cut taxes to the bone, bloated further by the massive spending on the "war on terror', an almost "enforced" globalization of the world by none other than the US itself that, ironically, has moved jobs and manufacturing away from America to the emerging world, and has come back to haunt it in the form of a massive US trade deficit (reaching as high a $800 billion in recent years), that together with interest rates so low that no one wants to hold dollars anymore.
But a more fundamental issue is at stake here. Any currency will always have ups and downs. Why should the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC which has become an economic might in its own right in recent years, tie its currency and its economic fortunes to any other currency, let alone a falling one? The dollar may have been mighty at one time, but now there is also the Euro.
The Puzzle
In our view, there is really little economic justification for not revaluing the GCCGCCCooperation Council for the Arab States of the Gulf
currencies, the recent strength of the dollar notwithstanding. Economist would never say that a price set decades ago is still right except by pure accident. Businesses would never last if they kept their prices fixed for decades. This should also be true of the price of currencies.
The pegging of GCCGCCCooperation Council for the Arab States of the Gulf currencies to the dollar in the mid-1980s made sense for a number of reasons, but those reasons are now mostly gone. Back in the 1980s, the GCCGCCCooperation Council for the Arab States of the Gulf was a minor economic player in the world. Their currencies and their central banks were untested, inexperienced and globally insignificant.
The main issue for them at the time was to preserve the global purchasing power of the single-most important asset they owned at the time oil, and to build up currency credibility and stability. Thus, it made sense to tie oil prices and their currencies to the dollar, the currency of global trade. Now, the situation has changed: the dollar is no longer the king, the GCCGCCCooperation Council for the Arab States of the Gulf has diversified its wealth significantly away from oil, together the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC
Region currency prices fixed against a falling dollar has hardened in recent months. Authorities have instead put their resolve back into the GCCGCCCooperation Council for the Arab States of the Gulf monetary union by the original 2010 deadline. Until recently, this was thought to be almost impossible by most observers, given that Oman had already voted to opt out and Bahrain and Kuwait were having reservations. In fact, it may have become even harder to achieve given that Qatar, the UAE, and even Saudi Arabia, much to the latter's consternation, will fail to meet the existing convergence criterion on inflation (i.e. no more than 2% away from the GCCGCCCooperation Council for the Arab States of the Gulf average, which is currently around 6.9%).
Some red herrings on the road to monetary union
A number of "red herrings" (i.e., myths) have been floated around about why a revaluation or de-pegging will not work:
Disturbing the pegs now will cause difficulty on the road to monetary union.
But, all the major currencies of the European Monetary Union were floating in the run up to the Euro and it did not hurt the euro monetary union. All that is required for monetary union, as for the euro, is for the GCCGCCCooperation Council for the Arab States of the Gulf currencies to set a fixed ratio among themselves, NOT a fixed ratio to currencies outside.
The Riyal peg is not the main reason for inflation. But, it is directly behind two of the four main reasons and indirectly behind the other two.
A fixed exchange rate regime has served us well. This is fine, but this is not the same as saying that the same rate established decades ago still serves us well. Moreover, it is time for the GCCGCCCooperation Council for the Arab States of the Gulf to stand on its own feet, as a new emerging global economic bloc, and establish its own future course.
Kuwait has revalued its currency but still shows rising inflation. The Kuwaiti revaluation was too little too late, and unlikely to blunt inflation anyway because they still continue to match US Fed rate cuts (so the currency does not revalue too much?).
We see four possible reasons for the GCCGCCCooperation Council for the Arab States of the Gulf resolve against revaluation:
Political, i.e., do not hit the dollar when it is already down.
Revaluation will erode the value of US dollar assets held by the GCCGCCCooperation Council for the Arab States of the Gulf.
GCCGCCCooperation Council for the Arab States of the Gulf
oil revenue, and hence, government budgets, will be worth less in local currencies, thus, forcing governments to cut expenditure. But, this is actually good because it will cut back on inflation pressure.
GCCGCCCooperation Council for the Arab States of the Gulf
non-oil exports will be hurt if the local currencies are allowed to appreciate.
Inflation is benefitting some segments of society, e.g. asset-owners and businesses.
There is no place to hide
The uncertainty regarding the dollar peg and inflation is making life difficult for businesses, workers, consumers and financial institutions alike. Market expectations of a revaluation and speculation will not die down as long as inflation continues and a credible anti-inflationary policy is not implemented and explained.
By Khan zahid
© The Peninsula 2008
Committee to hold meeting on common GCC currency
Committee to hold meeting on common GCC currency
DOHA, Sept 5, (KUNA): The technical committee of the Gulf Monetary Union is due to hold its 25th meeting in Doha next Sunday to discuss the issue of GCC single currency, it was officially reported. The committee, during its two-day meeting, is scheduled to discuss drafting regulations for the authority that would be assigned to issue the common current for the member states of the Gulf Cooperation Council. The special authority will be also tasked with working out various mechanisms of the process, such as the ways of ciruculating the single currency, setting the rate for the currency in addition to various other supervisary tasks. The authority that has been picked for the task is the GCC committee for supervision on the banking systems. The GCC secretariat general anticipates that various procedures for the issuance of the single currency will be finalized this year. A GCC central bank is due to established at least six months before the issuance of the common currency.
DOHA, Sept 5, (KUNA): The technical committee of the Gulf Monetary Union is due to hold its 25th meeting in Doha next Sunday to discuss the issue of GCC single currency, it was officially reported. The committee, during its two-day meeting, is scheduled to discuss drafting regulations for the authority that would be assigned to issue the common current for the member states of the Gulf Cooperation Council. The special authority will be also tasked with working out various mechanisms of the process, such as the ways of ciruculating the single currency, setting the rate for the currency in addition to various other supervisary tasks. The authority that has been picked for the task is the GCC committee for supervision on the banking systems. The GCC secretariat general anticipates that various procedures for the issuance of the single currency will be finalized this year. A GCC central bank is due to established at least six months before the issuance of the common currency.
Tuesday, September 2, 2008
GCC monetary union unlikely by 2010: UAE
DUBAI - With only about two years to go, Gulf Arab oil producers may not be able to meet the target for a monetary union by 2010, and are unlikely to sever their dollar pegs because the US currency is appreciating against other major currencies.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi stated this on Thursday, and stressed that the country’s economy would grow at 6.6 per cent this year and remain strong until 2009. Last year’s economic growth was 7.4 per cent.
In a keynote speech before a business conference, Al Suwaidi said the monetary union would be implemented in three stages with the last one involving the implementation of similar laws among the Gulf countries.
“If we achieve the first two stages to monetary union by 2010, then that will be enough,” said Al Suwaidi, who gave a keynote speech at the last of the two-day The 33rd Japan Cooperation Forum for the Middle East (JCCME).
He added that the first and second stages would reduce or even eliminate the cost of the exchange cross-rates as well as realise the free capital flows between the Gulf countries.
Al Suwaidi said, meanwhile, the rapid economic growth in the region could encourage the Sovereign Wealth Funds (SWFs) of GCC Arab governments to invest more of their assets in the domestic market.
He added this could start off a new regional development cycle. Among the Gulf Cooperation Council member-countries, only Kuwait has abandoned the dollar-peg while Oman said in 2006 that it would not join the monetary union.
The other GCC members are Saudi Arabia, Bahrain, the UAE and Qatar. “The current level of interest rates in the GCC actually creates an environment of ultra loose monetary policy with highly negative interest rates, which can only be conducive to massive credit growth,” said Philippe Dauba-Pantanacce, a Dubaibased senior economist for the Middle East & North Africa, Global Markets, at Standard Chartered Bank, in an earlier interview.
The UAE Central Bank has a two-per cent repurchase rate, or lending rates to commercial banks, since May 1. It has slashed this repo rate by 275 basis points since setting it at 4.75 per cent on November 29 following a revamped of its monetary policy tools.
The country has replaced a daily sale of fixed-rate certificates of deposit with the auction, the results of which have not been released.
jose@khaleejtimes.com
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi stated this on Thursday, and stressed that the country’s economy would grow at 6.6 per cent this year and remain strong until 2009. Last year’s economic growth was 7.4 per cent.
In a keynote speech before a business conference, Al Suwaidi said the monetary union would be implemented in three stages with the last one involving the implementation of similar laws among the Gulf countries.
“If we achieve the first two stages to monetary union by 2010, then that will be enough,” said Al Suwaidi, who gave a keynote speech at the last of the two-day The 33rd Japan Cooperation Forum for the Middle East (JCCME).
He added that the first and second stages would reduce or even eliminate the cost of the exchange cross-rates as well as realise the free capital flows between the Gulf countries.
Al Suwaidi said, meanwhile, the rapid economic growth in the region could encourage the Sovereign Wealth Funds (SWFs) of GCC Arab governments to invest more of their assets in the domestic market.
He added this could start off a new regional development cycle. Among the Gulf Cooperation Council member-countries, only Kuwait has abandoned the dollar-peg while Oman said in 2006 that it would not join the monetary union.
The other GCC members are Saudi Arabia, Bahrain, the UAE and Qatar. “The current level of interest rates in the GCC actually creates an environment of ultra loose monetary policy with highly negative interest rates, which can only be conducive to massive credit growth,” said Philippe Dauba-Pantanacce, a Dubaibased senior economist for the Middle East & North Africa, Global Markets, at Standard Chartered Bank, in an earlier interview.
The UAE Central Bank has a two-per cent repurchase rate, or lending rates to commercial banks, since May 1. It has slashed this repo rate by 275 basis points since setting it at 4.75 per cent on November 29 following a revamped of its monetary policy tools.
The country has replaced a daily sale of fixed-rate certificates of deposit with the auction, the results of which have not been released.
jose@khaleejtimes.com
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