Rising inflation main hurdle to currency union
By Issac John (Deputy Business Editor)
11 June 2008
DUBAI — Soaring rates of inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union, economists said.
In the wake of GCC Central Bankers breakthrough agreement on Monday setting up a regional central bank, analysts said the prevailing double-digit inflation rates in the UAE and Qatar will continue to be one of the main hurdles in meeting the convergence criterion on inflation, which is a critical aspect of successful currency union.
Marios Maratheftis, Regional Head of Research, Standard Chartered Bank, told Khaleej Times that the most important obstacle for the common currency was the absence of GCC-wide institution. “By 2010 we understand the central bank for the GCC will be in operation, may be the common currency will follow later but for us what is important is the establishment of an institution. I think the development is a breakthrough and very important development indeed.”
According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. "On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points," said Samba, a leading Saudi bank.
To meet the target for inflation, although Qatar has proposed stripping out rents from the inflation measure, it has met a cool response from other GCC members.
Analysts said the currency union presents the GCC with an imperative to define a more appropriate level for their exchange rates to ensure that they establish a realistic starting point.
"A satisfactory initial alignment of exchange rates is an essential, if not sufficient, condition for the viability of a GCC common currency. However, a currency union need not involve a fixed peg to the dollar (nor any other currency) and the project therefore also presents an opportunity to introduce a more flexible regime. This would allow the proposed GCC central bank some control over interest rates, and enable it to manage domestic demand more effectively. The end result would likely be more stable and predictable price growth, laying the foundations for sustainable, investment-led economic growth over the long term," the banks economist said.
Since the other convergence criteria, including limiting budget deficits to no greater than three per cent of GDP and public debt burdens of less than 60 per cent of GDP, now lack relevance given the GCC’s booming economies and robust financial indicators, inflation criterion is the main stumbling block to GCC currency union, analysts point out.
Observing that the most pressing challenge facing GCC economies is inflation, economists said a key factor bearing on skyrocketing price stems from the fixed peg to the US dollar. Another factor stoking inflation is increased government spending which has resulted in rapid liquidity growth across the GCC.
"A third factor contributing to demand pressures is the rapid growth of bank credit to the private sector, reflecting the greatly expanding role of the private sector in the regional economic and investment boom. A combination of promising investment opportunities together with highly liquid financial institutions have propelled annualised rates of credit growth to 35 percent or more across the region," they said
Tuesday, June 10, 2008
Saturday, June 7, 2008
GCC central bankers to discuss MU
GCC central bankers to discuss MU
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
Tuesday, June 3, 2008
Qatar must depeg, gov't advisor says
Qatar must depeg, gov't advisor says
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
US dodges issue of Gulf depegging
US dodges issue of Gulf depegging
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
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Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
advertisement
Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
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