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
Sunday, September 7, 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
Sunday, July 6, 2008
The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
UAE Central Bank
does not have a magic solution to soaring inflation in the country and any sudden currency changes could trigger monetary turmoil in the short term, a government report said yesterday.
Revaluing or de-pegging the dirham from the ailing US dollar remains a very difficult decision and such a move will not alone tackle inflation, which surged above 11 per cent last year from 9.5 per cent in 2006 and less than five per cent in previous years, the Department of Planning and Economy (DPE) said in its weekly report on the dirham peg and inflation in the UAE.
While stemming inflation requires a set of measures, changes in the UAE monetary policies appear to be more complex than any other country in the six-nation Gulf Cooperation Council (GCC), the report said.
It said the Central Bank had already made clear that there are no plans at present to unpeg the dirham from the dollar on the grounds that about 70 per cent of the country's foreign trade is in the US currency, a large part of the UAE's foreign assets are in dollar, more than 95 per cent of its official reserves are in dollar and the peg has long been a factor of stability.
Magic solution
"Therefore, it should be said in conclusion that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
does not possess the magical stick to stop inflation. Rather, it is a problem that should be tackled by more than one institution at the federal and local levels. Even the private sector and individual consumers have a role to play," it said.
According to the report, pegging the dirham to the dollar has been justified by many internal and external factors and that any decision to end the link requires alternative monetary policies that would curb inflation. But it warned:"Any major change in the exchange rate will cause financial and monetary unrest in the short term... available options do not seem attractive for the time being and changes of the monetary policies in the country look more complex than any other country of the GCC."
The report said the role of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
, like any central bank in the world, is to preserve the value of the national currency and keep inflation in check. However, the roles of central national banks are being curtailed by the assertive influences of globalisation sweeping across the world, it added.
Currency pressure
It noted that the UAE dirham has come under increased pressure as a result of the flow of oil revenues, adding that inflation has been partly fuelled by the high cost of imports from non-dollar markets.
While this imported inflation can best be reduced either by scaling down imports or by diversifying sources, such a decision requires well-thought out and long-term strategies, DPE said.
Moreover, the report believes any inflation ensuing from devaluation of local currency can only be redressed through adoption of a basket of alternative world currencies, but at carefully studied and fixed rates.
"More importantly, it should be said that despite the enormous pressures put on the UAE economy by the dollar woes, any abrupt change in monetary policies will not suffice in itself to bring down inflation," it said. "On the contrary, such a haphazard move would affect the competitive edge of the UAE's non-oil exports. At the same time, such a decision will affect the overall productivity and would touch on salaries and remittances."
Devaluation
According to DPE, oil revenues will remain unaffected as they are valued in dollars but under this scenario, a decision to devalue the dirham by little less than its current value would seem a good option as this would boost the competitiveness of the country's exports and re-exports.
"De-valuation of the dirham would not entirely be woesome because many sectors of the local economy will stand to benefit from such a decision.
"Having said that, it remains to be mentioned that any decision to change the monetary policies or even devalue the dirham, no matter how little that devaluation might be, would require a comprehensive and technical studies that encompass the pros and cons... an attempt to decide the future of the UAE's national currency will remain a complex task. "
The report, citing official comments, said a close look at the UAE's monetary and financial experience during the past three years would reveal that the dollar pegging policy has had some positive impacts.
Not easy
"Thus, to drop the dollar would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate... this dilemma, however, does not mean that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
would sit by idly while inflation continues to rip local markets apart. While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of local economy."
It recalled that when the UAE decided to peg the dirham to the dollar more than two decades ago, there were a host of economic, and financial and monetary justifications.
The pegging proved to be a safe haven for a long time, ensuring credibility, stability and boosting investments and investor confidence, it said.
"Furthermore, a review of these justifications will show that the argument to retain the pegging at fixed rate was fuelled by some objectives conditions. Prime among these conditions was the pricing of oil and other essential commodities in dollar. Indeed, 60 per cent of dollar reserves are outside the US.
Additionally, UAE cash surplus and financial accounts are all in dollars.
"What is important in the complex issue of whether or not to de-peg is the position of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates, which maintains that de-pegging will have adverse consequences that the national economy would not afford.
"The Central Bank maintains that monetary stability, which has long been the UAE's strength, will be tampered with, at least for the time being, if de-pegging is adopted."
Basket of currencies
Despite the positive aspects of the link to the dollar, the pegging of any national currency against a foreign basket is a double-edged sword, DPE said, citing recent Central Bank remarks. It noted that the decline in the US dollar benefited UAE non-oil exports but made the country's imports from other markets costlier.
"Thus, the most dangerous impact of the dollar decline is imported inflation that comes with it as a result of huge fall in the dollar exchange rate against other currencies. Imported inflation terribly affects economic activities and the gross domestic product. This is not to mention the spiralling prices of consumer goods that are purchased with other major currencies," DPE said.
"In short, 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 as a result of continued dirham pegging with the weakening dollar." It stressed that such a scenario might require certain practical measures to mitigate the negative impact.
"One way of tacking such a situation would be to tie the dirham to a basket of major currencies, including the dollar. This step would boost the international market value of the dirham. Such a decision would, of course, have some short-term effects. Nevertheless, it would achieve a better economic stability. However, it should be acknowledged that such a decision would be one of the most difficult and complex economic decisions to take. "As mentioned earlier, the decision to de-peg the dollar is not an easy one. It requires a set of alterative monetary policies to check inflation and exchange rate. Similarly, it is hard to assert categorically that a single currency anchor is the best system for the UAE."
Dollar has served GCC well
In its comment on the GCC as a whole, the report considered that the dollar pegging had served member states well for decades.
But it also noted that the pegging was adopted when oil prices were low and the greenback still at the height of its strength.
"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies. GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia.
"With oil windfall entering its fifth year in a row, and with the dollar continuing to decline, it is clear that GCC's monetary polices will face a problem of policy alignment. This problem will definitely affect the single currency union." It warned that a single GCC currency could not be without a decision by the six members to align their monetary, financial, and banking policies.
"This is the single most important objective that needs to be attained now. This alignment may require certain standards in the long-term. These standards include, among others, keeping inflation rate below two per cent at the average, maintaining budget deficit at not more than three per cent of the GDP and keeping the general GCC credit at 60 per cent," it said.
"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies. ...as the dollar continues to fall, the GCC states need to face the repercussion by adopting a unified stand. It should be noted that these states pegged their currencies to the dollar for objectives reasons."
The Dirham peg: Reasons and motives
Objectives and special reasons
Dirham peg has been the bedrock of a stable monetary stability. The economy enjoyed long credibility as a result.
Investor confidence in the local currency maintained
UAE's financial assets in dollars
70 per cent of foreign trade is in dollars
More than 95 of reserves is in dollar
International oil trade is priced in dollars
General motives
The dollar remains the single most important hard currency in the world
It is the currency of international trade
It is the currency of the US, which accounts for about 27 per cent of the world trade
66 per cent of world reserves are in dollars
60 per cent of the greenback is outside the US
Side effects of dollar peg
In view of US economic woes, dirham exchange rate is loosing some of its credibility, a trend that might have negative impact on monetary stability (As in 1977-1976)
That the dirham exchange rate has remained fixed against the dollar will require the Central Bank to be continually ready to intervene in the exchange market. This will require huge foreign assets reserves. With the dollar continuing to decline, future exchanges rate trends will continue to be uncertain. This will cause problems to economic planning
Euro has begun to compete with the dollar at the global level. It is a force to reckon with when considering the exchange rate
De-pegging or no de-pegging?
Reasons for taking the decision
Enhancing the efficiency of monetary policy to regulate economic activities
Curbing inflation and mitigating its effects at the domestic level
Mitigating the effects of dollar depreciation on domestic conditions.
Reasons for deferring the decision
Pegging is justified by many internal and external factors
De-pegging requires alternative monetary policies, which would curb inflation and check exchange rates
Changes in UAE's foreign trade, which helped to contain inflation
Taking risk by adjusting exchange rate is one of the tools for monetary policy
Any major change in the exchange rate will cause financial and monetary unrest in the short term
Available options do not seem attractive (currencies basket/floating, etc)
Difficulty in managing exchange rates in the context of other option
De-pegging requires regional and international consensus (GCC single currency)
De-pegging requires delicate balances
Changes of monetary policies in the UAE look more complex than any other country in the GCC
Future of dollar: further depreciation predicted
The dollar lost 40 per cent of its value since 2000
US monetary policy welcomes more reduction
Dollar weakness reduces cost of US exports
Dollar weakness helps US trade balance
Weakening dollar reduces cost of US assets
There is a global tendency to get rid of the dollar in favour of other currencies
By Nadim Kawach
© Emirates Business 24/7 2008
UAE Central Bank
does not have a magic solution to soaring inflation in the country and any sudden currency changes could trigger monetary turmoil in the short term, a government report said yesterday.
Revaluing or de-pegging the dirham from the ailing US dollar remains a very difficult decision and such a move will not alone tackle inflation, which surged above 11 per cent last year from 9.5 per cent in 2006 and less than five per cent in previous years, the Department of Planning and Economy (DPE) said in its weekly report on the dirham peg and inflation in the UAE.
While stemming inflation requires a set of measures, changes in the UAE monetary policies appear to be more complex than any other country in the six-nation Gulf Cooperation Council (GCC), the report said.
It said the Central Bank had already made clear that there are no plans at present to unpeg the dirham from the dollar on the grounds that about 70 per cent of the country's foreign trade is in the US currency, a large part of the UAE's foreign assets are in dollar, more than 95 per cent of its official reserves are in dollar and the peg has long been a factor of stability.
Magic solution
"Therefore, it should be said in conclusion that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
does not possess the magical stick to stop inflation. Rather, it is a problem that should be tackled by more than one institution at the federal and local levels. Even the private sector and individual consumers have a role to play," it said.
According to the report, pegging the dirham to the dollar has been justified by many internal and external factors and that any decision to end the link requires alternative monetary policies that would curb inflation. But it warned:"Any major change in the exchange rate will cause financial and monetary unrest in the short term... available options do not seem attractive for the time being and changes of the monetary policies in the country look more complex than any other country of the GCC."
The report said the role of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
, like any central bank in the world, is to preserve the value of the national currency and keep inflation in check. However, the roles of central national banks are being curtailed by the assertive influences of globalisation sweeping across the world, it added.
Currency pressure
It noted that the UAE dirham has come under increased pressure as a result of the flow of oil revenues, adding that inflation has been partly fuelled by the high cost of imports from non-dollar markets.
While this imported inflation can best be reduced either by scaling down imports or by diversifying sources, such a decision requires well-thought out and long-term strategies, DPE said.
Moreover, the report believes any inflation ensuing from devaluation of local currency can only be redressed through adoption of a basket of alternative world currencies, but at carefully studied and fixed rates.
"More importantly, it should be said that despite the enormous pressures put on the UAE economy by the dollar woes, any abrupt change in monetary policies will not suffice in itself to bring down inflation," it said. "On the contrary, such a haphazard move would affect the competitive edge of the UAE's non-oil exports. At the same time, such a decision will affect the overall productivity and would touch on salaries and remittances."
Devaluation
According to DPE, oil revenues will remain unaffected as they are valued in dollars but under this scenario, a decision to devalue the dirham by little less than its current value would seem a good option as this would boost the competitiveness of the country's exports and re-exports.
"De-valuation of the dirham would not entirely be woesome because many sectors of the local economy will stand to benefit from such a decision.
"Having said that, it remains to be mentioned that any decision to change the monetary policies or even devalue the dirham, no matter how little that devaluation might be, would require a comprehensive and technical studies that encompass the pros and cons... an attempt to decide the future of the UAE's national currency will remain a complex task. "
The report, citing official comments, said a close look at the UAE's monetary and financial experience during the past three years would reveal that the dollar pegging policy has had some positive impacts.
Not easy
"Thus, to drop the dollar would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate... this dilemma, however, does not mean that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
would sit by idly while inflation continues to rip local markets apart. While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of local economy."
It recalled that when the UAE decided to peg the dirham to the dollar more than two decades ago, there were a host of economic, and financial and monetary justifications.
The pegging proved to be a safe haven for a long time, ensuring credibility, stability and boosting investments and investor confidence, it said.
"Furthermore, a review of these justifications will show that the argument to retain the pegging at fixed rate was fuelled by some objectives conditions. Prime among these conditions was the pricing of oil and other essential commodities in dollar. Indeed, 60 per cent of dollar reserves are outside the US.
Additionally, UAE cash surplus and financial accounts are all in dollars.
"What is important in the complex issue of whether or not to de-peg is the position of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates, which maintains that de-pegging will have adverse consequences that the national economy would not afford.
"The Central Bank maintains that monetary stability, which has long been the UAE's strength, will be tampered with, at least for the time being, if de-pegging is adopted."
Basket of currencies
Despite the positive aspects of the link to the dollar, the pegging of any national currency against a foreign basket is a double-edged sword, DPE said, citing recent Central Bank remarks. It noted that the decline in the US dollar benefited UAE non-oil exports but made the country's imports from other markets costlier.
"Thus, the most dangerous impact of the dollar decline is imported inflation that comes with it as a result of huge fall in the dollar exchange rate against other currencies. Imported inflation terribly affects economic activities and the gross domestic product. This is not to mention the spiralling prices of consumer goods that are purchased with other major currencies," DPE said.
"In short, 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 as a result of continued dirham pegging with the weakening dollar." It stressed that such a scenario might require certain practical measures to mitigate the negative impact.
"One way of tacking such a situation would be to tie the dirham to a basket of major currencies, including the dollar. This step would boost the international market value of the dirham. Such a decision would, of course, have some short-term effects. Nevertheless, it would achieve a better economic stability. However, it should be acknowledged that such a decision would be one of the most difficult and complex economic decisions to take. "As mentioned earlier, the decision to de-peg the dollar is not an easy one. It requires a set of alterative monetary policies to check inflation and exchange rate. Similarly, it is hard to assert categorically that a single currency anchor is the best system for the UAE."
Dollar has served GCC well
In its comment on the GCC as a whole, the report considered that the dollar pegging had served member states well for decades.
But it also noted that the pegging was adopted when oil prices were low and the greenback still at the height of its strength.
"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies. GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia.
"With oil windfall entering its fifth year in a row, and with the dollar continuing to decline, it is clear that GCC's monetary polices will face a problem of policy alignment. This problem will definitely affect the single currency union." It warned that a single GCC currency could not be without a decision by the six members to align their monetary, financial, and banking policies.
"This is the single most important objective that needs to be attained now. This alignment may require certain standards in the long-term. These standards include, among others, keeping inflation rate below two per cent at the average, maintaining budget deficit at not more than three per cent of the GDP and keeping the general GCC credit at 60 per cent," it said.
"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies. ...as the dollar continues to fall, the GCC states need to face the repercussion by adopting a unified stand. It should be noted that these states pegged their currencies to the dollar for objectives reasons."
The Dirham peg: Reasons and motives
Objectives and special reasons
Dirham peg has been the bedrock of a stable monetary stability. The economy enjoyed long credibility as a result.
Investor confidence in the local currency maintained
UAE's financial assets in dollars
70 per cent of foreign trade is in dollars
More than 95 of reserves is in dollar
International oil trade is priced in dollars
General motives
The dollar remains the single most important hard currency in the world
It is the currency of international trade
It is the currency of the US, which accounts for about 27 per cent of the world trade
66 per cent of world reserves are in dollars
60 per cent of the greenback is outside the US
Side effects of dollar peg
In view of US economic woes, dirham exchange rate is loosing some of its credibility, a trend that might have negative impact on monetary stability (As in 1977-1976)
That the dirham exchange rate has remained fixed against the dollar will require the Central Bank to be continually ready to intervene in the exchange market. This will require huge foreign assets reserves. With the dollar continuing to decline, future exchanges rate trends will continue to be uncertain. This will cause problems to economic planning
Euro has begun to compete with the dollar at the global level. It is a force to reckon with when considering the exchange rate
De-pegging or no de-pegging?
Reasons for taking the decision
Enhancing the efficiency of monetary policy to regulate economic activities
Curbing inflation and mitigating its effects at the domestic level
Mitigating the effects of dollar depreciation on domestic conditions.
Reasons for deferring the decision
Pegging is justified by many internal and external factors
De-pegging requires alternative monetary policies, which would curb inflation and check exchange rates
Changes in UAE's foreign trade, which helped to contain inflation
Taking risk by adjusting exchange rate is one of the tools for monetary policy
Any major change in the exchange rate will cause financial and monetary unrest in the short term
Available options do not seem attractive (currencies basket/floating, etc)
Difficulty in managing exchange rates in the context of other option
De-pegging requires regional and international consensus (GCC single currency)
De-pegging requires delicate balances
Changes of monetary policies in the UAE look more complex than any other country in the GCC
Future of dollar: further depreciation predicted
The dollar lost 40 per cent of its value since 2000
US monetary policy welcomes more reduction
Dollar weakness reduces cost of US exports
Dollar weakness helps US trade balance
Weakening dollar reduces cost of US assets
There is a global tendency to get rid of the dollar in favour of other currencies
By Nadim Kawach
© Emirates Business 24/7 2008
Tuesday, June 10, 2008
Rising inflation main hurdle to currency union
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
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
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.
Subscribe to:
Posts (Atom)
