Should Oman drop the rial's peg to the dollar?

Section:

By Saleh Al Shaibany
The Times of Oman, Muscat
Sunday, October 27, 2013

http://www.timesofoman.com/News/Article-24535.aspx

The rial's peg to the dollar was a sensible decision taken four decades ago as the United States was driving the global economy, but its floundering finances and internal political bickering are forcing the once-mighty nation to lose its grip on the treasury.

Oman would not be the first nation in the Gulf Cooperation Council (GCC) if it were to drop the peg of its currency to the dollar. Kuwait did it in 2007 and so far remains the only country in the GCC to do so. Oman and its regional political allies pegged their currencies to the dollar to minimize foreign exchange volatility, encourage investments and international trade.

True, the peg to the greenback made sense then because all regional countries exported oil and there was a great need to receive payments in the once most stable currency in the world.

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Many critics say that sticking to the dollar peg is as good as devaluing the rial since the US currency is losing its strength consistently against major currencies of the world. Oman and its neighbors are big buyers of the dollar-dominated assets and the need to diversify Oman's portfolio away from the US currency is very pressing.

But intense foreign trade competition from Asian countries, especially China, has changed everything for the United States. Because of that, the dollar peg is forcing Oman and the other four GCC states to import US monetary policies, something that has been contributing to chronic inflation for many years now as well as soaring property prices.

The US government's shutdown this month should be another wake-up call for Oman to consider ending its reliance on the dollar. How could Oman continue to keep its faith in the dollar when the US government has no control over its own currency?

Like Qatar, Bahrain, Saudi Arabia, and the United Arab Emirates, Oman is paranoid and reluctant about changing a system that once served its economy well. Many financial experts are now convinced that the dollar is no longer the force it once was and the probability that it may regain its former glory is very unlikely. Inflation in Oman would not get any better as the dollar keeps losing both its elasticity and global respect as the world's key currency.

Another factor that makes sense for dropping the dollar is that Oman has already diverted away from the United States and is increasing turning toward the Asian countries as its major trading partners. Oman is exporting the bulk of its oil to the Far East, and China, the world's second richest country, is the biggest crude importer.

The Sultanate has already asked to be ruled out from the planned single currency the GCC nations have been considering. The idea has not yet been implemented. The idea was to stabilize trade with international partners without having to worry about the volatility of the US currency. But Oman can follow the example of both Kuwait and Singapore, which are now pegging their currencies to an international basket.

If Muscat follows suit, the rial would not suffer the fluctuations in value it now suffers under the greenback regime. It would make sense since its oil exports are well diversified among at least six countries which could be paying in their own currencies. But oil exporting to the Asian giants is not the only positive part. Oman, in the last 10 years, has been increasingly awarding major contracts to Japanese, Koreans, and Chinese companies in the petrochemical industries, making these countries its key trading partners.

But any decision to de-peg the rial from the dollar depends heavily on Oman's foreign reserves. The Sultanate's state reserves are mostly tied in dollars, like the rest of the GCC countries. It would be very difficult for the country to diversify its portfolio away from the US currencies without hurting the economy.

But the positive aspect is that the Sultanate can be least impacted in negative terms when it comes to diversifying its foreign reserves from the dollar since its major international partners are now Asian countries.

The constructive side of trade with the Asian economic giants like China, Japan, Korea, and India is that these countries will be responsible for the inevitable fall of the United States as the biggest economy in the world.

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