Arab Monetary Fund chief urges ending dollar pegs in Gulf

P.K. Abdul Ghafour
Arab News, Jeddah, Saudi Arabia
Saturday, December 1, 2007

http://www.arabnews.com/?page=6&section=0&article=104181&d=1&m=12&y=2007

JEDDAH, Saudi Arabia -- The pressure on the Gulf Cooperation Council countries is growing to drop their pegs to the tumbling US dollar with the Dec. 3-4 GCC Summit expected to take a decision on the matter in order to stop soaring inflation in the region.

The latest call for depegging from the dollar came from Jassem Al-Mannai, chairman of the Arab Monetary Fund, who urged the GCC states to lift their pegs to the dollar, saying revaluations would not solve the problem of rising inflation. Speaking at an economic seminar in Abu Dhabi, he advised the GCC, which groups Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, and the UAE, to switch to a managed float or peg their currencies to a basket, including the euro, sterling, and yen.

Mannai said there was no harm in linking GCC currencies with a basket of currencies, as many countries have successfully adopted this monetary measure in the past.

"There is no currency exchange system suitable for all ages and places. ... In the past GCC economies were negligible and now they have to adopt polices that suit their economic progress," he said.

Mannai called upon the GCC states to adopt an exchange rate based on a basket weighted on currencies of their main trade partners, including the euro, dollar, sterling and yen. The European Union is now the main trading partner of the GCC accounting for 35 percent of their foreign trade, followed by Asian countries 30 percent and the US 10 percent.

The UAE, the second largest economy in the GCC after Saudi Arabia, called this month for all Gulf oil producers to switch from fixed exchange rates to currency baskets. According to some sources, Saudi Arabia could consider revaluing its currency for the first time in 21 years without dropping its peg to the dollar.

But Mannai said revaluations alone would not solve the problem. "It will not be in the interest of Gulf countries and it will not help solve the problems that they are facing, because nobody can give us guarantee for the dollar not to fall further," the economist told the seminar.

"It will not give these countries the freedom to fight inflation, which is posing a growing threat to their economies," he added.

Inflation is at a 10-year high in Saudi Arabia, a 16-year peak in Oman, a 19-year high in the UAE, and near a record in Qatar. Rising prices of essential commodities have triggered calls for a national wage hike in Saudi Arabia, demands for price controls in Qatar and Oman, and demand for higher pay by migrant workers in the UAE.

UAE central bank Gov. Sultan Nasser Suweidi cited inflation in his call for reform, saying dollar pegs forced Gulf central banks to track US monetary policy to maintain the relative value of their currencies.

-- Additional input from news agencies.

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