Gulf oil producers should intensify efforts to reverse alarming inflation levels but they must not give in to speculators who seek a dramatic revaluation in regional currencies, experts said.
A gradual revaluation of Gulf currencies against the dollar could be one of the solutions to tackle inflation although the link between these currencies has left regional governments with little room to manoeuvre.
“The link between the Gulf Co-operation Council currencies and the dollar, which is expected to be maintained in the near future, has restricted the efficiency of the monetary policy of regional governments,” said Henry Azzam, Chief Executive Officer of Deutsche Bank in Dubai.
“Currently, the GCC governments are unable to raise interest rates to curb domestic credits and ease inflationary pressures since the interest rates on the dollar are steadily declining.
“The current price rise is a temporary phenomenon that requires a corrective monetary policy by the GCC governments. These governments should avoid unlinking their currencies to the dollar now because giving in to speculators will only encourage more speculation and this will only complicate the problem,” he said.
The International Monetary Fund has urged the GCC countries to keep their currencies pegged to the dollar on the grounds this has contributed to currency exchange stability in member states, which have recorded high economic growth rates over the past five years because of strong oil prices. Except for Kuwait, which pegs its dinar to a basket of currencies, the currencies of the UAE, Saudi Arabia, Bahrain, Qatar and Oman are tied to the dollar.
There has been mounting speculation that these GCC members intend to appreciate their exchange rates against the dollar to ease soaring import prices. Experts believe inflation, which has surged to double digits in some GCC states, is one of the biggest challenges being faced by these countries because of their limited options in the presence of the dollar peg.
“Monetary authorities in the Gulf have never been challenged as much as they are now. The monetary policy is surrounded by various factors, what we call the vicious square, all of which exert diverse influences,” the Kuwait-based Markaz Financial Centre said in a study.
“Liquidity has experienced very sharp growth during the past few years, thanks to high oil prices. The peg has led to imported inflation. This is forcing the authorities to follow monetary policy actions of the US, which are completely divorced from the local economy. While the US is in an easing mode in order to ward off recession, the GCC economies are experiencing high growth and inflation, which necessitates tight monetary policy. The challenge is to allow for a gradual appreciation of the currency without giving in to speculators.”
A study by the Washington-based Institute of International Finance agreed that the currency-dollar peg has crippled the region’s ability to deal with inflation by stemming domestic liquidity.
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