The Government of Abu Dhabi has called for a "rethink" of monetary policy across the GCC, including the US dollar peg, amid rising inflation, record oil prices and fading prospects for a single currency by 2010. A report released yesterday by Abu Dhabi's Department of Planning and Economy (DPE), an arm of the emirate that is not part of the Federal Government, urged other Gulf countries to take a "unified stand" and consider de-pegging from the US dollar and adjusting exchange rates to increase the value of their currencies.
"Pegging was adopted when oil prices were low and the greenback still at the height of its strength," the report said. "Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies." All GCC countries, except for Kuwait, peg their currencies to the dollar. Kuwait abandoned its dollar peg last year in favour of pegging to a basket of world currencies thought to be heavily weighted to the dollar. Most other Gulf states - including the UAE - have steadfastly asserted that they would not abandon dollar pegs ahead of the introduction of a single currency, originally scheduled to be introduced in 2010. The unified currency plan has been delayed as countries work out the location and governance structure of a regional central bank.
The dollar pegs, introduced in the late 1970s, have re-emerged in recent months as a hot issue, as GCC countries grapple with inflation and the dollar continues on a long-term decline. The dollar has gone down by 33 per cent against the euro since 2003, severely devaluing Gulf currencies even as oil prices reach record levels. Inflation, meanwhile, has surged to the double digits in all GCC countries, except Bahrain.
The dollar pegs have fanned inflation by forcing Gulf countries to adopt US monetary policy, which has favoured drastically reduced interest rates, forcing GCC countries to greatly increase money supply in their overheated economies. The decline of the dollar's value, meanwhile, has also reduced the buying power of their oil revenues. Abu Dhabi's DPE report contended that changes in monetary policy were an urgent necessity amid the global boom in commodity prices.
"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies," the report said. "That the GCC states continue to have fixed dollar exchange rates even as the dollar continues to decline causes a greater harm to the GCC countries, which are paying millions of dollars in commodity price differences."
Economists say, however, that re-pegging to a basket of currencies is no panacea, either. Despite de-pegging last year, Kuwait, where inflation rose to a record 10.1 per cent in February, has so far shown few signs of resilience to the recent economic turmoil. But inflation is not just a result of low interest rates, said Fabio Scacciavillani, an economist based in Dubai. "It's also world commodity prices, and in the UAE, the gigantic upgrade in all aspects of the economy that is putting a strain on the use of resources, and that is coming at a time when the dollar is weak. These are inflationary pressures outside of the control of the national authorities."
De-pegging was a "complex issue" that the UAE Central Bank believed could have "adverse consequences that the national economy could not afford", the DPE report said. "The Central Bank further 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." Whatever measures GCC governments pursue, Mr Scacciavillani said unity would be crucial.
The worst-case outcome, he said, would be if each of the GCC countries independently decided to re-peg to different baskets of currencies. "If everybody does it alone, without co-ordination, then you will have a disruptive effect," Mr Scacciavillani said. "If you start this game of de-pegging and linking to a basket of currencies, you introduce six currencies floating against each other in ways they cannot predict."
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