Gulf Arabs seem less sure of sticking with dollar peg

UAE Won't Rule Out
Dropping Dollar Peg

By Dylan Bowman
and Reuters
ArabianBusiness.com, Dubai
Sunday, June 24, 2007

http://www.arabianbusiness.com/index.php?option=com_content&view=article...

The United Arab Emirates has not ruled out dropping its currency's peg to the dollar but would only do so with the support of other Gulf Cooperation Council nations, the country's central bank governor said today.

"For the UAE I can say comfortably and surely that we will not move alone and we will move with other GCC countries," Sultan Nasser Al-Suweidi told reporters, speaking on the sidelines of the annual meeting of the Bank for International Settlements in Switzerland.

"We will all be together in it. No, we are not ruling out, but we will have to move together," he added.

Al-Suweidi's comments are the clearest indication yet that the UAE would consider dropping the dirham's dollar peg.

Previously Al-Suweidi has said the UAE is "committed" to keeping its currency pegged to the dollar at a fixed rate.

Jordan, however, categorically ruled out dropping its currency's peg to the dollar on Saturday, with central bank governor Umayya Toukan stating it was "not for discussion."

If fact, Toukan said Jordan may actually buy more of the US currency to help take pressure off the dinar.

"There may come a time when we will intervene in the market to take some upward pressure off our currency by buying dollars with dinars," he added.

Toukan has previously blamed the weak dollar, along with higher fuel costs, for rising inflation in the country.

However, he said inflation would return to normal levels of between 3-4% in the "medium term," from around 5% this year, and foresaw no currency problems on the horizon.

Central bank governors across the Middle East, where many countries have their currencies pegged to the dollar, have been under pressure to revalue this position following Kuwait's and then Syria's decision to drop their currencies' dollar peg in favour of a basket of currencies.

The weakening of the dollar against other international currencies over the last year has seen the cost of imports denominated in currencies such as the euro rise significantly.

This has had a negative impact on inflation and has limited countries' ability to cool their economies because their commitment to the dollar peg restricts their ability to raise interest rates out of step with the US Federal Reserve.

Suweidi said that countries in the GCC -- where price stability has suffered as a result of the weak dollar -- did not face a permanent inflation problem, but did have bottlenecks in real estate that were likely to be temporary.

He also said that the Gulf monetary union, which has been thrown into doubt by Kuwait's decision to drop the dollar peg, would come in stages and the unified currency will come after the GCC sees the common market was working to the group's satisfaction.

* * *

Gulf Arabs Facing Inflation Problems

By Dylan Bowman
and Reuters
ArabianBusiness.com, Dubai
Sunday, June 24, 2007

http://www.arabianbusiness.com/index.php?option=com_content&view=article...

Gulf countries planning a currency union are suffering from higher inflation and need more flexible monetary policy which is not tied to U.S. interest rates, the head of the Arab Monetary Fund said on Sunday.

Inflation is a region-wide problem as capital is flying into the Gulf economy which enjoys strong growth thanks to high oil prices.

"Everybody should admit that we are suffering from the inflation phenomenon and that is very bad for the economy because it makes the cost of living, production, high, and accordingly the region could lose quite a deal of competitiveness," director general of the AMF, Jassem Al-Mannai, told Reuters in an interview.

"Monetary policy should be more effective, meaning that monetary policy should have more manoeuvrability where you are not bound by the interest rates of an anchor currency."

Al-Mannai also said that the Gulf Cooperation Council's 2010 deadline for a single currency might be delayed by a few years after Oman said it will not meet the timeframe.

In the UAE, inflation rose by a third last year, driven up buy the rising cost of accommodation, according to official statistics released last week.

The country's inflation rate stood at 9.3% for 2006, up from 6.2% the year before, but down on previous official estimates of 10%.

If inflation levels do not drop there is the danger that soaring cost of living will deter workers from living in the Gulf region, which could damage the local economies.

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