A diplomatic way to fight gulf’s inflation

A diplomatic way to fight gulf’s inflation
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First Published: Mon, Mar 31 2008. 03 11 AM IST
Soaring inflation is the biggest political issue in the Gulf. Yet, the central bankers in Saudi Arabia, Bahrain, Oman, Qatar and the United Arab Emirates are impeded by their currencies’ pegs to the dollar.
The numbers are striking. In the United Arab Emirates, unofficial figures show inflation as high as at 14%, almost three times the government’s target — and analysts predict further rises.
The discontent over rising prices is tremendous.
The fear of irritating autocratic governments is failing to silence the upset. Low-paid migrant workers, who particularly feel the squeeze, have even risked losing their precious work permits by protesting. Local newspapers have been courageous enough to splash front pages with coverage of the resulting street riots.
The dollar peg forces Gulf countries to mirror US monetary policies — slashing interest rates at a time when sharp increases are needed.
Yet, without a change in currency policy, inflation will continue to rise and the politics will undoubtedly become more tumultuous.
Ideally, the Gulf states would de-peg their currencies from the falling dollar.
Yet, Saudi Arabia, the heavyweight of the nations, has long been reluctant to make such a move. When Kuwait moved the dinar to track a basket of currencies last May, the US was unimpressed — and that was before the dollar started its rapid descent.
Gulf government officials privately argue the US would view such a move now, when the global economy is already fragile, as equivalent to a declaration of economic war, which would have security consequences.
Under the circumstances, a currency revaluation against the dollar would be more diplomatic. Economists estimate that a one-time revaluation of up to 20% would be needed to bring inflation under control.
The US would not be happy if the Gulf states take such a step, but it could take some comfort that the dollar retained its status as the reference currency. The Gulf states might rue the paper losses on their sizable portfolios of dollar-denominated assets.
Still, revaluation looks like the most tenable response to a budding crisis.
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First Published: Mon, Mar 31 2008. 03 11 AM IST
More Topics: Inflation | Gulf | Dollar | Money Matters | Currency |