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Greenspan says GCC currency float would cut, not eradicate inflation
Author: BI-ME staff
Source: BI-ME and Reuters
Published: 26 February 2008
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SAUDI ARABIA. Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.
The pegs restrict the Gulf's ability to fight inflation by forcing them to shadow US monetary policy at a time when the Fed is cutting rates to ward off recession and Gulf economies are surging on a near five-fold jump in oil prices since 2002.
Rifts are growing across the world's top oil-exporting region on how to tackle inflation which hit a 27-year peak of 7.0% in Saudi Arabia in January and a 19-year peak of 9.3% in the United Arab Emirates in 2006, the most recent figure.
"In the short term free floating...will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan told an investment conference in Jeddah, Saudi Arabia's second-largest city.
Saudi and UAE central bank chiefs spoke in favor on Monday of retaining dollar pegs, while Qatar's prime minister advocated regional currency reform to avert possible unilateral revaluations designed to curb inflation.
"The economies of the Gulf and the United States are completely out of sync and that is exposing the shortcomings of the dollar peg," said Simon Williams, Middle East economist at HSBC Holdings in Dubai.
"Against a backdrop of inflation, high oil prices and low interest rates the debate over currency reform has to take on greater urgency," he said.
Floating the Saudi Riyal would not be appropriate for an economy that relies on oil exports, Saudi Central Bank Governor Hamad Saud al-Sayyari told Arabiya Television in response to Greenspan's suggestion.
"Floating is beneficial when the economy and exports are diverse....as for the Kingdom it remains reliant on the export of a single commodity," Sayyari said.
Dollar pegs were helping Gulf states attract foreign investments, UAE Central Bank Governor Sultan Nasser Al Suweidi added during a speech in the UAE capital, Abu Dhabi.
"They did very well for our economies because it has led to more capital flows," Suweidi said on Monday.
Still, "Gulf governments should consider the implication of such a move in the long term," Greenspan said of the idea of floating their currencies.
Qatar, contending with the region's highest inflation, is studying revaluing its Riyal among options to combat inflation that hit 13.7% in the fourth quarter, Sheikh Hamad bin Jassim bin Jabr Al Thani told Reuters late on Saturday.
The exchange rate contributes to about 40% of inflation in Qatar, where the Riyal is 30% undervalued, Hamad said.
"We prefer always to act with all the GCC countries," Sheikh Hamad, whose country currently chairs the six nation-Gulf Cooperation Council, said.
"It's now time for the Gulf to have its own currency," he said, adding the Gulf currency should be "like the Japanese yen or other currencies."
Both Qatar and the UAE are likely to sever their links to the US Dollar this year and track currency baskets as Kuwait did last May, Deutsche Bank said last month.
Divergence in Gulf monetary policy widened last May when Kuwait broke ranks with its neighbors by severing its link to the dollar in favour of a basket of currencies, saying a weak dollar was driving imported inflation.
Oman has said it will not join a single currency at all, and Suweidi said in November he was under mounting social and economic pressure to drop the peg.
He has since backtracked, mirroring the position of Saudi Arabia, which has in the last month introduced public sector wage increases, welfare payments and subsidies to offset the impact of inflation.
Inflation in the UAE last year likely rose to 10.9%, National Bank of Abu Dhabi said on Sunday.
