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Economics GCCs Dollar Peg - Essay Example

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Till 20th May 2007 the six nations of Gulf Cooperation Council (GCC) had unanimity on the six nation's monetary policy; that they would peg their currencies with the US Dollar. This in effect implied that Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE had a common and more or less fixed rate for exchanging with dollar…
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Economics GCCs Dollar Peg
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Economics - GCC's Dollar Peg Till 20th May 2007 the six nations of Gulf Cooperation Council (GCC) had unanimity on the six nation's monetary policy; that they would peg their currencies with the US Dollar. This in effect implied that Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE had a common and more or less fixed rate for exchanging with dollar. This proposition had brought in lot of foreign capital investment in the country while providing a support base for the dollar. But during the last couple of years, when dollar started coming under pressure and it became weak as compared to other major currencies around the world like the Euro, the gulf nations started feeling the pinch. This trend is considered a major contributor to the rising levels of inflation in the gulf region. The current levels of inflation are stated to be the highest in the last 30 years (Seville, 2008). At the same time the GDP growth started declining during the same period. Zawya (2008) wrote about some of the research studies carried out in 2008 which predicted that the gulf nations would be able to register a lower nominal GDP rise of about 16.4 percent till 2010, provided the crude prices average around $120 per barrel in 2008, $131 in 2009 and $133 in 2010. But, with crude oil prices tumbling down to $50 per barrel in the international market, the situation is starkly different today. Such developments resulted into a serious debate on how the gulf nations should take appropriate measures to handle the situation.
In the run up to the discussion towards taking mutually agreed steps for handling the monetary crisis in the gulf region, the GCC started discussing measures like adopting a common currency within the region. 2010 was being talked about as the deadline for coming out for a currency union (Ghafour, 2005). But these plans received a jolt when Kuwait unilaterally decided that it needs to move away from dollar peg. This step was taken by Kuwait central bank in order to contain the rising inflation. At a time when crude oil prices are falling, economies which are mainly dependent on oil like the GCC nations, have a reason to get worried. The situation gets compounded when the dollar peg mechanism is resulting in further losses during the time when dollar's position is further weakening. These nations are in a way forced to buy the undesired dollar reserves. Therefore it is quite natural that demands are coming up from a number of stakeholders that GCC should de-peg itself from dollar. But the moot question is will such a move prove to be a panacea for the prevailing bad weather around the economic conditions. The gulf nation's viewpoints differ in answering this question.
While on the one hand there are calls to switch currency peg from dollar to a basket that includes oil, there are views which state that the smaller economies in the gulf region might not be able to sustain wider fluctuations in the international market. In addition, fears are also being expressed that floating may not prove to be beneficial for an economy which relies majorly on oil. For example, Saudi Central Bank Governor Hamad Saud al-Sayyari said, "Floating is beneficial when the economy and exports are diverse ... as for the kingdom it remains reliant on the export of a single commodity" (Karam and Carvalho, 2008). Therefore, it is quite apparent that GCC nations are not yet ready for immediate de-peg from dollar. It would be in the interest of GCC economies that they can come up with industries in big way, so that part of the burden is taken off from the hydrocarbon dependence, and these nations will then be able to sustain oil shocks as well. Under those circumstances it would be wise for them to de-peg from the dollar.
References:
1. Ghafour, P.K. Abdul (2005). 'GCC Currency in 2010: Al-Assaf'. Arab News. Available online at http://www.arabnews.com/page=6§ion=0&article=61225&d=29&m=3&y=2005 (April 25, 2009)
2. Karam, Souhail and Carvalho, Stanley (2008). 'Dropping Gulf dollar peg would ease inflation: Greenspan'. Available online at http://www.reuters.com/article/ousivMolt/idUSL2515874520080225 (April 25, 2009)
3. Seville, Charles (2008). 'It's a free run for inflation in GCC'. Gulf News. Available online at http://www.gulfnews.com/BUSINESS/money/10226146.html (April 25, 2009)
4. Zawaya (2008). GCC states' nominal GDP to grow 16.4%. available online at http://www.zawya.com/story.cfm/sidZAWYA20080619032113 (April 25, 2009) Read More
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