The eagerly awaited Fed rate cut will severly intensify the debate about the Gulf Arab pegs to the dollar. Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates have thus far shrugged off demands to adjust their exchange rate regime claiming, it would harm their economy’s.
“[De-pegging is] an extremely difficult matter, taking into consideration that a majority of their deals are in dollars… [GCC states] don’t have too many options” regarding the dollar peg.”
- Amer Tameemi, former chairman of the Kuwait Economic Society
The policy of pegging local currencies to the dollar enhanced monetary stability and benefited domestic economies when the US and Gulf economies were heading in the same direction. Today, Gulf economies are growing at an unprecedented rate by the price of oil and growth in the economy’s, while the US is facing a weak dollar, a cash crunch and high energy prices. As the US lowers rates, Gulf countries are forced to lower rates to ward off speculation in their currency, although rate rises were required in the Gulf.
“Maintaining the dollar peg means higher inflation rates and eventually GCC governments have to compensate that with salary raises… They have either to peg to a basket of currencies or gradually revalue their currencies, otherwise the cost will be too high,”"
- Ali al-Bader, former chief of the Kuwait Investment Authority
Alan Greenspan, Former Federal Reserve chairman, advised Gulf Arab states to float their currencies as a means to curb inflation during a visit to the region last month. Also, some economists see inflation as mostly homegrown and the result of high oil prices.
“If we want high oil prices we should not worry about the (high) price of tomatoes”
- Abdulmajeed Al-Shatti, CEO Commercial Bank of Kuwait
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