DUBAI: Arab states in the Gulf should aim to narrow the gap in their inflation rates before a 2010 target for monetary union, a report said yesterday, proposing a depegging from the US dollar.
“Inflation should be the priority item on the policy agenda,” said the Dubai International Financial Center (DIFC) in its progress report toward monetary union in the Gulf Cooperation Council (GCC). The top priority should be “not to alter the commitment to 2010,” said Nasser Saidi, chief economist at DIFC Authority, presenting the report.
The document looks at six convergence criteria formulated by a GCC technical committee, “largely inspired by the Maastricht criteria” which regulated the adoption of a common currency by European Union members. These include convergence on inflation rates, interest rates, foreign exchange reserves, fiscal deficits, public debt, as well as maintaining a fixed peg to the US dollar.
A windfall of record-high oil revenues has provided GCC countries with large fiscal surpluses, reduced their public debt to modest percentages of economic production, and boosted their coffers of foreign exchange. But inflation — higher than usual in all six member states — has been running exceptionally high in Qatar and the United Arab Emirates, at 13.76 and 11.1 percent in 2007, respectively. In Bahrain, Kuwait, Oman and Saudi Arabia, consumer prices did not exceed single digits last year, although they have hit double digits in Kuwait and Saudi Arabia in monthly data for 2008. “Inflation rates should not exceed the GCC weighted average inflation rates plus two percent in each member country,” the report said, putting the GCC weighted average inflation at 6.91 percent in 2007.
GCC interest rates, meanwhile, converge as a result of the currencies’ peg to the dollar. Only Kuwait dropped out of the dollar link last year, choosing a basket of currencies. But the peg to the greenback has deprived GCC central banks of the use of interest rates to control inflation, being forced to follow the US Federal Reserve in reducing rates even while their economies are booming. “Pegging to the US dollar is not necessarily the best option to control inflation,” Saidi said.
While the dollar peg “provided for monetary and price stability in the past ... (several changes) and the weakness of US dollar ... provide rationale for a change in policy toward inflation targeting,” the report said.
