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    Gulf inflation and the dollar peg

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    sang_garuda
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    Gulf inflation and the dollar peg

    Post by sang_garuda on Fri Jul 25, 2008 9:19 am

    One cause of Gulf inflation is the peg of most Gulf currencies to the weakening dollar.



    If one cause of inflation is the sharp increase of wealth, another is the peg of Gulf currencies to the dollar.


    By Patrick Seale

    The oil-rich Arab states of the Gulf are suffering from a painful and insidious disease which, if unchecked, will eat away at their prosperity and stability. The disease is called inflation.

    The figures tell the story. Inflation in Saudi Arabia - by far the region’s biggest economy - is running at about 10.4% a year; in the United Arab Emirates it is 11%; in Kuwait 10%; in Oman 13.2%; in Qatar 14%.

    Double-digit inflation such as this is hard to check. Governments are forced to compensate by increasing subsidies on basic items, by introducing price controls and, above all, by increasing wages of public employees. Private employers have usually to follow suit - and inflation edges upwards.

    In inflationary situations, it is always those who live by their labour - who have no access to oil revenues and are not cushioned by wealth - who suffer first and who start to agitate, threatening political stability.

    The root cause of Gulf inflation is, of course, the stupendous avalanche of wealth which has poured over the region as a result of the soaring price of oil. Not so long ago, oil was selling at $20; now it is edging towards $150. The oil price has surged seven-fold since 2002. It has doubled in price in the last year alone.

    If one cause of inflation is the sharp increase of wealth - too many riyals and too many dirhams chasing too few goods - another cause is the peg of most Gulf currencies to the weakening dollar. The Saudi riyal, for example, has been pegged at a rate of 3.75 riyals to the U.S. dollar since 1986.

    As the dollar falls sharply against the euro and the yen, such dollar pegs contribute to inflation by making Gulf imports from Europe and Japan more expensive. Oman’s import bill, for example, surged in 2007 by almost 47% to $15.96bn.

    Economists and central bankers up and down the Gulf are now debating whether it would be wise to end the dollar peg and revalue their currencies.

    A committee of Saudi Arabia’s Shura Council has recommended to King Abdallah that the riyal should be revalued by up to 30%. But Hamad Saud al-Sayyari, head of the Saudi central bank, has said that adjusting exchange rates will not solve the problem of high inflation. Meanwhile, Muhammad al-Jahdhamy, executive vice-president of Oman’s central bank, has said that inflation will stabilise, a remark that implied that a revaluation was not necessary.

    Some experts believe that Gulf currencies should abandon the dollar peg in favour of a peg to a basket of currencies. Others argue that only a floating exchange rate would give the Gulf countries the monetary policy independence they need in a situation of global financial turbulence.

    Ala’a A-Youssuf, chief economist of the London-based Gulf Finance House, argued in a letter to the Financial Times (July 16) that exchange rate appreciation alone would not be effective. He called for a “comprehensive medium-term development framework that explicitly recognizes the need to contain inflation while fostering growth and development.” Such a programme, he might have added, would be easier to implement if the Gulf countries were to adopt a single currency, on the model of the European Union.

    The Financial Times (8 July) has called for Gulf currencies to include the price of oil in the basket to which they could peg their currencies. Their currencies would appreciate when oil was strong and depreciate when it was weak.

    The truth is that the world economy is in great trouble. While oil and other commodities continue to climb, stock markets tumble and several leading commercial banks are struggling to stay afloat. In the United States, consumer confidence is at a 28-year low.

    The biggest threat overhanging the world economy is the uncertain future of Fannie Mae and Freddie Mac, the pillars of the U.S. mortgage market. Together, they own or guarantee almost half of the $12,000bn U.S. mortgage market. But, as house prices fall and foreclosures rise across the United States, they have incurred huge losses. If they collapsed, the consequences could be disastrous for the global financial system - and for the dollar.

    To survive, Fannie and Freddie need to borrow and raise fresh capital. But it will not be easy to attract private lenders so long as it is not clear what the U.S. government will do to save these venerable institutions.

    One solution being floated is not to nationalize them - which would be contrary to America’s liberal market ideology - but to place them in “conservatorship” - a sort of disguised nationalization, which would allow the U.S. government to pretend that the liabilities of Fannie and Freddie were not its own.

    With the world teetering on the edge of a depression, these are not easy times for financial authorities, whether in the United States, in the Gulf, or indeed anywhere else.
    -- Patrick Seale is a leading British writer on the Middle East, and the author of The Struggle for Syria; also, Asad of Syria: The Struggle for the Middle East; and Abu Nidal: A Gun for Hire.

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    Re: Gulf inflation and the dollar peg

    Post by car0_linex on Sun Jul 27, 2008 5:30 pm

    thank 4 sharing affraid

    car0_linex
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    Re: Gulf inflation and the dollar peg

    Post by car0_linex on Sun Jul 27, 2008 5:33 pm

    inflation n indonesia in juny increase became 10,6%




    soooo dangerous......

    Prodip2007
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    Re: Gulf inflation and the dollar peg

    Post by Prodip2007 on Sat Aug 09, 2008 8:04 am

    Thank u bro for sharing that.Gud job bro.Keep up bro.And enjoy our forum.

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    Re: Gulf inflation and the dollar peg

    Post by sodong on Fri Aug 15, 2008 1:23 am

    thanks 4 info bro garuda rock

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