Depeg to fight inflation - IMF
Dubai: The International Monetary Fund (IMF) has suggested Gulf states depeg from the dollar in order to fight "double-digit" inflation.
Dominique Strauss-Kahn, IMF managing director, on Wednesday, implicitly asked the Gulf states to consider "alternative exchange rate arrangements" which he said, will address inflation.
He added that achieving a monetary union by 2010 will be a challenge.
"If inflationary pressures were to persist for an extended period, consideration may need to be given to alternative exchange rate arrangements that allow monetary policy to be utilised in fighting inflation," Strauss-Kahn said, in a statement issued after a meeting with the finance ministers and central bank governors of the six-nation Gulf Cooperation Council (GCC) in Jeddah.
The meeting discussed issues relating to the GCC Monetary Union, monetary policy and the single currency. The GCC, which established a Customs Union in 2003, has entered into a common market on January 1, this year, as part of its economic integration plan to create a European Union-type single currency regime by 2010.
Strauss-Kahn said high oil price increases - although abating sharply in recent days - have been a mixed blessing for major oil exporters.
"Surging oil revenues are fuelling investment and growth, but are also adding to inflationary pressures as higher domestic demand runs up against supply and capacity bottlenecks," Strauss-Kahn said.
In GCC countries, average growth in 2007 exceeded five per cent and is anticipated to remain strong in 2008 and beyond, he said, adding, the non-oil sector has been the main engine of growth, underpinned by commendable reforms to increase employment and productivity and diversify the economies.
"At the same time, inflation rates have reached double digits in most GCC countries," he said.
"Recent signs of easing in food prices, a strengthening of the dollar-euro exchange rate, and an end to US monetary easing support our expectation that inflationary pressures in the GCC region should gradually abate. As absorptive capacity expands, inflationary pressures caused by supply bottlenecks should also subside."
The main problem with the convergence criteria is inflation, with countries like Qatar and the UAE experiencing higher inflation, Standard Chartered Bank said in its latest research
"Our view is that as long as the necessary institutions are in place, Monetary Union should go ahead," Marios Marath-eftis, Standard Chartered's Regional Head of Research, Mepna, said yesterday.
"Inflation will converge in any case. In fact this process of convergence has already started. The problem is that the inflation rates of GCC countries are converging to the double digit inflation rates of Qatar.
"Even though this kind of convergence will help with the criteria, it cannot be desirable. In our view the inflation problems sighted by the IMF are directly related to the ultra loose monetary conditions in the region, which are a direct result of the US dollar pegs that the IMF has been strongly advocating.
"Even though the FX regime of the common currency has not been discussed, our view is that the region would benefit immensely by having a more flexible exchange rate."
He said, achieving monetary union by 2010 will be a major challenge, as much remains to be done to enable the creation of a common currency.
"Overcoming the current inflationary pressures, developing a clear vision of the powers of the future common central bank, choosing an exchange regime of the common currency, and harmonising financial regulations and structures will be critical in this process," he added.
all good, all reasonable, everyone agrees its a good idea, they call gcc meeting. saudi arabia says no. everybody goes back and shrugs their shoulders. what's the situation with merging all the currencies of the gulf states, and creating something like the Euro? discussions have been going on for 4 years or more...