- The Washington Times - Friday, May 2, 2008

KUWAIT — Gulf states are considering dropping their pegs to the dollar after the U.S. currency’s decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al-Shimali said yesterday.

“Yes, there are some” Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the past 12 months, Mr. al-Shimali said, without naming the countries. “Some countries will do what we are doing.”

Mr. al-Shimali’s comments, which came at a meeting of the Fourth World Economic Forum in Kuwait, might rekindle speculation of a change in Middle East currency systems, which eased after the United Arab Emirates and Qatar last month ruled out any revaluation or dropping the dollar peg in the short term. The issue will remain a significant concern as long as inflation remains high.

“Inflation is rising in the Gulf to a great extent because of loose monetary policy,” said Marios Maratheftis, head of research for Standard Chartered PLC in the Middle East. “Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.”

The United Arab Emirates, Bahrain and Qatar lowered their benchmark interest rates yesterday by a quarter point, matching a cut by the U.S. Federal Reserve a day earlier. The move is needed to maintain the dollar pegs.

Inflation is running close to 10 percent in Saudi Arabia and the UAE, while Qatar’s consumer prices rose 14 percent in the fourth quarter.

The Kuwaiti dinar has appreciated 7.9 percent against the dollar since the nation in May 2007 became the only Gulf Arab state to drop its peg to the U.S. currency. The link to the dollar meant that imports in euros and other currencies that have strengthened against the dollar became more expensive.

The idea of dropping the peg “has been started by other Gulf countries and they are partially going this way because the dollar has been going down for some time,” Mr. al-Shimali said yesterday.

Revaluation speculation peaked in November after UAE central bank Governor Sultan Bin Nasser al-Suwaidi said he was considering dropping the dirham’s peg to the dollar, and a Saudi Arabia central bank official said Gulf states might revalue their currencies together.

All the Gulf Cooperation Council states, apart from Oman, are planning to form a single Gulf currency by 2010. The group’s central bank governors will meet next month in an attempt to get the project back on schedule.

“The case for currency reform is strong,” Simon Williams, chief Middle East economist at HSBC Holdings PLC, said from Dubai. “The inflationary pressures the Gulf faces not only demand a stronger currency, they also require an independent monetary policy. The issue is not going to go away, but I don’t believe that change is close.”

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