Saturday 26 September 2020

Gulf sticking to FX peg 'due to poor research'

DUBAI, June 1, 2016

The Gulf's oil-exporting states are reluctant to consider abandoning their currency pegs partly because their central banks' research capabilities are not strong enough to analyse the change, Newsweek quoted a Gulf central banker as saying.

The currencies of five of the six GCC members are pegged to the US dollar, while Kuwait's dinar is pegged to a weighted basket of foreign exchange. All six currencies have come under pressure since late last year as oil prices have slumped, slashing export revenues.

One way to ease the pressure might be to remove the pegs and allow the currencies to float down to levels where inflows and outflows of funds became more balanced.

But weaker currencies could fuel inflation, and central banks around the region have insisted they will stick to the pegs, arguing that the stable expectations provided by fixed exchange rates are vital.

Khalid Alkhater, a former member of the GCC Technical Committee for Monetary Union where he represented Qatar, said central banks were committed to the pegs partly because they had not developed adequate economic research to examine the alternatives.

"They are technically not ready because they lack the required research and human capital infrastructure and they lack them because of the peg. So it is like a vicious circle, and this can lead to the fear to float," he told Newsweek.

"The peg may give false perception of relief of responsibility for inflation as it may be used as an excuse that central banks can't fight inflation.

"Therefore, it is much easier and more convenient to cling to the peg rather than risking conducting an independent monetary policy and being responsible for its outcomes, including inflation."

Alkhater, who has long advocated reform of GCC exchange rate policy, told Newsweek that his remarks represented his personal academic view.

As a member of the GCC committee for monetary union, he discussed proposals for the region to establish a common currency. Progress towards that goal has largely stalled in the last few years and analysts do not expect a single currency to be created for the foreseeable future.

In the Newsweek interview, Alkhater said that if they maintained their currency pegs, GCC economies would suffer as they were forced to imitate future interest rate hikes by the US Federal Reserve.

"Now, with the US economy recovering the Fed is likely to continue to raise interest rates, but the GCC countries are slowing down due to lower oil prices which is expected to persist in the medium to long term.

"The potential implication would, again, be a policy conflict reinforcing the slowdown and contributing to further economic contraction as the GCC central banks will follow the Fed as they have always done historically," he added.

A paper by researchers at Saudi Arabia's central bank, published in April, suggested Riyadh might want to change its currency peg eventually, but said there were strong arguments for keeping it for now. The central bank said the paper did not necessarily represent its views.  - Reuters

Tags: Gulf | research | peg |

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