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Arab Monetary Fund urges Gulf to drop pegs

Abu Dhabi, November 30, 2007

The Arab Monetary Fund has called on Gulf Arab states to drop their pegs to the tumbling US dollar, saying revaluations would not solve the problem of soaring inflation, a Dubai newspaper reported on Friday.

Jassem Al-Mannai, chairman of the Arab Monetary Fund, had advised Gulf countries to switch to a managed float or peg their currencies to a basket, including the euro, sterling and yen, Emarat al-Youm reported. The newspaper gave no direct quotation for this.

The fund, sponsored by 22 Arab states, is based in Abu Dhabi, capital of the United Arab Emirates.

A summit of Gulf rulers on Monday and Tuesday in Doha could settle the future of their exchange-rate policies following a currency reform debate between its two largest members.

The UAE, the second largest Arab economy after Saudi Arabia, called this month for all Gulf oil producers to switch from fixed exchange rates to currency baskets.

Saudi Arabia, the world's largest oil exporter, could consider revaluing its currency for the first time in 21 years without dropping its peg, according to a source familiar with Saudi currency policy.

Revaluations alone will not solve the problem, the paper quoted Al-Mannai as saying. "It will not be in the interest of Gulf countries and it will not help solve the problems that they are facing," he said.

"It will not give these countries the freedom to fight  inflation which is posing a growing threat to their economies."

UAE central bank governor Sultan Nasser al-Suweidi cited inflation in his call for reform, saying dollar pegs forced Gulf central banks to track US monetary policy to maintain the relative value of their currencies.

The US Federal Reserve is cutting rates to contain the fallout from a mortgage debt crisis and Gulf central banks are following despite the risk of stoking inflation, at decade highs across the region.

Suweidi said he would only drop the UAE peg in concert with other Gulf oil producers preparing for monetary union as early as 2010 -- unlike Kuwait, which broke ranks with its neighbours and started tracking a currency basket in May.

 Mannai urged "Gulf states to adopt an exchange rate based on a basket weighted on currencies of their main trade partners, including the euro, dollar, sterling and yen," the paper said.

Inflation is at a 10-year in Saudi Arabia, a 16-year peak in Oman, a 19-year high in the UAE and near a record in Qatar.

Rising prices have triggered calls for a national wage hike in Saudi Arabia, demands for price controls in Qatar and Oman and riots for higher pay by migrant workers in the UAE.

Set up in 1976, the Arab Monetary Fund has goals including  creating a single Arab currency and promoting trade among member states. - Reuters




Tags: Currency | peg | Arab Monetary Fund |

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