Is it time to ditch the dollar peg?

All across the GCC, the figures are nothing short of staggering. Over the past five years, Qatar has managed an average GDP growth rate of 11% per year. In the UAE, the figure is 10%. Saudi Arabia comes in at 5%.

In fact, wherever you look in the latest report by investment bank Merill Lynch, all you see is growth.

But for how long? The very same report, released at the end of the January, also sounds a more ominous warning, suggesting that inflation in the GCC is not a "temporary phenomenon" as we would all like it to be. It predicts that inflation in the UAE will hit 12% this year, and also be in double figures in Qatar. The rest of the GCC is facing upwards of 5% inflation at least.

Inflation - as anyone who has lived in the West will tell you, is the biggest obstacle to stability and growth. It can drain and ultimate bring down an economy. With already rising costs of construction, there is a danger that some of the region's mega projects would have to be scaled down. No sector would be hit worse than the small business sector, usually the last in the payment chain.

It is a downward spiral nobody wants to see. So what should we do? In the US and UK, the ability to cut interest rates is the biggest weapon available. It is one that Gulf states also need - but while most currencies are pegged to the dollar, one they cannot have.

De-pegging against the dollar may be the best and only way to combat inflation - and in doing so, secure the region's economic boom. The small business sector cannot afford to see the current uncertainty of GCC nations on this issue. The time to act is now.

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READERS' COMMENTS

De-pegging
Posted by Trevor Skinner on Thursday 7 February 2008 at 10:29 UAE time


Be careful what you wish for. De-pegging will mean a floating exchange rate and a monetary policy commensurate with inflation and positive real interest rates. It's a very flexible system.

However, I hope you don't have any debt. Under a regime wholesale interest rates will be above 10% (more like 12%). Where do you think retail rates will be and what effect do you think that will have on small business and the property market? It wouldn't be pretty.

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