Gulf states must ditch dollar peg - Emirates NBD

INFLATION BATTLE: Al Tayer urged Gulf states to ditch their dollar peg and instead move to a basket of currencies. (Getty Images)

Gulf states should consider ditching their dollar peg and instead move to a basket of currencies, according to the chairman of the Gulf’s biggest bank.

“We are handicapped in how to deal with inflation because of the US dollar,” said Emirates NBD Chairman Ahmed Humaid Al Tayer said in an interview in Dubai late on Sunday.

He said a basket of currencies would allow Gulf states to tackle inflation while also better reflecting their main trading partners in Asia and Europe.

“I hope GCC governments reach agreement on this in the interest of the economy, otherwise inflation is killing growth,” said Al Tayer.

Inflation has hit record highs across the Gulf over the last year, driven by rising rents and food costs.

Inflation in the UAE reached a 19-year high of 9.3% in 2006, the latest official figure, and analysts have warned it is in danger of touching 12% this year unless the dirham is revalued or depegged from the tumbling dollar.

Al Tayer is just the latest in a string prominent business figures to call for the UAE and other Gulf states to revalue or sever their ties to the US currency, which last week fell to a record low against the euro and a basket of major currencies.

Abu Dhabi Commercial Bank (ADCB) Chief Executive Eirvin Knox said earlier this month the UAE should reconsider its peg "in light of the long-term growth prospects in the region".

Gulf states' dollar peg limits the ability of central banks to fight inflation because the peg forces states to track US monetary policy in order to maintain the relative attractiveness of their currencies.

The US Federal Reserve has been slashing interest rates to stop the US slipping into recession at a time when Gulf states should be raising rates.

This has put increasing pressure on central bank governors to follow Kuwait's lead and ditch the dollar peg in favour of a basket of currencies.

UAE Central Bank Governor Sultan Nasser Al-Suweidi last week again reiterated the Gulf state had no plans to revalue its currency.

"There is no intention at this time to revalue the dirham against the dollar," the daily Al-Ittihad quoted Al-Suweidi as saying. "And we have not made any changes in this regard."

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