Kuwait drops the dollar peg

Kuwaiti Prime Minister Sheikh Naser Mohammed Ahmad al-Sabah attends the opening of the World Economic Forum on the Middle East May 18, 2007 in Southern Shuneh on the shore of the Dead Sea in Jordan. (Salah Malkawi/ Getty Images)

Kuwait has dropped the dinar's dollar peg in favour of a basket of other currencies, as its impatience at the depreciating greenback and the delayed introduction of the GCC single currency grows.

The US dollar exchange rate peg was adopted on 5 January 2003, in a move set to pave the way for a single GCC currency. Since the 2010 deadline for that is looking increasingly doubtful, Kuwait will keep the basket peg until a single currency is put in place.

The Governor of the Central Bank of Kuwait, Sheikh Salem Abdelaziz Al-Sabah, said that the move was triggered by a spike in inflation driven by the dollar's decline against other currencies in the past two years.

"The massive decline in the dollar's exchange rate against main currencies... has contributed to the increase in local inflation rates, and this step comes within the effort made by the central banks to curb the inflation pressure in local economy," he told the state news agency KUNA.

However, the five other members of the Gulf Cooperation Council (GCC) look unlikely to follow Kuwait's move, according to the Secretary of GCC States Abdul-Rahman al-Attiya. "I don't expect other member states to follow Kuwait's revaluation move," he told Reuters by telephone.

Bahrain's central bank governor told Reuters on the sidelines of the World Economic Forum in Jordan that "there is no change" to their currency policy.

Hamood Sangour Al-Zadjali, Oman's Central Bank governor, echoed this. "We are still committed to the dollar peg policy. At the Central Bank of Oman we did not know about this. There was a position by the leaders of all Gulf countries to remain pegged to the dollar and we have abided by that decision," he said.

Analysts expressed no surprise at the speed at which the decision appears to have been taken.

"The direction of change is in line with expectations. It's been clear for some time that Kuwait wants a stronger dinar and a more flexible regime," said Simon Williams of HSBC Bank Middle East.

"I'd still be surprised if we see any Gulf countries changing the value of their currencies or the nature of their currency pegs in the near term.

"However, it is bound to add to the debate that we know is taking place in a number of the Gulf central banks over how they manage the value of their currenices."

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READERS' COMMENTS

UAE should also drop the dollar pegging
Posted by Zulqarnain Abidy, Dubai, UAE on Monday 21 May 2007 at 09:49 UAE time

It's perfectly understandable to follow a winner, or a leader. However, it baffles as why to follow a long-ago leader or current looser for too long? Dollar happens to be loosing ground against all major currencies; Euro, Japanese Yen and British Pound for years now. While the dollar is depreciating, the currencies pegged to it would also suffer equally. Most of the Gulf economies are oil or export based at one hand whereas these countries' import bill is also enormous, importing most of their necessities from abroad. Pegging to a weaker currency means DOUBLE TROUBLE; reduced income from exports at one hand whereas increasing expenditure due to expensive import bill at the other. There is a valid question to ask as why to peg against one or basket of currencies? Or, why to make this, pegging the currency, so public that everyone - countries, companies or individuals - use it to its advantage. Ideally, currency should be freely floated against its own strength or weakness, with minimum intervention from the state. A weak dirham is for no one’s benefit; also affecting expatriates as bad; their savings are reduced. Besides money they send home is also devalued. All of this and many other factors make a perfect case for UAE and other in region would follow Kuwait and would drop the Dollar peg.

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