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Mon 25 Feb 2008 12:22 PM

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Ditching peg will ease inflation - Greenspan

Former Fed chairman says free-floating currencies will ease inflation 'significantly'.

Ditching peg will ease inflation - Greenspan
DITCH PEG: Greenspan said free-floating currencies would ease inflation

Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall "significantly" were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

"In the short term, free floating... will not fully dissipate inflationary pressure, although it would significantly do so," Greenspan told an investment conference in Jeddah.

But Saudi Central Bank Vice-Governor Muhammed Al Jasser and UAE Central Bank Governor Sultan Nasser Al-Suweidi both said dollar pegs have served their economies well by attracting foreign investment.

"They did very well for our economies because it has led to more capital flows," Al-Suweidi told an investment conference in Abu Dhabi on Monday.

Likewise Al Jasser, questioned by newswire Reuters about the riyal/dollar peg on Sunday, said: "It just happens to be serving our economic interests and continues to do so."

The pegs restrict the Gulf's ability to fight inflation by forcing them to shadow US monetary policy when the Fed is cutting rates to ward off recession and Gulf economies are surging on a near five-fold jump in oil prices since 2002.

Inflation in Saudi Arabia, the world's largest oil exporter, hit a 27-year peak of 7% in January, while in the UAE, price rises in 2006 - the latest available figure - rose to 9.3%, at least a 19-year high.

Still, "Gulf governments should consider the implication of such a move in the long term," Greenspan said of the idea of floating their currencies.

Rifts in Gulf monetary policy widened last May when Kuwait broke ranks with its neighbours by severing its link to the dollar in favour of a basket of currencies, saying a weak dollar was driving imported inflation.

Oman has said it will not join a single currency at all, and Al-Suweidi said in November he was under mounting social and economic pressure to drop the peg.

He has since backtracked, mirroring the position of Saudi Arabia, which has in the last month introduced public sector wage increases, welfare payments and subsidies to offset the impact of inflation.

Qatar, contending with the region's highest inflation, is urging Gulf states to bridge differences over a single currency, saying monetary union could avert possible unilateral revaluations, its prime minister told Reuters on Saturday. (Reuters)

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Dr. N. AlDabbagh 12 years ago

This is Mr. Greenspan's out of office opinion. I think that the Gulf economies will suffer socially and financially whether they keep their currencies pegged to the US dollar or not. The worst case scenario is to float their currencies, if this happen it will spark currency speculation similar to the recent shares speculation with all its implication on society and its finances, the only difference is it will be more damaging and last longer. The least damaging is to peg any currency to the world economy, not to an unpredictable one. The same strategy is also true to energy pricing. Dr. N. alDabbagh