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Sun 4 Mar 2007 12:00 AM

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Revaluation, not revolution

A revaluation of GCC currencies may slow inflation - but we shouldn't ditch the dollar.

There was much excitement last week, over the prospect of currency revaluations by the GCC Central Banks. Speculation about a currency revaluation has been growing since UAE Central Bank governor Sultan Nasser Al Suweidi said in January that Gulf Arab central bank governors could decide to keep or change currency pegs at their next meeting in Riyadh.

The governors meet in a month, and each will have no doubt thumbed through a copy of Deutsche Bank’s recent GCC Macro Outlook report — which extrapolates that the UAE dirham and Bahraini dinar would need to be revaluated by between 10%-15%, while the Saudi riyal and the Omani riyal are undervalued by 25%-30%.

The currencies’ peg to the struggling dollar has meant that we have been paying increasingly steep prices for imports from two key trading partners, Asia and Europe, and this has undoubtedly fuelled the rampant consumer price inflation in the region.

Just last month, another report, this time from market research firm YouGovSiraj, revealed that while salaries in the region went up by an average of 15% last year, the cost of living soared by an incredible 24%.

The arguments in favour of a revaluation are manifold, and real estate owners in particular would see their properties appreciate dramatically in value.

Not only that, but the millions of expatriates who earn their money in local currencies would find the value of those salaries soaring back home. In short, shout the experts (and the expats), it’s time for a little payback.

Yet in our haste to extol the virtues of a revaluated currency, we cannot afford to ditch the dollar entirely. The prospects of GCC monetary union in 2010 are unsure at this moment, yet if we are seriously aiming for a single currency in the near future, then a peg to a basket of currencies — which includes the dollar — it surely is the most sensible option.

The alternative — a headlong rush towards a free-floating exchange rate — would expose the region to a foreign exchange volatility that is unsuitable for the rapidly developing economies of the Gulf. We must be careful, especially if we intend to enter a single currency in the rudest possible health.

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