Gulf States May End Dollar Pegs, Kuwait Minister Says

Gulf States May End Dollar Pegs, Kuwait Minister Says

May 1 (Bloomberg) -- Gulf states are considering dropping their pegs to the dollar after the U.S. currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al- Shimali said.

``Yes, there are some'' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, al-Shimali said in an interview in Kuwait late yesterday without naming the countries. ``Some countries will do what we are doing.''

Al-Shimali's comments may restoke speculation of a change in Middle East currency systems that eased after the United Arab Emirates and Qatar last month ruled out any revaluation or dropping the dollar peg in the short term. The issue will remain a key issue as long as inflation remains high.

``Inflation is rising in the Gulf to a great extent because of loose monetary policy,'' said Marios Maratheftis, head of research for Standard Chartered Plc in the Middle East in a telephone interview from Dubai. ``Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.''

The U.A.E., Bahrain and Qatar lowered their benchmark interest rates today by a quarter point, matching a cut by the U.S. Federal Reserve a day earlier. The move is needed to maintain the dollar pegs. Saudi Arabia is on its weekend while Oman moves its interest rates in line with the London Inter Bank Offered Rate.

Gulf Inflation

Inflation is running close to 10 percent in Saudi Arabia and the U.A.E., while Qatar's consumer prices rose 14 percent in the fourth quarter.

The Kuwaiti dinar has appreciated 7.9 percent against the dollar since the nation in May became the only Gulf Arab state to drop its peg to the U.S. currency. Contracts to buy U.A.E. dirhams in 12 months time are trading at a 2 percent premium and Saudi riyal forwards are trading at a 1.3 percent premium to the spot price, suggesting that some traders are betting that those countries will follow Kuwait in revaluing. The link to the dollar meant that imports in euros and other currencies that have strengthened against the dollar became more expensive.

The idea of dropping the peg ``has been started by other Gulf countries and they are partially going this way because the dollar has been going down for some time,'' al-Shimali said yesterday.

Forum meeting

``This news has already been in newspapers,'' al-Shimali told reporters at a meeting of the Fourth World Economic Forum in Kuwait today.

Reuters reported today that al-Shimali said he was citing newspaper reports and not expressing his own opinion when commenting to Bloomberg on the future of the Gulf dollar pegs.

When asked at the forum about Gulf states considering dropping their pegs, al-Shimali told reporters that he would not comment on behalf of Gulf states.

Officials at the Qatari, Omani and U.A.E. central banks were not immediately available. The Bahraini and Saudi central banks were closed today.

Revaluation speculation peaked in November after U.A.E. central bank Governor Sultan Bin Nasser al-Suwaidi said he was considering dropping the dirham's peg to the dollar, and a Saudi Arabia central bank official said that Gulf states may revalue their currencies together.

All the GCC states, apart from Oman, are planning to form a single Gulf currency by 2010. The group's central bank governors will meet in June in an attempt to get the project back on schedule.

``The case for currency reform is strong,'' Simon Williams, chief Middle East economist at HSBC Holdings Plc, said in a telephone interview from Dubai. ``The inflationary pressures the Gulf faces not only demand a stronger currency, they also require an independent monetary policy. The issue is not going to go away, but I don't believe that change is close.''