Business | Economy

GCC not ready to float currencies

Gulf countries are not yet ready to float their currencies or their unified currency as and when it happens, according to Jean-Pierre Beguelin, chief economist of Pictet, a Swiss private bank.

  • By Babu Das Augustine, Banking Editor
  • Published: 23:42 November 12, 2008
  • Gulf News

  • Image Credit: Gulf News archive
  • Beguelin argues that GCC countries, with their huge oil surpluses, would face severe upward (exchange rate) pressure on currencies if they decide to float.

Dubai: Gulf countries are not yet ready to float their currencies or their unified currency as and when it happens, according to Jean-Pierre Beguelin, chief economist of Pictet, a Swiss private bank.

Beguelin argues that GCC countries, with their huge oil surpluses, would face severe upward (exchange rate) pressure on currencies if they decide to float.

"If currencies are allowed to float completely free, they do tend to overshoot their equilibrium levels for quite prolonged spells, seriously curbing the very independence of monetary policy that they are supposed to foster," he said.

One of the major arguments against a currency peg is that it makes domestic monetary policy totally ineffective as the country is forced to mimic the monetary policy of the country to which the anchor currency belongs.

"Rising inflation has been a major challenge for the region. In the absence of monetary policy independence, many argued that Gulf should revalue or depeg. In retrospect, it was a wise decision that the Gulf central banks refused to change the policy," said Beguelin.

Trade imbalances

If GCC countries were to switch over to a flexible exchange-rate system, their currencies would, in all probability, experience even more violent swings than the price of crude oil so that, if the latter rose, the authorities would be forced to act to stop an overshooting currency from suffocating other economic activities, such as tourism.

According to Beguelin, by allowing trade imbalances to persist, fixed exchange rates cushion the impact of shocks that are very real in origin, such as unexpected swings in demand or output.

In contrast, a flexible currency is more helpful if a country is being dogged by the vagaries of financial flows as the influx or exodus of speculative money does not lead to violent movements in a country's domestic interest rates.

To date, GCC countries have been more prone to shifts in world demand than international financial turmoil.

Thus it is in the interest of these countries to keep their currencies steady against the dollar.

"This state of affairs should hold true for a few more years yet even though increasing diversification of their econ-omies, especially towards financial business, will increasingly warrant a switch to flexible exchange rates," he said.

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