Business | Opinion
Financial institutions have obligations too
Merrill Lynch has spoken in the name of three governments - the US, Qatar and the UAE - as though it was the central bank governor in all three countries.
- Dr Mohammad Al Asoomi, Special to Gulf News
- Published: 00:08 June 5, 2008
Merrill Lynch, one of the world's leading financial institutions, revived speculations about Gulf currency after they were stopped over the past two months by a UAE government decision.
The issue of GCC inflation was tackled in a major report earlier this month, where the US Treasury signalled that it would welcome the prospect of Gulf countries easing their ties to the dollar.
According to Merrill Lynch, the US Treasury gave GCC countries the green light to make changes to currency exchange rates, pegged to the US dollar.
The financial institution's report did not stop at that. It tried to further inflame speculations by reporting that the UAE and Qatar could drop their dollar pegs and move to a basket of currencies within months, allowing a five per cent appreciation before the end of the year. Saudi Arabia was unlikely to follow until late 2009, Merrill said.
By doing this, Merrill Lynch has spoken in the name of three governments - the United States, Qatar and the UAE - as though it were the central bank governor in all three countries.
Qatar's central bank was quick to respond. Governor Shaikh Abdullah Bin Saud Al Thani denied reports that Qatar might revalue its dollar-pegged currency or drop the link altogether. There were similar reactions in the rest of the GCC.
At the same time, the US Secretary of Treasury, Henry Paulson, stressed that severing the link between GCC countries' currencies and the dollar is a sovereign issue, adding that the link between those currencies and the dollar is related to these countries.
Merrill Lynch's report, which revived speculations, had several wrong assumptions. First, it was wrong in saying that GCC countries need a green light from anyone to change their monetary policies. For instance, Kuwait, which has a joint defence treaty with the US, de-linked its currency to the dollar a year ago.
Also, the dollar is a common peg for GCC currencies, which allows these currencies to move towards each other by a limited margin, which is essential for preserving currency policy treaties between GCC countries.
Single currency
Apart from that, GCC countries agreed in their last Doha summit to keep currency exchange rates unchanged, as a prelude for issuing a single Gulf currency on time in 2010.
De-pegging at this time will affect this plan negatively.
The main issues here are economic interests, as there are investments of billions of dollars abroad, and oil, which is the GCC countries' main income commodity, which is priced in dollar.
Merrill Lynch or any other investment company may release studies and private expectations over any economic or financial issue, but that has to be done on a highly professional basis and away from calculations that may harm the interests of certain countries.
This conduct may well harm the professional reputation of certain establishments, and jeopardises its credibility.
In a highly commended step, GCC central banks sent a strong message to markets, by responding immediately to the report. The message was for everyone to disregard rumours and to deal with monitory and financial issues according to declared policies.
Companies and foreign banks working in the region have to abide by the local law, rules and regulations, and refrain from harming GCC countries' economies by encouraging currency speculations.
The writer is a UAE economic expert.
Share this article
More from Business Opinion
More from Business
Popular in Business
-
Budget travel
Airlines in the region
Take a pictorial look at some of the budget airlines in GCC
Business Editor's choice
-
Louvre, Golden Tulip hotel chains to expand in region
Dubai could host first establishment in 2010
-
Lending slows down in eurozone
Central Bank will this week announce revisions to liquidity-boosting measures
-
Global outcry over Dubai World restructuring is exaggerated
About 75 per cent of the $20b bond has already been subscribed
