No urgency for revaluation of Gulf currencies

Dubai: There is no urgency to revalue Gulf currencies if the rationale is to reduce inflation, said Mohsin S. Khan, Director for the Middle East and Central Asia of the International Monetary Fund.

The sharp decline of the dollar against other leading international currencies, and the consequent decline in the purchasing power of GCC currencies, has revived the debate about revaluation. The main benefit of an appreciation in the eyes of its supporters is that it would dampen inflation.

"A close look at the available inflation data suggests that imported inflation is not alarmingly high in any of the GCC countries. While the inflation rate in all GCC countries except the UAE and Qatar is in single digits, in the UAE and Qatar, the role of imported inflation is marginal," he said.

Khan said that while inflation in the Gulf states is mainly driven by excess liquidity, increased government spending and supply constraints, any attempt to revalue or change the currency peg will undermine currency stability long enjoyed by the region.

Pegging to one currency has its benefits in terms of stability, transparency and simplicity.

Khan said that achieving monetary union by 2010 is very ambitious, however, the IMF has no doubt about the commitment of GCC central banks and political establishments to the common currency.

Stopping short of saying that the GCC is likely to miss the 2010 deadline, Khan said the whole process of establishing systems and processes needed to achieve monetary union is very time consuming.

"The fiscal convergence in the GCC is closer than in any other region. In addition, there is strong political support for monetary union, which is more important than any economic rationale to create a monetary union," the IMF official said.