Revaluation alone 'will not solve inflation problem'

Dubai: Pressure is mounting on the Gulf Cooperation Council (GCC) central banks to drop the dollar pegs and let the bloc's currencies appreciate.

Arab Monetary Fund chairman Jassem Al Mannai said in published remarks that revaluations would not solve the problem of soaring inflation.

He advised Gulf countries to switch to a managed float or peg their currencies to a basket, including the euro, sterling and yen, Reuters reported yesterday citing an Arabic press report.

The fund, sponsored by 22 Arab states, is based in Abu Dhabi.

A summit this week of Gulf rulers could settle the future of their exchange-rate policies following a currency reform debate between its two largest members.

The UAE, the second largest Arab economy after Saudi Arabia, in November called for the GCC to switch from fixed exchange rates to currency baskets.

Saudi Arabia, the world's largest oil exporter, could consider revaluing its currency for the first time in 21 years without dropping its peg, according to a source familiar with Saudi currency policy. Revaluations alone will not solve the problem, Al Mannai was quoted as saying. "It will not be in the interest of Gulf countries and it will not help solve the problems that they are facing," he said.

"It will not give these countries the freedom to fight inflation which is posing a growing threat to their economies."

Al Mannai urged "Gulf states to adopt an exchange rate based on a basket weighted on currencies of their main trade partners, including the euro, dollar, sterling and yen."

A senior official at the National Bank of Abu Dhabi (NBAD) said the UAE dirham is undervalued.

Nazim Fawaz Al Qudsi, head of NBAD's investment division, told the Emirates News Agency (WAM) that the UAE Central Bank would announce revaluation of the UAE dirham against the dollar.

"The Central Bank's recent moves, including issuance of dirham, dollar and euro certificates of deposit, indicate that revaluation is imminent," Al Qudsi said.

He said that appreciating the dirham against the US dollar is "a sovereign decision at the end of the day."