Dollar peg has resulted in lower purchasing power

The annual conference of Emirates Centre for Strategic Studies and Research is one of the most significant scientific forums held in the region, because of the quality and importance of the topics discussed and the prestigious international and Arab presence.

The ECSSR's 13th annual conference, held under the banner of The Arabian Gulf: Between Conservatism and Change, focused on the impact of changes witnessed by the GCC countries.

Dr Mohsin Khan, the Director of Middle East and Central Asia Department - International Monetary Fund (IMF) touched upon a very important issue, when he called upon the GCC countries not to drop their currencies' link to the dollar.

He also added that de-pegging their currencies to the dollar will not bring down inflation. The currency peg to the dollar, in his opinion, plays a limited role in the high inflation rates witnessed in the GCC countries.

I am not about to enter a technical or vocational debate with Khan, but I would like to point here that exchange rates of GCC currencies towards other international major currencies, such as the Euro and the Sterling Pound, have declined by 40 per cent during the course of the two past years, while the imports of GCC countries outside the dollar zone is more than 60 per cent of the total GCC countries' imports, 40 per cent of which are from Europe.

This means the value of these imports have increased at almost the same rate, because of the eroded purchase power of the local currencies.

If we add to that the increasing prices of commodities due to other reasons, such as the increase in energy prices, rents and inflation rates in countries of origin, we will be able to understand the reasons behind the big price leaps of these commodities and services, and the unprecedented high inflation rates in GCC countries.

Some prominent international economic establishments mentioned earlier that 40 per cent of the GCC's inflation rates is a result of their currencies' peg to the dollar. Kuwait's relatively low inflation rates when compared to other GCC countries is due to its currency's link to a basket of currencies.

Earlier this year, Allen Greenspan, the former chairman of the federal Reserve Bank, called upon the GCC countries to de-link their currencies to the dollar. There are also indirect elements that have led to an increase in inflation rates because of the dollar link, which was not noticed by Khan.

One such issue is the adherence to the low interest rate to the dollar, at a time when economic circumstances demand lifting interest rates to cap inflation levels in the GCC countries.

No doubt there are costs and speculations to the de-link process, which have been pointed out by Khan. Having said that, there is no better time to endure these costs, as the financial situation in GCC countries is at its best, at least in 30 years. Speculation is temporary and can be controlled.

The problem with IMF is that it has ready-made solutions for all countries. It also tries to impose its agenda on member countries unprofessionally. Khan might not have followed the quality developments that took place in GCC countries over the past few years.

The Gulf today is not the same as it was during the 1960s and 1970s, when foreign experts' advice was taken with good faith.

The Arab Gulf today has leaders who make use of modern technologies and communication means, hence they are more accurate in following up international developments. The Gulf today boasts hundreds of nationals who are specialised in scientific and knowledge areas. This expertise is being used to achieve success.

The writer is a UAE economic expert.