Sinking with the dollar

Plans to establish a common GCC currency by 2010 have apparently been put on hold because of one serious problem facing the economies of the region: the pegging to the US dollar. The depreciation of the greenback against all major currencies of the world in the past few years has triggered alarm bells in the offices of GCC finance ministers who are helplessly watching their currencies sink with the dollar.

Last week, the euro stood at an all-time high of 1.47 against the dollar, which hit historic lows. Recent fundamental analyses of the US economy formed a bleak picture of the future with no predictions of a speedy recovery in sight. All major world currencies have witnessed an increase in their currencies' value. It was not necessarily because their economies were doing well, but the driving factor here was the weak US economy.

For some industrialised countries which depend on exporting products to the US, such as Japan and Germany, this may have not been helpful given that customers would have to pay more to purchase their goods. But for other countries whose economies depend on capital flow and investments, that was a healthy sign. Unfortunately, however, this doesn't apply to the GCC countries because their decades-old decision of sticking to the dollar.

"But how could this affect me as a GCC citizen?" you may ask.

To answer this question, imagine having your life savings, which you accumulated over many years of labour and cost-conscious spending, lose as much as 25 per cent of their actual value since you started saving years ago. Well this is what happened to thousands of people in the region because of the strategy of pegging their currencies to the dollar. If you had converted your local currency to gold or even to the euro at the time you started saving years ago, you would have done yourself a favour by increasing your investment significantly.

Risky strategy

Today more than ever, it seems that the GCC strategy of sticking to the old greenback has cost - and is still costing - their economies dearly. The original idea was to maintain a stable conversion rate to keep a cap on inflation and on the cost of customer goods and other investments. But it was also a risky strategy given that the foreign exchange market has increasingly become an unpredictable area with once steady trends suddenly reversing or even zigzagging. It was also due to the emergence of new global economic powers, such as the European Union, and also due to the devastating implications of the Iraq war on the price of oil and consequently on the US economy.

The undeniable reality is that pegging to the dollar may have worked in the past during the heyday of a strong and stable US economy. But today this strategy has clearly backfired with negative implications for the economies in many ways including rising inflation and higher costs of imported goods from many parts of the world.

Luckily, most GCC countries were able to compensate somewhat by taking advantage of the rise in oil prices. But it is citizens who may suffer more in the long run because they would be pressured in multiple ways.

First they would have their zero-interest bank savings depreciate in value; second, they will have to spend more on imported European and Asian goods, and thirdly, they may find it increasingly more expensive to spend their vacations in Europe and some other countries whose currencies have risen. The situation is even worse if they didn't have an income boost.

Depegging

Kuwait was the first GCC nation to acknowledge and respond to the problem by depegging its dinar from the dollar. It was a clever manoeuvre that received praise from economic experts because moving from the dollar to a diversified basket of currencies would decrease inflation while maintaining a more stable currency. Some had suggested that the pegging should have been to gold instead of a basket of currencies, but they do acknowledge that keeping a distance from the falling dollar is still a wise move.

Other GCC members are still studying their options when it comes to the dollar. It would not be unexpected to find countries that depend on capital flow such as the UAE and Qatar to follow suit. In the long run and if the dollar keeps on declining, it is even a better idea to price their valuable export commodities, such as oil and gas, in a currency other than the dollar. But that is a bit far-fetched for the time being.

As times and global trends change, why should GCC economic policies remain unchanged?

We learned from nature that species that adapt the best are those with the highest probability of survival. It is hence important to consider a new approach and accept the virtue of change as a fact of life.

The reality is that the US economy is suffering and living standards there are declining. Why should the GCC take it as its example and leave its people to a similar fate?

If the interest of GCC citizens lies in securing more stable currencies and adopting economic change, and if abandoning the dollar and letting it sink alone is important to achieve this goal, so be it. Life must go on.

Walid Al Saqaf is an information communications technology and media consultant.