The link above don't work but here's the article, very interesting that the GCC has another article today about it...if they are not careful "hot money" will flood that place:
Exchange rate adjustment of 5% is seen for GCC currency
By Santhosh V Perumal
Business Reporter
The Gulf Co-operation Council countries may have to make only a nominal exchange rate adjustment of less than 5% in fixing the value for their proposed common currency, according to a study.
Finding that adjustments would tend to drop from 2010 to 2013, Qatar would have to make the lowest revaluation of 1.3% against the dollar by 2013, said a working paper ‘Establishing Conversion Values for New Currency Unions: Method and Application to the planned GCC Currency Union’, prepared for the International Monetary Fund.
“Our calculations suggest that only a small nominal exchange rate adjustment (less than 5%) is needed for the GCC countries to establish the conversion at the closest level to equilibrium,” said the study whose findings come at a time as the GCC has agreed to set up a monetary council in Riyadh to make arrangements for the planned currency union.
If the GCC decides to establish the new currency as planned by 2010, Saudi Arabia would need to revalue its currency by 2.94% against the dollar, Kuwait by 5.15%, Qatar by 4.54%, and Bahrain by 1.09%, it said.
By 2011, Saudi Arabia would need to revalue its currency by 2.73%, Kuwait (4.75%), Qatar (4.11%) and Bahrain (3.6%).
By 2012, Saudi Arabia would need to revalue its currency by 3.04%, Kuwait (4.25%), Qatar (2.93%) and Bahrain (3.95%), whereas by 2013, it would be 3.35%, 3.75%, 1.30% and 4.3% respectively.
With the GCC countries largely following fixed exchange parity, the study said odds are high (for the region) that the new currency will be pegged to the dollar at least for the first year of its launch.
There have been widespread concerns that the dollar peg was contributing to overheating of the economies and causing large-scale capital losses because of the dollar’s weakness.
Numerous proposals, such as switching to a basket or announcing a large appreciation (20%-30%) of the GCC currencies against the dollar, were made to deal with the weak greenback, according to the study.
The paper identified the year in which each GCC economy would be the closest to its internal and external equilibrium by using the real exchange rate equilibrium that links the exchange rate to its long term fundamentals. Then, it estimated the degree of misalignment in the bilateral exchange rate vis-à-vis the dollar based on the World Economic Outlook forecasts until 2013.
Calculating the real effective exchange rate (REER) misalignment for each of the GCC currencies, the study identified 2005 as equilibrium year for Qatar, 2006 for Bahrain and 2003 for Kuwait and Saudi Arabia.
The theoretical determinants of the REER equilibrium vary across countries and include trade, openness, foreign reserves, government consumption, net capital flows, broad money and the US nominal effective exchange rate.
Asserting that identifying the equilibrium exchange rate at the conversion date is essential, the study said if an exchange rate was misaligned (overvalued or undervalued) at the time of the conversion into the union currency, it would be frozen at that misalignment leading to economic distortions across the region.
An undervalued entry would give rise to a higher competitiveness for a country compared with its partners in the union, and will “require a higher than average inflation rate throughout the union” to reduce the misalignment, it said.
Highlighting that an overvalued entry could involve significant costs in terms of unemployment and bankruptcies, the study said, therefore, the fair assessment of the misalignment for all members of the union was crucial.
