Dollar link is the best choice
07/02/2010
Dr Jasim Husain Ali, Special to Gulf News (www.gulfnews.com) Published on February 7, 2010
Gulf Cooperation Council (GCC) countries must link their currencies either unilaterally or collectively to the US dollar due to the absence of a viable alternative. The other choices, namely pegging GCC currencies to the euro or a basket of currencies, and still the floating option, carry their own risks and challenges.
Undoubtedly, the talk of possible de-link with the dollar stems from the drop in the dollar’s value over the past few years. In fact, there was almost parity between the dollar and the euro in 1999, the launching year for the European currency. Yet $1.4321 (Dh5.26) was needed to exchange to a euro by year-end 2009. Part of this trend was designed to address the sustained deficit in the US trade account, amounting to $816 billion in 2008. In turn, the lower value of the dollar is meant to make American exports cheaper worldwide, thus serving the cause of bridging the deficit.
Undoubtedly, the euro link makes GCC currencies subject to economic upheavals in some 16 countries comprising the euro zone at the moment. The recent example of Greece’s debt crisis displayed the level of risk involved, with the euro closing down at $1.3862 on the last day of trading in January. It emerged that the budget deficit of Greece amounts to more than 12 per cent of gross domestic product (GDP). In turn, the euro zone member countries can have a budget deficit within 3 per cent of GDP.
Still, one trouble with the euro zone concerns appreciation in value, which in the case of pegging would place restraints on GCC exports. Nowadays, this is a problem encountering euro zone countries, making exports of Germany, for instance, less competitive in international markets. Undoubtedly, export problems undermine prospects for jobs and economic growth rates, something not serving economic goals of different GCC countries. It is suggested that Oman decided to shun Gulf Monetary Union (GMU) to avoid being subjected to a consensus decision about link of the planned currency. The sultanate likes to keep its currency pegged to the dollar as a strategic choice.
Yet, the notion of linking to a basket of currencies including the dollar, euro, yuan and yen would subject GCC economies to developments in a span of economies facing diverse opportunities and challenges. Management of such a scenario is uniquely difficult. This partly explains the desire to price oil in US dollars, making adjustments relatively convenient.
In addition, the floating choice carries its own demands, namely the ability to publish statistics on a regular course. To be sure, availability of updated information is a problem throughout the GCC. Absence of sustained information places GCC currencies at the mercy of bidders. In 2007, leading GCC currencies came under constant attack for possible appreciation in value amidst inflationary pressures partly caused by the declining value of the American dollar.
I contend that the planned currency should be pegged to the greenback for numerous reasons.
Among others, the practice would give investors confidence in dealing with regional economies. Small investors, who are the majority, tend to avoid instability.
Also, the link uniquely fits the nature of GCC international trade, notably exports. GCC merchandise exports primarily comprise crude oil, refined products such as diesel and petrochemicals, and aluminium goods and textiles.
Petroleum receipts contribute about two thirds of treasury income in all GCC states. Also, services such as financial services are priced in dollars.
Additionally, a sizable volume of imports is priced in dollars, notably products from the US and China, to name a few.
Undoubtedly, GCC currencies have the choice of incrementing values of their currencies if the greenback weakens.
The writer is a Member of Parliament in Bahrain.
07/02/2010
Dr Jasim Husain Ali, Special to Gulf News (www.gulfnews.com) Published on February 7, 2010
Gulf Cooperation Council (GCC) countries must link their currencies either unilaterally or collectively to the US dollar due to the absence of a viable alternative. The other choices, namely pegging GCC currencies to the euro or a basket of currencies, and still the floating option, carry their own risks and challenges.
Undoubtedly, the talk of possible de-link with the dollar stems from the drop in the dollar’s value over the past few years. In fact, there was almost parity between the dollar and the euro in 1999, the launching year for the European currency. Yet $1.4321 (Dh5.26) was needed to exchange to a euro by year-end 2009. Part of this trend was designed to address the sustained deficit in the US trade account, amounting to $816 billion in 2008. In turn, the lower value of the dollar is meant to make American exports cheaper worldwide, thus serving the cause of bridging the deficit.
Undoubtedly, the euro link makes GCC currencies subject to economic upheavals in some 16 countries comprising the euro zone at the moment. The recent example of Greece’s debt crisis displayed the level of risk involved, with the euro closing down at $1.3862 on the last day of trading in January. It emerged that the budget deficit of Greece amounts to more than 12 per cent of gross domestic product (GDP). In turn, the euro zone member countries can have a budget deficit within 3 per cent of GDP.
Still, one trouble with the euro zone concerns appreciation in value, which in the case of pegging would place restraints on GCC exports. Nowadays, this is a problem encountering euro zone countries, making exports of Germany, for instance, less competitive in international markets. Undoubtedly, export problems undermine prospects for jobs and economic growth rates, something not serving economic goals of different GCC countries. It is suggested that Oman decided to shun Gulf Monetary Union (GMU) to avoid being subjected to a consensus decision about link of the planned currency. The sultanate likes to keep its currency pegged to the dollar as a strategic choice.
Yet, the notion of linking to a basket of currencies including the dollar, euro, yuan and yen would subject GCC economies to developments in a span of economies facing diverse opportunities and challenges. Management of such a scenario is uniquely difficult. This partly explains the desire to price oil in US dollars, making adjustments relatively convenient.
In addition, the floating choice carries its own demands, namely the ability to publish statistics on a regular course. To be sure, availability of updated information is a problem throughout the GCC. Absence of sustained information places GCC currencies at the mercy of bidders. In 2007, leading GCC currencies came under constant attack for possible appreciation in value amidst inflationary pressures partly caused by the declining value of the American dollar.
I contend that the planned currency should be pegged to the greenback for numerous reasons.
Among others, the practice would give investors confidence in dealing with regional economies. Small investors, who are the majority, tend to avoid instability.
Also, the link uniquely fits the nature of GCC international trade, notably exports. GCC merchandise exports primarily comprise crude oil, refined products such as diesel and petrochemicals, and aluminium goods and textiles.
Petroleum receipts contribute about two thirds of treasury income in all GCC states. Also, services such as financial services are priced in dollars.
Additionally, a sizable volume of imports is priced in dollars, notably products from the US and China, to name a few.
Undoubtedly, GCC currencies have the choice of incrementing values of their currencies if the greenback weakens.
The writer is a Member of Parliament in Bahrain.