Dubai: More than a decade ago, the Arab Gulf countries struggled to maintain their currency as the dollar withdrew. This time, the link to a slider can provide reassurance.
Back in 2007 and 2008, the weak dollar increased the cost of imports and sent inflation up. Sluggish domestic demand has the lid on price growth, while declines in the dollar could boost non-oil industries such as tourism once the pandemic eases. The inflationary hot money flow to the region was also out of the picture when Brent crude oil was close to $ 150 12 years ago.
“The fall in the dollar will be positive for the Gulf Cooperation Council once the impact of the Covid-19 pandemic softens,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank in the United Arab Emirates. “The dollar pegs remain an important anchor for the economy and for capital inflows.”
The six GCC members have run foreign exchange governments since the early 1970s. The system survived successive years of low oil prices in the 1990s, a period of dollar weakness before the financial crisis in 2008 and another catastrophic crash in 2014. Only Kuwait decided in May 2007 to put the dinar on a basket to link currencies as inflation accelerates. .
Earlier this year, devaluation bets on forward markets increased as oil prices fell to nearly 18-year lows, plaguing the economies of the regions and raising questions about their foreign exchange reserves. Traders have since increased the commitment as the Gulf states reduced spending and subsidies, turning to debt markets to finance their budget deficits.
With oil and gas prices in dollars, the pennies helped protect countries from the volatility of energy markets, enabling central banks in the good times to accumulate foreign exchange reserves.
“The more important consideration for GCC countries’ exchange rate pieces is not short-term fluctuations in the value of the US dollar, but rather access to sufficient foreign exchange assets in the medium term,” said Robert Mogielnicki, a resident scholar of the Arab world. Gulf States Institute in Washington.
Source: Gulf News