Flip through the latest issue of Gulf Weekly.
The US treasury has virtually given the GCC governments the go-ahead to dump the dollar and track a basket of currencies.
A submission by the US treasury to congress draws attention to the inflation and currency issues in the Gulf for the first time. US investment bank Merrill Lynch says: "We believe the inclusion effectively gives the GCC countries the green light for change."
The bank suggests that the UAE and Qatar will move to a currency basket in the next few months, which will also involve the dirham and riyal appreciating by five per cent by the end of 2008. It also expects Saudi Arabia to change its peg to the dollar in 2009.
But, here in the Gulf the very idea of ditching the dollar peg is anathema for central bankers.
UAE Central Bank governor Sultan bin Nasser Al Suweidi, responding to remarks made by Merrill Lynch, says there was not any move or trend for a depeg or a revaluation. He dubs the Merrill Lynch report as weak and lacking transparency.
Bahrain reiterated its commitment to its peg to the US dollar, with the central bank governor stating the kingdom has no plans to alter the dinar's value.
"We are sticking to our exchange policy," Rasheed Al Maraj says. He argues that inflation will 'ease off' when GCC states are able to absorb the excess liquidity into their own markets. Bahrain's own inflation rate has almost quintupled to just under five per cent after averaging around one per cent for the previous decade.
When Qatari Finance Minister Yusuf Kamal was asked by reporters after a GCC trade meeting in Doha about the report by Merrill Lynch, which expected Qatar and the UAE to end the peg with the US dollar within six months, he said: "This report is completely untrue and baseless."
But Abdullah Al Qahtani, under-Secretary at the Ministry of Economy and Trade, sought to look at it with an injured ego and said: "Ending the peg between our currency and the US dollar is a sovereign decision that should be taken only by the Qatari Government ... It is good to read such reports but this issue is up to the state of Qatar not an independent institution like Merrill Lynch ... the green light comes from Qatar not from the United States, hence we can decide when and where we move our currency ... any way, such a decision is up to the Central Bank of Qatar."
Political arguments apart, what are the near-term goals that can be achieved by de-pegging from the dollar?
Removing the dollar peg would allow Gulf central banks to raise interest rates as a means of constraining money supply and controlling inflation. However, many UAE officials have spoken publicly against such a move because it could cause instability and reduce the value of their dollar-denominated savings in dirhams.
There is growing recognition that pegging to the dollar - and importing US monetary policy - carries large risks for oil-exporting economies. Economic conditions in oil-importing and oil-exporting economies can differ. Right now the Gulf is booming and needs tighter policy while the US is slumping and needs lower policy.
Speculation about whether the GCC countries will revalue their currencies has been rife ever since the US Federal Reserve began cutting interest rates. The moves were followed by GCC central banks because of the currency pegs, but put further upward pressure on already rising inflation rates.
Inflation in the Gulf ranges from 5.2 per cent in Bahrain to 13.8 per cent in Qatar. Inflation in Saudi Arabia, the world's biggest oil exporter, rose to 10.5 per cent in April, its highest in at least 27 years.
Last year, inflation across the GCC reached an average of 7.4 per cent, compared to 4.2 per cent in the preceding five years. The most recent inflation figures for the UAE estimate that it has reached about 11 per cent.
Another aspect causing concern is that there isn't really a consensus on what should replace the Gulf's current dollar peg.
The only option acceptable to Saudi Arabia is to revalue against the dollar. That maintains the link to the dollar, but at a different rate. Another option is a basket peg. That would allow the Gulf countries to avoid following the dollar down any more, but it also means that they wouldn't follow the dollar up if it rebounds.
Yet another option is to both shift to a basket and to allow the currency to appreciate against the basket, as Kuwait is doing now.
Gerald Lyons and Marios Maratheftis of Standard Chartered suggest a large one-off revaluation to correct for the depreciation of the Gulf currencies associated with the dollar's fall, and then a basket peg.
In recent years many emerging economies have shifted from exchange-rate pegs to a "managed float". Instead of aiming for an exchange rate, their central banks have an inflation target. If the Gulf states move to a single currency, as they plan to in the next few years, that currency should surely float.
Oil exporting economies can also look at pegging to a basket that includes the price of oil. Including oil in a broader basket keeps the currency from moving as much as oil, dampening some of the moves in the oil price.
But it still assures that the exchange rate moves with the price of oil.
