Skip to content Skip to Search
Skip navigation

Inflation raises old debate on currencies being pegged to dollar

Creative Commons
To peg or not to peg? That is the question

The Gulf’s currencies have been linked to the US dollar for decades: the Omani riyal since the 1970s, the Qatari riyal since mid-2001 and the Bahraini dinar and the UAE dirham officially since early 2002.

The latter three have effectively been linked to the American greenback since the 1980s, as has the Saudi riyal.

The Kuwaiti dinar was the exception, as in May 2007 it decided to shift its peg to a basket of currencies although the US dollar still accounts for 70-80 percent of the value.

This week central banks in Saudi Arabia, the UAE, Qatar and Bahrain mirrored the policy of the US Federal Reserve and increased their interest rates by 75 basis points (bps).

“The rate hikes by the GCC central banks continue to show commitment to the regional currency pegs to the dollar,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, said.

“Inflation in the region is lower than in the US, so the same magnitude of monetary tightening is not required in the region. 

“This is especially true for the GCC countries that introduced a fuel price cap.”

With more Fed interest rate increases predicted throughout the rest of the year, we asked analysts to give their views on whether pegging Gulf currencies to the US dollar still makes economic sense.

‘This does make the decision to peg the currency a difficult one’
Iain Ramsay, Dubai-based chief investment officer at financial services firm AHR Private Wealth

Having no independence over monetary policy and rate-setting continually leaves Gulf countries vulnerable to making rate decisions that may not be correct or warranted in their specific countries. 

When considering the very different economic dynamics of the Gulf countries against the US, this does make the decision to peg the currency a difficult one. 

For example, while the US has flooded their economy with monetary and fiscal stimulus and is now looking to counteract that with rate rises, many Gulf countries have not, to the same extent.

They benefit greatly from higher energy prices, whereas the US does not. This alone could be a strong argument for independent monetary policy control.

However, it should be said that, with higher interest rates, a peg to the world’s major reserve currency brings with it much stability.

The region is benefitting from that at present, as the US dollar has strengthened considerably against other major currencies. 

This stability in currency valuation can be invaluable to the region’s economies, so serious consideration should be given to an alternative monetary approach.

Depegging wouldn’t be a panacea
Rachel Ziemba, New York-based founder of geo-economic advisory firm Ziemba Insights

Regional authorities are not ready to give up the predictability of pegging to the dollar until they are willing to move to a basket peg. 

Not that depegging would be a panacea. The increase in rates is global and it’s likely that local economies would need to take some tightening measures. 

A more market/external, balance-based currency would tend to move with oil prices and would also likely have appreciated.

‘I expect that to change one day but not right now’
Keren Bobker, a Dubai-based independent financial advisor and senior partner at Holborn Assets

The GCC countries have been pegged to the dollar for so long (with the exception of Kuwait) due to oil revenue, which is priced internationally in dollars. 

I expect that to change one day, but not right now, with the rise in prices and current demand.

‘It is a policy that has served regional economies well for several decades’
Faisal Durrani, London-based partner and head of Middle East research at real estate advisory firm Knight Frank

The Gulf economies have on numerous occasions explored the idea of depegging, or adjusting the dollar fixed-peg rate. 

It is a policy that has served regional economies well for several decades. Indeed, the recent strength of the dollar has to an extent helped to contain imported inflation.

As long as it retains its position as the go-to global currency benchmark, it is difficult to envisage a scenario where the region’s governments opt to break with the status quo.

‘Decoupling would not affect the competitiveness of Gulf oil exports’
Dr Ryan Lemand, an Abu Dhabi-based non-executive director at financial services firm FundRock

Countries that have their currencies pegged to the dollar should generally follow American monetary policy on interest rates, to avoid arbitrage and imbalances.

This is despite the fact that these countries do not need to adopt such an aggressive monetary policy from a fundamental economic perspective. 

The GCC countries are net exporters of oil and oil derivatives. Other than that, they are not major exporters of most goods and services. 

What’s more, the GCC states, and particularly the UAE, have strong economic balance sheets. 

Tying local currencies to the dollar keeps these currencies artificially undervalued when compared with their value if they were not pegged.

Given the increasing difference in macroeconomic strength between the GCC countries and the US, it could be worthwhile for the region’s monetary policymakers to consider decoupling from the dollar. 

In the US, monetary policymakers cannot increase interest rates above certain levels because of the adverse effects on debt servicing. 

But this is not a problem for the GCC countries, and the divergence is widening every day.

Decoupling would not affect the competitiveness of Gulf oil exports, thanks to the dollar pricing of oil. 

Plus, stronger local currencies would improve purchasing power for GCC consumers, whether they’re buying imported goods and services, or travelling abroad. 

‘High costs associated with depegging could outweigh the current decline’
Fazeela Gopalani, Dubai-based head of the Association of Chartered Certified Accountants (ACCA) Middle East

Pegging has been a longstanding practice which has worked well in the most part and needs to be viewed with the same longevity lens.

Yes, we have seen the fall of the dollar since early 2000, which has driven a decline of value against other currencies such as the Euro, but it’s not a new issue. Anyone dealing in currencies has at some point faced similar issues.

Whilst it’s clear this has reduced the purchase power of individuals and business in the region, it’s not just a local issue considering that much of the purchasing power impacted is food-related – and this is a global phenomenon.

To simply abandon the pegging system needs a thorough work through as the high costs associated with this action could outweigh the current decline and future upturn.

Latest articles

More than 24 million people visited the World Expo event at Expo City Dubai between October 2021 and March 2022

Construction begins at Expo City Dubai site

Construction has begun on the first residential properties at Expo City Dubai, part of a mixed-use master plan to repurpose the legacy site after the world fair came to a close two years ago. Master developer Expo City Dubai announced last week that it has awarded four key contracts for its Mangrove Residences. UAE-based USF […]

OTB Group has a presence in Dubai with its Maison Margiela store in the Dubai Mall

Chalhoub Group in venture with Italian luxury brand

Luxury distributor Chalhoub Group has entered into a joint venture with Italian fashion conglomerate OTB Group to expand the brand’s footprint in the Gulf. OTB (which stands for Only The Brave) owns the Diesel, Jil Sander, Maison Margiela, Marni and Viktor&Rolf brands, the Staff International and Brave Kid companies, and holds a stake in the […]

Arid conditions brought about by the drought in Morocco are affecting the cost of sheep

Drought pushes up sheep price for Eid in Morocco

The price for a sheep in Morocco for the annual sacrifice at Eid al-Adha has increased on average at 10 times the 2.2 percent rate of inflation. A medium-sized female sheep costs MAD4000 ($400) as opposed to MAD3000 last year. This puts it out of range for many families in the country where a high […]

Countryside, Farm, Field

Oman to build agricultural city to enhance food security

Oman will build an agricultural city as part of its food security initiative, a news report said. Saham Agricultural City will cover an area of 65 sq km, with 70 percent dedicated to agriculture and 30 percent to urban development, Oman Daily Observer reported. The city will use advanced technologies such as hydroponics, aeroponics and […]