EXCLUSIVE - Gulf revaluation talks due in days - Bahrain

  • World
  • Saturday, 08 Dec 2007

By Mohammed Abbas

MANAMA (Reuters) - Gulf Arab policymakers will meet within days to discuss currency revaluations after the oil producing region's rulers agreed to keep exchange rates pegged to the weakened dollar, Bahrain's foreign minister said on Saturday. 

Other Gulf states preparing with Bahrain for monetary union as early as 2010 have declined say whether they are considering revaluation after agreeing at a summit last week to keep any reform talks secret, to avoid stirring market speculation. 

Since the summit, the United Arab Emirates central bank has backtracked on its appeal for an end to Gulf dollar-pegs and last week ruled out any change in currency policy for "the foreseeable future". 

Currency revaluations are being considered, although states with dollar pegs have agreed to keep them in place, Bahraini Foreign Minister Sheikh Khaled bin Ahmed al-Khalifa told Reuters on the sidelines of a conference in Manama. 

"That's being discussed between the central banks and there will be a meeting between the ministers of finance and the central bank governors in the next few days," he said, when asked about revaluations. 

Sheikh Khaled, a member of the ruling family, declined to say where the meeting would take place. "That will not really change a lot. It will not mean a big change." he said. 

His version of Gulf currency diplomacy tallies with details given by a source familiar with Saudi foreign exchange policy who told Reuters last month Riyadh was willing to consider its first revaluation in 21 years to keep monetary union alive. 

Any revaluation would be "small" and would be carried out in tandem with other Gulf states, the source said, ruling out severing the riyal's peg to the dollar. 


All countries with dollar pegs have no plans to drop them, Sheikh Khaled said. Kuwait broke ranks with its neighbours in May and started tracking a currency basket, saying the dollar's slide was fuelling inflation by making imports more expensive. 

At the Gulf Cooperation Council (GCC) summit Qatar said currency reform was a "sovereign decision" and that any country had the right to follow Kuwait's example. 

"The right is there. Yes, each country has the right, but we do have a common policy," Sheikh Khaled said. 

Kuwait cast doubt on the viability of common currency policy by scrapping its peg. The UAE raised expectations it would follow when it called last month for all Gulf states to track currency baskets, drawing a rebuff from Saudi Arabia. 

"We are going to take the appropriate decision, but only as the GCC," UAE Foreign Minister Sheikh Abdullah bin Zayed al-Nahayan told Reuters on Saturday in Bahrain, declining to give details of the meeting of central bankers and ministers. 

Saudi Arabia, the largest Arab economy, has not changed the riyal's rate since 1986. With the Gulf's largest population, the kingdom ran budget deficits in the 1990s and fears a revaluation would cut the riyal value of dollar-denominated oil revenue. 

Its smaller, wealthier neighbours are more concerned the weaker dollar is eroding savings of expatriates, who dominate their workforce, and hampering their central banks in the fight against inflation, at decade highs across the Gulf. 

The dollar pegs force the region to shadow U.S. interest rates. With the U.S. Federal Reserve cutting rates to contain the fallout from a mortgage crisis, Gulf central banks are following to prevent currency appreciation. 

With more Fed cuts expected and the dollar hitting record lows on global markets last month, investors expect Gulf states to give up on their pegs and allow their currencies to appreciate. 

Gulf central banks are trying to quash those expectations. 

UAE Central Bank governor Sultan Nasser al-Suweidi said last week his country had no plans to alter exchange rate policy, re-aligning his position with that of Saudi officials including Finance Minister Ibrahim al-Assaf. 

Suweidi had nourished market expectations of an imminent change in policy when he said last month he was under growing social and economic pressure to drop the peg and track a currency basket. 

Unlike Kuwait, the UAE would only act in concert with its neighbours, Suweidi said in a series of interviews that led investors to push the UAE dirham to 17-year high and the Saudi riyal to 21-year peak. 

The Gulf states also agreed at their summit to stick to a 2010 deadline for monetary union. Oman, one of six states that had agreed to the target date, said last year it had decided not to join by 2010. 

"I hope we do but I don't think we will make 2010," Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani told the conference in Bahrain, when asked whether other states would meet the deadline. 

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