During his speech at the annual Jeddah Economic Forum, which finished Tuesday, former Federal Reserve Chairman Alan Greenspan suggested that the Gulf Cooperation Council (GCC) countries, which include Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman, end their currency dependency on the dollar.
At the moment the various GCC countries’ currencies are linked to the U.S. dollar, which, in practice, means that their value on the international market are tied to the dollar and are without correlation to the economic performance of the countries themselves.
One of the main reasons for this is that the price of oil is set in dollars, according to John Foster, editor of Islamic Business & Finance, a Gulf-based financial magazine
At the moment the U.S. economy is going through an economic slowdown, while the Gulf countries are experiencing an economic boom. So, according to conventional economic theory, the currencies of the GCC should be strong and have a good exchange rate. However, due to the dollar peg the value of the currencies is kept low, fueling among other things, record levels of inflation.
The high levels of inflation are causing several problems, including sharp rises in the prices of staple food over the past year, which have affected both locals and expats. Another side effect is the negative impact on remittances, money that Asian expat workers send back to their families.
The double burden of rising food costs and lower remittances have, over the last six months, generated several strikes among construction workers demanding higher salaries.
Foster also mentioned that talks were being conducted within the GCC to establish a single currency unit much like the euro in the Europe, in order to strengthen the value to the local countries. At the moment, however, it is unlikely that the 2010 deadline for the establishment of such a unit will be met, which has prompted the UAE and Saudi Arabia to consider breaking ranks.