Zawya Dow Jones/Dubai
Kuwait’s policy of pegging its currency to a basket of currencies has created a stable environment for the exchange rate and has helped avoid inflationary pressures, according to Kuwait Central Bank Governor Sheikh Salem Abdulaziz al-Sabah. “Pegging the (Kuwaiti dinar) exchange rate to a special weighted basket of currencies...has provided a measure of stability to the (dinar) exchange rate which in turn has provided a solid platform to aid development of the local economy,” Sheikh Salem said in an emailed response to questions from Zawya Dow Jones. It has also “assisted in reducing the imported inflationary pressures resulting from fluctuations in the exchange rates of the world’s major currencies,” said Sheikh Salem.Since 2007, Kuwait has pegged its dinar exchange rate to an undisclosed basket of currencies from countries with which it shares financial and trade ties. Before that, it pegged its currency to the dollar, the policy still followed by Kuwait’s fellow members of the Gulf Cooperation Council. The other five states of the six member GCC-Saudi Arabia, the UAE, Qatar, Bahrain and Oman-all have maintained their currency pegs to the US dollar. Recent weakness in the dollar has led to various rounds of speculation that those GCC states might review their currency policies as inflationary pressures have increased and income from dollar-denominated oil exports has been eroded. The dollar has suffered as the US Federal Reserve has pursued a policy of quantitative easing-via purchases of US government debt-in order to stimulate the economy. Sheikh Salem said one advantage of the country’s currency basket has been to allow “an independent monetary policy” rather than “being linked to that of a currency against which the exchange rate is pegged.” Moreover, institutions operating “within the financial sector in Kuwait have been shielded from the often volatile conditions that have affected exchange markets elsewhere in the world,” Sheikh Salem said. “Local businesses have, therefore, been provided with the means to plan for future business expansion without having to make provision for extreme changes in exchange rate values,” he said. Sheikh Salem said the Kuwaiti currency moved within a fairly narrow 4% range against the dollar during 2010, a year in which the major currencies such as the euro, yen and Swiss franc saw large fluctuations. In a recent interview, Bahrain central bank governor Rasheed al-Maraj said his country has no intention of dropping the dollar peg because so many of its transactions take place in dollars. UAE Central Bank governor Sultan al-Suwaidi has repeatedly said that his country was happy with the currency link and has no plans to change its monetary regime. But some economists have argued that the other GCC countries should follow Kuwait’s example and move to pegging their currencies to a basket of currencies. Gerard Lyons, chief economist and group head of research at Standard Chartered Bank said the Gulf region would be better to switch to a currency basket arrangement because of increasing trade with Asia and other emerging markets that do not have dollar pegs.