Kuwait's decision to stop pegging its currency to the dollar last year hasn't completely tamed inflation, but experts say many of its neighbors will follow, desperate to fight inflation. Oil is priced in dollars on the world market, but many Gulf countries rely on government-subsidized imports priced in euros and other currencies that have been rising against the greenback. This relationship has pushed up the price of imports, a dilemma that could get worse as fears of a recession in the United States and related interest-rate cuts continue to push down the dollar. Raising interest rates would have little effect on the Gulf states' inflation rates while their currencies remain dollar-pegged. “Inflation is likely to stay on an increasing trend in the short term,” said a Merrill Lynch report about Gulf nations in January. With few other fiscal policies available to control inflation, the region's governments would consider de-pegging or revaluating their currencies, the report speculated. Merrill Lynch predicted Qatar and the United Arab Emirates, with inflation rates of 14 percent and 10 percent, would revalue currencies relative to the dollar or de-peg. In a January interview with Kuwait's Aljarida daily, Steve Conlon, economic officer at the American Embassy, said that Washington was unhappy with Kuwait's currency move because it showed no confidence on the strength of the dollar. However, Saudi's Finance Minister Ibrahim Al-Assaf said in December that any move to de-peg would be a unanimous decision by members of the Cooperation Council, an alliance of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The vice governor of the Saudi Arabian Monetary Authority, Mohammed Al-Jasser, advised against drastic moves. “This is not the first time that the dollar loses value,” he said. “It's part of the business cycle.” Saudi Arabia is less vulnerable to the inflationary impact of the falling dollar because it has a strong domestic industrial base. Many smaller countries like Kuwait, Qatar and UAE import almost everything but oil. Ibrahim Al-Ibrahim, economic adviser to Qatar's emir, told Gulf Times in January that de-pegging from the dollar was being examined. Other countries, like UAE, have said they are sticking with the dollar, but pressure will continue to build if its value remains low. “Any central bank will do their utmost, and they will not belittle any measure which can contribute to controlling inflation at any level,” said Ali Al-Mousa, former deputy governor of Central Bank of Kuwait. Kuwait's decision to de-peg last May led the dinar to appreciate 5.9 percent in 2007, making imports less expensive. Economists, though, estimate that 70 percent of Kuwait's inflation is because of government expenditures of huge oil revenues, a situation faced by other Persian Gulf countries as crude prices hover near record levels. The dollar has considerable weight in the currencies to which the dinar is now tied. Economists say it will take time for effects of the currency move to work through the economy. Merrill Lynch estimated inflation in Kuwait to rise from 5 percent in 2007 to 7 percent in 2008, then decline to 6.2 percent in 2009. HSBC speculated in an October report that other countries may follow Kuwait's lead. Dollar weakness, an oil-driven boom and inflation have deepened expectations that Gulf states will revalue their currencies. The report added that overhauling a long relationship is difficult because it represents a “complete break with the past and a venture into the unknown.” Finance experts are divided about how big an impact de-pegging would have on the value of the US dollar. Al-Mousa, the former Kuwaiti bank official, said that investment flows into the US economy were more important. __
