Gulf states remain wedded to dollar

As oil terms soared and the value of the U.S. Dollar plunged, a chorus of academics and policy experts took up the cry that Saudi Arabian Peninsula and neighboring Gulf state should wantonness their currency peg to a depreciating dollar to help armed combat the sociable ravages of rising prices that were spread across the part.

The brief, put forth by the likes of Alan Greenspan and the Harvard University economist St. Martin Feldstein, made impeccable theoretical sense: with Gulf economies riding an oil boom, higher interest rates and stronger currencies were needed, not the contrary. Currency bargainer took heed.

But that statement made only limited headway in Saudi Arabian Peninsula. And now, with the dollar's modest comeback and oil's retreat, policy shaper in the part have been bolstered in their resoluteness to keep the peg in place and accept the effect of higher inflation if need be.

"The peg is here to stay, no ifs or buts," said Elijah Muhammad Al-Jasser, the vice governor of the telephone exchange bank who oversees the financial management of Saudi Arabian Peninsula's glide dollar modesty base.

posing in his spacious office on the top floor of the Saudi arab Monetary federal agency's postmodern headquarters, the academician in Al-Jasser - he has a doctor's degree in economic science from the University of Golden State, Riverside - gusto the to and fro of the argument.

But the policy maker in him takes a different view: the Saudi authorization have long said that a precipitous revaluation would addition investor uncertainness as well as psychiatrist the authorities's budget surplus and its foreign exchange modesty. Plus, they say, it is not the exchange rate that is causation the price spiral.

"Inflation in our case and in this point of time is not a monetary phenomenon," Al-Jasser said during an interview last month. "It is driven more by government and private sector spending, coupled with the global boom in China and India. Wages are flexible here."

Flexible they may be, but that is cold comfort for millions of immigrant workers who swarm to countries throughout the Gulf - not just Saudi Arabia but the United Arab Emirates, Qatar and Kuwait as well - in search of a better life.

Consider Sher Bahader, a cab driver here in the nation's capital, who ticks off the items that have soared in price since inflation hit a 30-year high. Milk, food and, most acutely, rent.

"Too many things are expensive; its very, very difficult," said Bahader, 57, who works seven days a week from 4 in the morning to 11 at night to make enough to send to his five children and wife, who live in a small village in Pakistan-administered Kashmir. "If the oil price is high, that is good for the Saudi Arabian people, but not for the poor man."

The root of the problem is clear. Inflation is high and rising: 10.7 percent in Saudi Arabia as of April, up from 1 percent in 2003; 14 percent in Qatar for the first quarter of 2008; and 12 percent for the United Arab Emirates as of March.

But even as Gulf central bankers and outside prognosticators quarrel over how to respond to the situation, the intellectual divide between Gulf central bankers and outside prognosticators also highlights the gap that often exists between the prescriptions offered by academics and policy outfits in Washington, New York and Cambridge and the grittier realities that face policy makers in their home countries.

Indeed, academics are right when they say that the lower interest rates that dollar-pegged Gulf economies must adhere to have fueled a development boom that has resulted in major supply constraints.

In a part of the world that prizes stability of all kinds, however, it was always unlikely that countries like Abu Dhabi and Saudi Arabia would abruptly revalue and watch their budget surpluses disappear just to appease outside experts - or dyspeptic taxi drivers for that matter.

Especially when memories of oil at $10 a barrel and gaping budget deficits remain vivid.

"The Gulf countries have opted to inflate," said Brad Setser, an international financial analyst at the Council of Foreign Relations who was one of many arguing that the Gulf countries should forgo the dollar link. "If oil revenues are going up 500 percent you can afford to pay your workers more. But that will just add to the inflationary spiral."

It is not just the academics either: the world's credit ratings agencies have recently warned that higher inflation in the coming years could lead to social unrest in the region even as the agencies themselves conclude that the large internal and external surpluses rule out a downgrade.