De-pegging 'no answer to inflation'

Henry Paulson's comment comes after Qatari adviser calls dollar peg "unreasonable".

    Paulson said Gulf leaders do not believe de-pegging will solve the inflation problem [AFP]

    Speaking in Doha on Sunday, Paulson said: "You can look at Kuwait, they depegged to a basket of  currencies (but) they have the same inflation ... problem."
    But he did not rule out any move by the Gulf states to abandon the peg, reiterating his view that currency policy decisions were sovereign matters.
    The Gulf oil producers - with the exception of Kuwait - peg their currencies to the dollar, which means that they must match interest rate cuts introduced by the US Federal Reserve.
    But many economists say the rate cuts are inappropriate for the booming Gulf economies and worsen inflation.
    Calls to de-peg
    Ibrahim al-Ibrahim, an economic adviser to the emir of Qatar, called on Friday for the Qatari currency to be de-pegged from the US dollar.
    Al-Ibrahim said it is unreasonable to peg to a declining currency while the country's economy is growing.
    The Middle East Economic Digest magazine quoted al-Ibrahim as saying that he was making every effort to convince the Qatari government to de-peg its currency from the US dollar, but that any action must be taken in co-ordination with other Gulf Arab states.
    Analysts believe that if there is a move to de-peg it is likely to be a decision taken jointly across the Gulf Co-operation Council (GCC).
    The GCC states have a long-term goal to achieve monetary union and abandoning their dollar pegs could hamper those efforts.
    Sovereign wealth funds
    Speaking more widely about investments, Paulson said he believed the region's sovereign wealth funds were mainly seeking returns on their investment rather than pursuing political goals on behalf of their governments.
    Many Gulf states put their petrodollars into government-run sovereign wealth funds that then make investments abroad.
    Paulson said adoption of "best practice" guidelines, such as those being developed by the IMF, by the government-run funds would help allay protectionist fears.
    He also said he has received indications of interest for investments from the Gulf region in a new clean technology fund supported by the US, Britain and Japan.
    The multibillion dollar fund aims to subsidise projects in developing economies - such as power plants that use the lowest carbon-emissions producing technologies commercially available.

    SOURCE: Al Jazeera and agencies


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