Marketplace Middle East - Blog
1/31/08
The Heat is on

It is certainly not the first thing on the mind of Ben Bernanke and the board of governors at the U.S. Federal Reserve, but the second aggressive move within a span of eight days is putting the heat on his counterparts in the Gulf.

Five of six members of the Gulf Cooperation Council remain linked to the U.S. dollar through a historic pegging, designed to keep inflation at bay. We are seeing the first signs of cracks with that policy and realistically one may not see the peg lasting through 2008.

In an interview from Davos last week with “Marketplace Middle East” Qatar’s Prime Minister Sheikh Hamad bin Jassem Al Thani said, “We are studying all options at the moment”, adding, “Every country has to see its way out of this, but only after consultation with the GCC.”

You don’t even have to read between the lines to get the message that there is a sense of urgency. Inflation of 14 percent in Qatar threatens to undermine the economic master plan being pursued by the royal family. A visit to Doha in the past six months opened my eyes to what is quietly in store. Education, technology, energy and financial services hubs are underway – not at the breakneck pace of Dubai, but a measured response considering Qatar sits atop the largest gas field in the world and remains a key OPEC producer. While not in competition with the United Arab Emirates, Qatar and the UAE share common traits today: Fast growth and equally high inflation.

The March to 2010

Under ideal circumstances and without the interest rate pressure applied from the Federal Reserve, GCC members would ideally like to transfer their peg to the dollar to their own single currency. Time is not on their side. Sheikh Hamad was candid in his reply; “It (2010) is just a target. I don’t think we will reach that target.” This means that the economies in the region won’t converge as planned by then and they may grow their separate ways, until they can come together by, say, 2015.

Like the Euro introduction before it, a single Gulf currency will indeed help control inflation with a single, independent central bank and it will strip out a great deal of national protectionism still afforded some of the vast trading families. Also think of all the operating costs one can strip out with a single currency for investments and transactions?

That all seems like a long way off. In the meantime, there is a test underway -- a test of wills within the GCC whether to stay with or abandon the dollar link -- a test to the concept of de-coupling. Can the Middle East sustain its fast growth, infrastructure outlay and the ability to build intellectual capital to match the financial capital?

The answer to that question will likely come after the Federal Reserve finishes its aggressive attempts to stave off recession and what many still see as a potential global credit crunch.


What do you think? Email us at mme@cnn.com, or click on "add a comment" below.
GCC member deserve to be free from bondage. U.S. economy is endanger and the recession can be seens from now.

GCC country should react before its too late. The rising inflation eventually will turn people to think and find a quick solution of the problem.
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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