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GCC must revalue currencies but retain dollar peg, says Forbes

DUBAI — The UAE and other Gulf states must revalue their currencies at one-time, by 8-15 per cent, rather than abandon the US dollar-peg and embrace a currency basket as this would create economic chaos.

The warning came from Steve Forbes, president and CEO of Forbes and editor in chief of Forbes magazine, who said that a revaluation will help tame inflation.

But he stressed that currencies in the Gulf Cooperation Council (GCC) should be pegged again to the dollar, and for countries to wait for another 3-4 years if the US changes its monetary policy.

"In the meantime, do not float your currency," he told business leaders in the Gulf at yesterday's opening of the Leaders in Dubai Business Forum 2007.

He said that if the price of gold is over $450, there must be something wrong with the US monetary policy. The current price of gold is between $780-800.

He said that Kuwait, which unshackled its dinar from the greenback in May, should rejoin the five other GCC states of Saudi Arabia, Bahrain, Qatar, the UAE and Oman to pegging their currencies to the dollar.

He cited the case of Argentina, which underwent an economic debacle in 2000-2001 when it abandoned the dollar-peg. He contrasted this with China, which has resisted calls by the US to revalue its renminbi, or yuan, and is enjoying a robust economy.

He also mentioned other economies such as Taiwan whose financial system "fell like a stone" at one time or another following a move to a basket of currencies.

Regional financial analysts have said that abandoning the dollar peg is a question of when rather than if for the GCC countries. Some estimates put inflation in the UAE at 12 per cent per annum, although it could be higher. The GCC states have been reluctant to move to a currency basket because of the oil sales that are denominated in US dollars, and the group's $2 trillion worth of sovereign wealth funds which are mostly invested in US Treasury bills.

In a speech entitled "The Rise of China", Forbes said the UAE, the GCC and the whole Middle East should learn a lesson from China by avoiding concentrating on only one economic sector.

He said that even with its exports growing over fifty-fold from $21 billion in 1978 to $1.2 trillion last year, China has made itself vulnerable to any downturn in its major markets — US and Europe — because its economy is 95 per cent export manufacturing base.

He said China may have the world's fastest growing economy but still it is mainly an assembly hub for raw materials from other countries. He added that it would take at least 10 years for China to become a leading country in high technology industry such as India.

He stressed that China has poor adherence to intellectual property rights (IPRs) resulting to most of its foreign-patented products being counterfeit.

He said Chinese government is doing something to meet its IPR obligations as it is a member of the World Trade Organisation but the local leaders have been lacklustre in their move to curb violations.

He added that China has become an inspiration to world economies, nevertheless, what with the number of foreign firms doing business there swelling to over 40,000 in 2006 from 12 in 1978 while its per capita income had grown from $16 to $2,000 and still rising.