However, Dr. Muhammed Al-Jasser, vice governor of the Saudi Arabian Monetary Agency (SAMA)Saudi Arabian Monetary Agency (SAMA), immediately ruled out de-pegging the riyal from the greenback.

While addressing a packed room of delegates at the 9th Jeddah Economic Forum at the International Conference and Exhibition Center, Greenspan also said oil prices would remain high in the near future. "Unless oil producing capacity is increased, there will be tremendous pressure on oil prices. Only increasing oil production, whenever there is a rise in oil prices, is not enough. There is an urgent need to have more oil companies and increase in production capacity," he said.

On the issue of floating the currency, Greenspan said, "Critical political judgment is needed in terms of inflation. If currencies are allowed to float then the pressure on inflation will be significantly soft."

Due to rising oil prices, which is hovering around $100 a barrel, Gulf economies are booming. The pegs restrict the Gulf's ability to fight inflation by forcing them to follow US monetary policy at a time when the US Federal Reserve Board is cutting rates to ward off recession.

The Gulf states are facing a major problem of how to tackle inflation. Inflation in Saudi Arabia touched 7 percent in January, its highest level in more than 25 years.

However, Al-Jasser said revaluing the Saudi riyal would not necessarily help reduce inflation because Saudi Arabia has an oil-based economy and is trying to diversify.

The SAMASAMA vice chair added that although Kuwait has delinked its currency from the dollar, inflation has not reduced there. Likewise, inflation is the highest in Qatar, the fastest growing economy in the Gulf Cooperation Council (GCC).

"As the price of riyal is not governed by the dollar rate, the economic growth will not be affected... Saudi Arabia's growth is strongly linked to the demand of oil," he said.

"If oil prices are high the economy will grow rapidly, but if oil prices are low the economy will slowdown... Because of rising demand in major emerging economies such as China and India, the pressure on oil prices will continue as there is not enough oil available to meet the demand."

Al-Jasser also said that the price of oil is more volatile than other commodities. "Oil prices will stay permanently high because there is a tremendous increase in demand while the supply problem persists," he explained.

Commenting on Greenspan's and Al-Jasser's statements on currency policy, Dr. John Sfakianakis, chief economist at the Riyadh-based Saudi British Bank (SABB), who is attending the forum, told Arab News, "I think Greenspan's remarks do make lot of economic sense in nonoil economies. However, in oil economies currency stability, which means no revaluation, makes more economic sense."

He added, "A weak dollar would not prevail over the long-term which means that if you revalue today and then, when the dollar gains strength, you would be forced to devalue... The need today is for high economic growth to become sustainable so as to create the necessary jobs and we should not regard the currency debate as the crux of economic policy."

Sfakianakis said a revaluation would immediately decrease the amount of oil revenues Saudi Arabia is receiving and that, since 90 percent of government revenues are derived from oil, the logic of no revaluation has to prevail. "A revaluation, if moderate, will not solve the inflationary pressures in Saudi Arabia and the GCC countries. A basket of currencies as a solution to the inflationary pressures is proving to be less successful in fighting inflation in Kuwait," he said.

During a panel discussion on "Financial Horizons: The Circle of Influence," Abdulkareem Abu Al-Nasr, chief executive officer of the National Commercial Bank, said the private sector involvement is greater now than the first oil boom. He also said there was a need to give a boost to education and friendly regulations.

Maha K. Al-Ghunaim, chairperson and managing director of the Kuwait-based Global Investment House, said there is a tremendous change in investment policies by the GCC states. Al-Ghunaim said that GCC countries are now bringing their money back to their own countries and investing, unlike before when they invested in Europe and the US. She added that the rise in investment and major projects in the region are set to boost GCC economies.

By Khalil Hanware

© Arab News 2008

 

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