When rulers of the Arab Gulf Cooperation Council (GCC) states gather for their 28th Supreme Council Summit in Doha in mid-December, the six rulers and their deputies will tackle a full agenda, ranging from critical security matters to equally important political questions.
This summit may also tackle a most unusual concern, namely the much discussed and little understood currency policy, which threatens GCC unity. How GCC rulers propose to solve their differences on the latter will make or break the summit.
Of course, no one will know their decisions, since all summits are shielded in total mystery. As an occasional invitee at GCC summits, covering them is an exercise in frustration, since so little is shared with journalists. Naturally, when the subject is security related, as for example throughout the 1980s when the Iranian Revolution and the Iran-Iraq War dominated all formal discussions, one expects little news.
This year, however, something pertinent will be addressed and whatever conclusions are inked into laws, may well affect millions.
Exchange rate
On the surface, GCC countries have no persuasive reasons to change exchange rate policies, especially since the peg - or to define it more precisely a currency's "measure against" - to the dollar proved its long-time worth.
Except for Kuwait, GCC states relied on a de facto peg of their respective currencies to the dollar, at least since 1981.
The Kuwaiti dinar was cleverly measured alongside a basket of currencies before 2003. To be sure, Kuwaitis never neglected the US dollar, especially after the 1991 liberation of the country sealed their destiny.
After 2003, however, Kuwait floated its dinar - within a 3.5 per cent trading band with the dollar - before opting out of the peg entirely last May.
Today, Kuwait calibrates the dinar's real worth against an undisclosed basket of currencies, which probably includes the European euro, the British sterling pound and the Japanese yen. Needless to say, Washington was not particularly thrilled with these developments, but Kuwait's long term worth, as both a garrison state as well as a leading oil producer, was worth more than financial regulatory preferences.
Today, all GCC states, but especially Bahrain, Oman, Qatar, Saudi Arabia and the UAE, face significant inflationary pressures as expenditures grow exponentially. In an ideal situation, exchange rates should quickly appreciate when the universal currency loses a significant portion of its value, as is the case with the dollar at present. No such adjustments were introduced because of the currency pegs, while GCC concerns with a unified currency, targeted for 2010, preoccupied many.
Therefore, one must assess the exchange rate conundrum at the Doha Summit with the moribund common currency issue, which is in abeyance for the foreseeable future now that Oman withdrew from further discussions.
Moreover, the leaders should decide whether the peg with the dollar is still worthy as a fiscal policy anchor, or whether they must abandon it to attract non-dollar foreign investments.
In other words, the question goes beyond dollar payments for oil exports, to encompass foreign direct investments in euros, pounds, yens, or yuan.
Naturally, GCC leaders are critically concerned with short-term losses, because government assets are mostly denominated in dollars, as are bank reserves. Over the long-haul, however, currency appreciation will significantly reduce whatever impact dollar losses may have on local markets.
Herein lies a key political challenge, because neither the peg to the dollar nor the common currency, make sense on exclusive economic grounds.
Sole exception
New exchange rate policies may not have feared impacts, with the sole exception of affecting future bond sales and ratings, but GCC leaders cannot rely on significant fiscal surpluses. With additional needs, ranging from the requirements to create millions of new jobs to appeasing an edgy ally, Gulf officials must also factor in the terror dynamic.
Towards that end, one should not be surprised to "hear" that GCC leaders considered various and appropriate re-evaluations of their currencies.
They might even issue very strong assurances to industrialised countries that ample supplies of oil and gas would be guaranteed, as enunciated by the Emir of Qatar Shaikh Hamad Bin Khalifa, probably not a fortuitous coincidence.
That will mean that GCC states decided to transform their upcoming summit into a relevant gathering. One succeeds after generously greasing the wheels of world markets in reassuring ways.
Dr Joseph A. Kechichian is a commentator and author of several books on Gulf affairs.
