Kuwait should stop pegging its dinar currency to the US dollar because rising US interest rates are pushing up local borrowing costs and hurting the Kuwaiti economy, a leading lawmaker said on Saturday.
Kuwait, like other oil-producing countries in the Gulf Arab region, links its currency to the dollar and its central bank routinely matches interest rate hikes by the US Federal Reserve to maintain the dinar's appeal.
Youssef al-Zalzalah, chairman of parliament's finance and economic committee, attacked the dollar peg, saying he preferred linking the dinar to a basket of currencies, a policy Kuwait abandoned in 2002.
"Pegging the dinar to the dollar is not a sound policy. Pegging the dinar to a basket of currencies was better," Zalzalah told Reuters, confirming comments reported by local media.
"The dinar was able to maintain its purchasing power in the event of changes to any currency in the basket."
The dollar's long decline against the euro over the past three years raised pressure for an end to currency pegs in the six Gulf Arab states - Kuwait, Qatar, Saudi Arabia, the United Arab Emirates, Bahrain and Oman.
Officials insist they want to preserve a link which has served them well in the past - at least until regional monetary union planned for 2010.
Although the dollar was trading at 18-month highs against the euro on Friday, Zalzalah said the peg was still hurting Kuwait by forcing the central bank to raise its benchmark dinar discount rate in tandem with the Fed.
The central bank raised the discount rate by 25 basis points to 6 percent last week, soon after a quarter point Fed hike. Governor Sheikh Salem Abdulaziz said the 10th rate hike since mid 2004 was also designed to stem inflationary pressures in an economy awash with cash from record oil revenues.