Kuwait on Sunday pegged its dinar to a basket of international currencies after more than four years of linking the local currency to the dollar, in a bid to reduce inflationary pressures.
The oil-rich emirate had historically pegged the dinar to a basket of currencies before pegging it to the dollar on January 5, 2003 in preparation for single currency in Gulf Cooperation Council states planned for 2010. The value of the dinar immediately jumped from 289.14 fils to the dollar to 288.01 fils on the news.
There are 1,000 fils in one Kuwaiti dinar. Central Bank governor Sheikh Salem Abdul Aziz al-Sabah said in a statement quoted by the state-run KUNA news agency that a sharp decline in the dollar's value had a negative impact on the Kuwaiti economy in the past two years. "In spite of efforts taken by the central bank to reduce the impact of the dollar's decline against other currencies... it resulted in a drop in the dinar's purchasing power against other international currencies," he said.
"That contributed to a rise in the domestic inflation rate and accordingly this step comes as part of efforts to reduce inflationary pressures on the local economy." When Kuwait switched to the dollar peg in 2003 it set the exchange rate at 299.63 fils but allowed it to fluctuate 3.5 percent. The margins were set between a maximum of 310.11 fils and a minimum of 289.14 fils, a level reached last year following the sharp drop of the dollar against major international currencies.
Sheikh Salem said the switch would provide more flexibility in setting the exchange rate, thus boosting the ability of the domestic economy to "absorb the impact of sharp fluctuations in the exchange rates of major currencies." Kuwaiti economist Hajjaj Bukhdour said the decision would help reduce "imported inflation." "The decision will effectively reduce the value Kuwait pays for its imports from countries other than the United States, thus reducing the rate of imported inflation," Bukhdour told AFP.
The planning ministry said last week that the inflation rate reached 5.1 percent in the first quarter compared to 3.1 percent last year, but Bukhdour said he believed the actual rate was higher than eight percent. Sheikh Salem reiterated Kuwait's commitment to plans for a single currency among the six members of the GCC. "Until completing all technical, legislative and institutional requirements for the GCC monetary union and single currency, the Central Bank of Kuwait will continue to peg the dinar against a basket of currencies," he said. Bukhdour said Kuwait's measure reflected difficulties faced by the alliance to achieve their target by 2010, especially after Oman had announced it would not be able to meet the target date.
The GCC, which groups energy-rich Bahrain, Kuwait, Oman, Qatar, United Arab Emirates and Saudi Arabia, have agreed to a number of monetary union criteria but failed to reach a consensus on a number of key issues. The main stumbling blocks include agreement on inflation rate, which has soared in Qatar and UAE and the lack of political willingness by member states to relinquish part of their independence in favour of a single currency.