GCC may not follow US Fed to avoid ‘stifling’ non-oil growth
Pegging Gulf currencies to dollar hinders diversified economy
KUWAIT CITY, Oct 12: The Economist Intelligence Unit reported that some of the wealthiest countries in the Gulf Cooperation Council could decide not to follow the US Federal Reserve which has raised interest rates, citing Kuwait in particular because it does not want to stifle
non-oil growth in the country, reports Al-Rai daily.
The EIU pointed out that this option is not available to Bahrain due to financial pressures on it, stressing in general that the expected tightening of interest rates in the region will constitute an obstacle to its growth.
EIU sources indicated that pegging the Gulf Cooperation Council countries currencies to the dollar was beneficial because it provided them with a credible basis for their monetary policies, noting that this link made the Gulf countries follow the US Fed example in its interest rates policy, while the Kuwaiti dinar exchange rate is linked to a basket of currencies dominated by the dollar.
Consistent
The unit clarified that most of the GCC countries raised interest rates in a manner that is fully consistent with the
US increases, which have totaled 225 basis points so far, with the expectation of more increases in the context of the Federal Reserve’s efforts to reduce the inflation rate to 2% from the current rate of 8.3%. It is expected that the total US increases will reach 375-400 basis points during 2022 and 2023.
However, the EIU warned that the monetary policies of the Gulf countries could mean implementing a faster and more strict monetary policy than is required, especially since inflation rates in these countries range between 2 and 5 percent compared to an average of 8 percent and more in the United States, noting at the same time, the Gulf currencies are witnessing a rise in the exchange rate as a result of the strengthening of the dollar, which will negatively affect competitiveness in the non-oil sector, and consequently hinder efforts to diversify the economy.
The unit added, “The rise in interest rates will also mean an increase in borrowing costs for families and businesses, which will lead to a slowdown in the activity of the non-oil sector and growth in general in these countries next year.”
Those companies that were hoping to take advantage of the various measures to facilitate the loans that were applied during the “Corona” and which were extended in a number of countries until 2022.
The Economist Intelligence indicated that despite the improvement in economic activity in the UAE, credit growth in the private sector during the first half of this year was only about 3.7 percent, a reflection of banks’ caution against repeated defaults in recent years by the sector’s borrowers.