Breaking Away from the Dollar Is Impossible … At Least for Now

There has been a lot of talk lately about the Gulf countries delinking their currencies from the dollar. The possibility of this has been justified by the poor economic and financial statuses of the countries in the region due in part to a decline in the price of oil that is no longer as strong as it has been throughout previous years. Some see the continued strength of the dollar — especially in light of the recent U.S. interest rate increase — as commensurate with the condition of the region’s countries that are suffering from excessive budget [cuts] and a sharp decline in revenue. As the dollar continues to strengthen, it will increase the burden by increasing borrowing costs. Also, it will weaken the competitiveness of the region’s products, which will not help it to achieve a policy of diversifying domestic production that the Gulf States are touting. Therefore, some economists are thinking that delinking from the dollar would provide more flexibility under current economic conditions. It seems as though these countries’ fiscal management policies do not have the space to provide the required incentives [needed] to revitalize the economy and realize the desired level of economic growth.

In reality, all these considerations are justified without a doubt, as they seem correct to a great extent. This is true, except that when given an in-depth look at the economic conditions of the countries in the region and their previous experiences being linked to the dollar, there has not been an opportunity to break away from it.

The first of several reasons why [there has been no opportunity to break away from the dollar] is because so far, the countries in the region do not enjoy a production base or export diversification sufficient enough to benefit from any decline in a currency exchange rate. A lack of this cannot result in a delinking from the dollar because the principle export of the region, which is limited to oil, is priced in U.S. dollars.

Additionally, if the region depends on imports from abroad to fulfill almost all its needs, a subsequent break from the dollar would increase the import bill. Another reason is that the majority of its citizens’ salaries and savings are not held in local currencies. This would mean that, in the event of a delinking of the dollar, their finances and savings would lose an important part of their purchasing power, whether inside or outside of the country. All relevant authorities are, therefore, keen to take notice and to try to avoid this outcome. The other reason that makes it impossible to break away from the dollar is that those countries’ previous experiences with it allowed them to achieve a state of financial and monetary stability. Their financial and monetary states have been strengthened by the confidence that there would not be unexpected surprises or undesirable fluctuations in the exchange rates. The effect of this subsequently re-assured investors and depositors to move their money into and out of the region without fear or potential risk of exchange rate fluctuations because their currencies are fixed to the dollar and are stable over the long term. The confidence factor in stabilizing exchange rates is something very important. This is certainly true for countries keen on encouraging investment, and [particularly] private investment abroad, which the currency linkage represents in this case as something that ensures that there is no exposure to exchange rate dangers. Of course, the price for this stability and security is that they must accept and cope with the rising dollar's exchange rate, which would increase the cost of living and production. The sum of this means the weakening of their competitiveness and investments. However, in general, this price is accepted considering the stable exchange rates and free movement of capital.

With regards to delinking from the dollar and the flexibility of Gulf fiscal management policies to do that, it is true that is not something that is easy to do. This is especially the case in the absence of a development of tools and crisis monetary policies that are required. The effect of this could, therefore, lead to results that are the opposite of what is desired. In theory, the ability to have flexibility in a monetary policy that is not linked to a fixed exchange rate can be beneficial when considering the different economic cycles of the countries in the region compared to the United States, whose currency is the dollar.

However, in practice, the policy of having a flexible exchange rate does not necessarily lead to guaranteed results, according to the experiences of many countries in the world. This means that they usually lack the advanced policies and sophisticated financial tools in addition to the necessary experience and qualifications to ensure the success of such policies that can be fraught with risk. All things considered, we think that for the countries of the region, delinking from the dollar seems impossible right now. However, we believe that this may change and evolve in the future, therefore calling for a reconsideration of this assessment.