Due to political disputes among Gulf Cooperation Council (GCC) countries and the dramatic decrease in oil prices, the GCC countries may face difficulties in sustaining their currency pegs. Even though the GCC has enjoyed fixed exchange rate regimes that are considered the ideal macroeconomic policy structure for these states, its foreign exchange markets have felt the pressure of the lower energy prices.
In his Doha Center policy briefing, Luiz Pinto (formerly a joint fellow with the center and Qatar University) inspects the basics of the GCC currency pegs and the potential of sustaining them over time. He argues that although static exchange rate regimes are still ideal for all the GCC countries, the capability of policymakers to support the pegs differs across the region. Moreover, the paper analyzes how the weighing scale of the payment pressures caused by different factors including the geopolitical risks have caused “peso problems” and increased the probabilities of liquidity catastrophe in the Gulf.
Pinto, a co-founder and managing director of the advisory firm Brics Overseas, asserts that GCC countries should provide economic support for Bahrain and Oman to prevent a financial crisis in the region. He calls for establishing new regional financial collaboration that includes bilateral agreements to reinforce policy negotiations. He concludes by encouraging GCC countries to attend peer-review meetings and macroeconomic monitoring sessions that would help them exchange data on short-term and medium-term capital flows.