Satyendra Pathak
doha
Qatar recently hosted the first edition of the annual conference aimed at strengthening joint cooperation among the central banks of Gulf Cooperation Council (GCC) countries.
Titled "The Impact of Exchange Rate Policy, Digital Transformation, and Artificial Intelligence on Financial and Monetary Stability in GCC Countries,” this groundbreaking event brought together distinguished leaders from the central banks of the GCC countries.
The conference’s first session began with remarks from Qatar Central Bank Governor Sheikh Bandar bin Mohammed bin Saoud Al Thani who emphasised the central role of exchange rate policy in the economic framework of each country.
He explained that each nation adopts a currency policy tailored to its unique economic nature. In the case of the Gulf countries, most have implemented a fixed exchange rate system, which has proven successful in stabilizing their financial and monetary environments.
Sheikh Bandar highlighted that the fixed exchange rate policy has brought numerous benefits, including attracting foreign investment, preserving domestic capital, and mitigating fluctuations in import prices and inflation. Furthermore, this policy has reduced the cost of major infrastructure projects across the region.
Despite the challenge posed by the limited independence of monetary policy under a fixed exchange rate regime, Sheikh Bandar argued that the advantages, such as financial stability and economic diversification, far outweigh the drawbacks.
He stressed that adopting a fixed exchange rate policy is not a decision taken lightly but rather one that is based on careful study of each country’s economic structure and infrastructure. Through these assessments, the fixed exchange rate policy has emerged as the most effective strategy for the Gulf states.
Sheikh Bandar added that transitioning to a different exchange rate policy would require significant changes to the economic structure, a process that would take decades rather than happen overnight. He also noted that the International Monetary Fund (IMF) has commended the success of the GCC’s current exchange rate policies.
Sheikh Bandar further discussed the success of Gulf countries in maintaining moderate inflation levels. While global inflation rates surged to 9-10 percent over the past two years, inflation in the GCC remained around 5-6 percent, demonstrating the effectiveness of the region’s monetary policies in controlling inflation.
Saudi Central Bank Governor Ayman bin Mohammed Al Sayari elaborated on the broader role of monetary policy in maintaining economic stability. He emphasized that monetary stability is crucial for the long-term sustainability of Gulf economies, which rely heavily on energy exports. With around 70 percent of the GCC’s exports priced in US dollars, maintaining a fixed exchange rate helps reduce currency fluctuations and mitigate imported inflation.
Al Sayari also highlighted the role of exchange rate stability in supporting economic diversification, noting that it enables better financial planning and long-term economic policy formulation. This stability makes the Gulf economies more attractive to foreign investors, particularly in sectors that rely on the import of intermediate and capital goods essential for the production process.
Furthermore, Al Sayari underscored that the fixed exchange rate policy has bolstered the credibility of the Gulf’s central banks, allowing them to maintain lower interest rate margins compared to other emerging markets. He cited the COVID-19 pandemic as a test of the effectiveness of the GCC’s monetary and financial stability, noting that the region’s central banks successfully supported the private sector’s access to credit, which in turn helped safeguard national economies during the global crisis.
The Saudi governor also pointed to the growth of the Gulf economies between 2000 and 2023, with an average GDP growth of around 4 percent compared to 1.8 percent in developed economies over the same period. Inflation rates in the GCC remained stable at around 2%, further illustrating the success of the region’s monetary policies. Al-Sayari concluded by reaffirming that maintaining monetary stability is the central bank’s top priority, as it helps alleviate inflationary pressures and promotes economic growth.
Tahir bin Salem Al Amri of Central Bank of Oman spoke about the diversity of exchange rate regimes, explaining that the choice of exchange rate policy—whether fixing the exchange rate or pegging it to a particular currency—is driven by purely economic considerations. He praised the GCC economies for achieving various gains through their chosen exchange rate policies, noting that these policies have proven beneficial for regional stability.
Al Amri also emphasized that the Gulf economies are among the largest and most important globally, and therefore require appropriate exchange rate policies to meet their economic goals. Historically, the fixed exchange rate system has provided a stable environment for attracting investments, supporting economic development, and facilitating integration between monetary and fiscal policies across the region.
Central Bank of Bahrain Governor Khalid Ibrahim Humaidan echoed the sentiments of his fellow panelists by emphasising the advantages of a fixed exchange rate policy. He highlighted that over the past 40 years, the Gulf economies have recorded high growth rates, averaging 15 percent faster growth compared to other parts of the world. In addition, inflation in the GCC has remained lower than the global average, standing at around 2 percent compared to 5.1 percent globally.
Governor Humaidan also pointed out that the region has successfully attracted foreign direct investment, with annual growth rates of 5.5 percent compared to 3.1 percent in the rest of the world. He stressed that the fixed exchange rate policy has played a critical role in this achievement by providing a stable currency environment that supports investment and economic expansion.