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Kuwait pegs dinar to the US dollar

Despite pegging its currency to the US dollar the exchange rate risks will remain the same for the Kuwait Dinar, says a recent economic report from the National Bank of Kuwait.

Despite pegging its currency to the US dollar the exchange rate risks will remain the same for the Kuwait Dinar, says a recent economic report from the National Bank of Kuwait.

Kuwait linked the dinar to the US dollar in preparation for a single GCC currency to be launched in 2010. The new development ends 27 years of the Kuwait dinar exchange rate being linked to a basket of currencies.

The decision came after the Council of Ministers passed on October 13, 2002 a draft decree to change its policy to one where the KD would be fully linked to the US dollar.

The new mechanism went into effect in January 2003 as part of Kuwait’s commitment within a broader December 2001 agreement reached with the other five members of the Gulf Cooperation Council (GCC) to prepare for the adoption of a single GCC currency by 2010, as part of the broader plan for a common market and a customs union.

In its latest economic report NBK said, “on the surface, the change in policy regime appears to be significant, but in practice, little change is expected in the behaviour of the KD exchange rate vis-à-vis the US$ or other major currencies.” The governor of the Central Bank of Kuwait (CBK), who is responsible for setting the parity as well as a band within which the exchange rate that will be allowed to fluctuate, confirmed this on numerous occasions. The governor indicated this will "represent a smooth evolution of the historic behaviour of the KD-$ exchange rate, whereby the band will also ensure a continuation of the relative stability of the KD against major currencies other than the dollar," said NBK.

Currency regime aside, KD-$ stability derives from to the denomination of oil revenues in US dollars, as well as a major part of the country’s foreign assets, not to mention the important volume of imports from the US. This stability, said NBK “will be supported in the future by the country’s strong current account position and sizeable foreign reserves.”

According to the NBK report, up to the time the single currency was eventually adopted, the euro countries shifted their focus to aligning their policies and achieving greater integration among their markets. The GCC countries will need to follow the same path to prevent misalignments from leading to destabilizing capital flows under a currency union. This is of particular importance given the vast divergence among the GCC members policy, economic and regulatory environments.

Thus, Kuwait will be better off maintaining some flexibility in its exchange rate vis-à-vis the dollar and other GCC currencies, and thus some degree of freedom in responding to new developments and pursuing economic goals. Once economic reforms and liberalization measures are in place and policies and regulations are better aligned among GCC countries moving to a fixed regime or single currency will be possible.

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