Kuwait moves to a US dollar peg (page 2 of 2)

The latter purported to maintain relative stability among their currencies and by pegging them to the Deutsche mark within a 4.5% band around specified parity rates. The parity rates were adjusted several times to correct for misalignments in the monetary and fiscal policies of the different countries, and the band itself was widened to 15% in 1992.

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. This has always been the view of the CBK, which leads us to strongly believe that foreign exchange risk will not be eliminated under the new regime.