Why Are the GCC Currencies Stable While Other Arab Countries’ Aren’t?

Published August 20th, 2020 - 02:00 GMT
Why Are the GCC Currencies Stable While Other Arab Countries’ Aren’t?
Countries in the Gulf region have for decades enjoyed some high ranks in terms of the GDP. (Shutterstock: WorldStockStudio)

The recent waves of economic volatility that have hit the whole world have vastly impacted currency values around the world, especially that the crisis triggered by a global pandemic isn't over yet, neither is it clear when the virus will be under control for the global economy to work in full capacity again.

If we take a look at our region, we will notice how several currencies have lost a lot of their value in a very short span, mainly due to Coronavirus closures and travel bans. However, some currencies have managed to maintain their value despite the meltdown. So where does the difference lie? 

While Gulf countries have been able to keep their currencies' exchange rates stable, currencies in countries like Lebanon or Syria dropped value sharply. By May, the Lebanese lira has plummeted by more than 50% and it continues to fall due to the economic and political unrest that is ravaging the country.

Generally speaking, many GCC currencies are pegged to the USD, the main currency used for oil exports, which, in addition to government policies and foreign currency reserves, explain their stable exchange rate so far.

During April and May and due to plunging oil prices before lockdown restrictions were eased globally, Saudi Arabia had maintained strong US dollar reserves, but it was about 35% down compared to 2014 reserves, losing about $20 billion during April 2020.

In 2020, the UAE has also lost about $15 billion of its reveres of US dollar, while Kuwait lost $38.6 billion, especially that it is linked with the value of a package of currencies including the US dollar.

Despite all these losses that have been recovering after oil prices started to climb up again in late May, the value of GCC currencies has remained relatively stable. In fact, the Kuwaiti Dinar still ranks the most valuable currency in the world as 1 KWD equals 3.38 USD.

In addition to the fact that GCC economies maintain a very strong relationship with the US and other leading economies, these economies remain among the best in the region, if not the best.

Due to owning huge oil reserves, countries in the Gulf region have for decades enjoyed some high ranks in terms of the GDP, which supports the purchasing power and helps to strengthen the local economy.

Finally, the relatively stable political environment especially internally in each of the GCC countries, besides international investments that have been well-established in the region are all factors that have positively influenced currencies' stability over the years.

GCC countries have been quite lucky to be amongst the top exporters of one of the world's most demanded and expensive commodities; that is oil. But that alone isn't enough for maintaining the currency exchange rate. Smart government policies that control a country's reserves of foreign currencies, especially ones linked to the national one, in addition to a stable political scene, strong ties with the world's strongest economies and strategies that aim to attract foreign investments, are all needed to protect and sustain the value of a currency.

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