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Kuwait Defends Decision to Link Dinar to US Dollar - 2002-10-30


Kuwait says that starting next year it is tying the value of its currency, the dinar, to the dollar. The move has raised questions among economists in the region, and Kuwait has been forced to defend its decision.

Many economists say they are confused by Kuwait's decision to link the dinar directly to the dollar. According to Cairo University Economics Professor Gouda Abdel Khalek, it does not make sense economically.

"If you tie your currency to one single currency, then you are bound to follow the behavior of the currency that you tied to," he said. "If you compare that with tying to a basket of currencies, then logically speaking that can insure a greater degree of stability of the value of the currency and that raises, perhaps, what was the motivation for Kuwait to take this step?"

Kuwait's finance minister, Youssef al-Ibrahim, defended his government's move. He said linking the dinar with the dollar will not lead to inflation and will not weaken the dinar.

The finance minister noted that oil, Kuwait's number-one export, is bought and sold in dollars.

For 27 years, the emirate's dinar was tied to a basket of currencies, including the Japanese yen and the dollar. But last year the Gulf Cooperation Council, which is made up of six oil-rich Gulf Arab states including Kuwait, launched a plan to create a single currency by 2010 that is tied directly to the dollar. The five other countries in the council already tie their currencies to dollar.

Economists in the region, including those in Kuwait who asked not to be identified, said they expected those members to switch to Kuwait's method of having a basket of currencies. Instead, Kuwait switched to the dollar and the economists said they can not understand why.

Ahmed El-Sayed El-Naggar, the chief economist at the al Ahram Center for Political and Strategic Studies in Cairo, says there must be a reason, other than economics, for Kuwait's decision.

Mr. El-Naggar says he can not find any economic justification for the decision. The only one he can think of, he says, is there must be a political reason, possibly to further Kuwait's ties with the United States. But, he says, "economically it is wrong."

Kuwaiti officials have said the decision reached by the Gulf Cooperation Council to create a single currency required the emirate to switch its policy.

Some Kuwaiti economists said they believe Kuwait should have refused.

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