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Despite the US dollar still being the dominant currency in the global market, four Arab currencies have taken the top spots in terms of value.
This article was translated from Arabic.
There is no denying that the U.S. dollar has been the most widely used currency in international commerce since the end of World War II, and has served as the cornerstone of global markets. However, when it comes to its value against other currencies, the dollar currently ranks tenth in the world.
Meanwhile, Arab currencies have taken the top four spots globally in terms of their value, raising questions about the reasons, importance, and significance of these currencies maintaining a high exchange rate compared to other currencies.
Arab currencies still rank among the most expensive in the world on foreign exchange markets and have a high purchasing power, despite some of them slipping in recent years, causing financial and living crises. A report released in March 2023 by Forbes confirms this.
The Kuwaiti dinar takes the lead as the world’s most valuable currency, with a current value of approximately $3.26. The Bahraini dinar follows closely behind, securing the second position with a value of $2.65. The Omani riyal ranks third with a value of around $2.6, while the Jordanian dinar comes in fourth place with a value of about $1.41.
Undoubtedly, a currency’s strength and international position are determined by various factors beyond its value in the currency market. These factors include the level of demand for it in international markets and the desire to maintain it as a global currency. The three currencies that possess the most power at present are the US dollar, the euro, and the pound sterling.
In fact, about two-thirds of central banks’ reserves worldwide are still denominated in U.S. dollars, and 79 per cent of global trade transactions are settled in U.S. dollars, making it the dominant currency in the market.
The increase in the value of the four Arab currencies, however, is due to a number of economic variables that have helped these currencies hold their worth over the years. It also represents the efforts made by respective central banks to maintain the high value of their own currencies. This does not preclude these four Arab nations from later reconsidering their determination on maintaining their currencies’ exchange rates at extremely high levels in comparison to other currencies throughout the world, though.
The Kuwaiti dinar was first introduced in 1960, when Kuwait decided to produce a currency to replace the Gulf rupee, which at the time was pegged to the Indian rupee. Since then, the Central Bank of Kuwait has implemented various monetary policies, starting with pegging the dinar to the pound sterling and later to the U.S. dollar in 2003. In 2007, the Central Bank began linking the dinar to a basket of currencies.
One of the most significant elements of Kuwait’s monetary policy has been fixing the exchange rate of the dinar and maintaining its high value against other currencies. To achieve this, the Central Bank of Kuwait relies on a large reserve of foreign currencies obtained from selling oil in global markets. This allows the Central Bank to intervene in the market and sell hard currency to maintain the value of the dinar. As a result, the Kuwaiti dinar is currently the highest currency in the world.
This monetary policy aims to preserve the purchasing power of wages, salaries and savings within Kuwait, as well as the government’s ability to finance its projects in the local currency. It also allows for better utilization of revenues from oil sales by using them to guarantee the value of the Kuwaiti dinar locally.
A concern with monetary policies that keep currency exchange rates high is that they make it harder for domestic producers to compete with imports. The high value of the local currency raises domestic producers’ pricing on international markets, reducing their ability to compete with foreign products. Additionally, it causes local market prices for imported goods to be lower than those for comparable local production prices.
Kuwait’s economic policies haven’t given enough thought to this specific issue given its reliance on oil exports that are mostly priced in dollars to fuel its economy. However, should Kuwait desire to reduce its reliance on oil exports and build a robust domestic production base in the future, it will need to reevaluate said policies.
The Gulf rupee was replaced by the Bahraini dinar in 1965, marking the beginning of the national currency. The Bahrain Monetary Agency was founded in 1973 with the purpose of acting as the nation’s central bank and establishing its monetary policy. Later, when the Central Bank and Financial Institutions Law was passed, the institution underwent a complete transformation, becoming the country’s central bank.
Bahrain fixed its currency solely to the U.S. dollar, in contrast to Kuwait, which pegged its currency to a range of currencies. As a consequence, the Bahraini dinar’s value is influenced by the value of the dollar. The value of the Bahraini dinar increases when the dollar’s exchange rate increases relative to other currencies, and vice versa. Therefore, the Bahraini dinar saw large gains at the same time as interest rates in the United States rose. This was followed by an increase in the dollar’s exchange rate versus other foreign currencies.
Bahrain has built up foreign currency reserves over the previous few decades by capitalizing on its relatively small population, financial requirements, and oil exports. The Bahraini dinar’s high exchange rate against the dollar is protected by these reserves.
Despite experiencing considerable financial and economic unrest at certain junctures, the Bahraini dinar’s value remains robust across international markets. Revenues from oil exports have allowed for sufficient cash flows in U.S. dollars to maintain the high exchange rate of the Bahraini dinar. Nevertheless, much like Kuwait, Bahrain will need to reduce its reliance on oil exports and diversify its economy moving forward.
The Gulf rupee was replaced by the Saidi riyal, which Oman launched in 1970. The Omani rial followed in 1972. Following Bahrain’s example, Oman switched to fixing its currency solely to the U.S. dollar in 1973 from its initial peg to the pound sterling. As a result, Oman has relied on its oil exports to support this exchange rate, which means that the strength of the Omani currency is tightly related to the stability of the exchange rate against the dollar.
Oman, in contrast to Bahrain, is a sizable nation with substantial rural areas, and its coastal regions are renowned for fishing and foreign trade. Maintaining a high exchange rate for the Omani rial while it is solely pegged to the US dollar has proven difficult for Oman’s productive sectors. In order to realize its objectives of economic diversification and bolstering its productive sectors, Oman will consequently need to reevaluate its monetary policy in the future, much like Kuwait.
Jordan has maintained a constant exchange rate of 1 Jordanian dinar to $1.41 since 1995. The Jordanian monetary authorities view this policy as the most effective means of preserving the country’s financial stability and sustaining demand for the Jordanian dinar. One significant consequence of this policy, however, is that any decrease or increase in the exchange rate of the U.S. dollar in global markets impacts the prices of goods imported from European and Asian markets, due to the dependence of the value of the Jordanian dinar on the value of the U.S. dollar.
Unlike the Gulf nations that rely on their oil exports, Jordan currently has a considerable issue in maintaining a steady financial flow in foreign currency. In the case that the amount of foreign currency reserves held by the Central Bank of Jordan declines, it may prove challenging to uphold the fixed exchange rate. Furthermore, as seen in Lebanon‘s experience with a similar policy, the fixed exchange rate policy could also affect the competitiveness of Jordan’s productive sectors.
It is evident that the four Arab countries’ aim of maintaining a high exchange rate for their national currencies was motivated by rational economic and financial objectives. These nations must, however, practice sound monetary policies. This entails refraining in the long run from rigidly adhering to the policy of fixing and supporting the exchange rate of local currencies, particularly if the high exchange rate of these currencies imposes heavy costs on respective industrial and agricultural sectors.