The decision of the Jamia Millia Islamia University in New Delhi to provide legal aid to two of its students accused of being the perpetrators of the Delhi serial blasts is a step in the right direction coming as it does on the heels of the Nanavati Commission report which has reopened festering wounds over the Gujarat riots in which Muslims were wantonly massacred as police looked on. Though the Jamia move has been criticised on political grounds, which is only natural given the nature of the national discourse on the issue of domestic terrorism, on the one hand, and the involvement of Muslims in the recent bomb blasts on the other hand, it is pertinent that a level-headed approach is taken to the purely humanitarian gesture by the university. The issue here is, as Jamia Vice-Chancellor Professor Mushirul Hasan said, about “principles” not politics, which tragically has now been reduced to viewing both terrorism and humanitarian issues through the narrow prism of majority-minority politics.
Though the police have denied Muslims’ allegation of a witch-hunt against the community following the recent serial blasts across the country, there is no denying the fact there is more than a grain of truth in the allegation, which is all the more reason for applauding the Jamia move. But on the flip side there is also the issue of how the Indian police are conditioned to behave. A relic of the British Raj, the police even after 60-plus years of independence behave in exactly the same way they were originally conditioned to act against the natives. Police rudeness is a big issue in the UK and the authorities are taking it very seriously. But Indian police even in this age behave as if human rights are some luxury only the West can afford and that wanton arrests and beating up of suspects are the norm not the exception. Things are just getting worse and any sensible man, let alone a Muslim, will think twice before approaching the police for assistance if he can help it. The worst part is that the picture of a rude, abusive and draconian police as the norm has been so thoroughly ingrained in the popular consciousness that there is no public demand to rectify the rather grim situation. While one has to applaud the police for having brought the guilty from previous terror acts to justice, most of the time many innocents are caught up in their overzealousness to parade an array of ‘terrorists’ before the press and the judiciary based on pure circumstantial evidence. And with courts taking more than a decade to pronounce verdicts on terror cases, it is only natural many innocents’ and their families’ lives are ground to the dust under the wheels of the slow-moving justice juggernaut.
In the backdrop of these tragic realities, the move by Jamia Millia should be applauded, for the Indian penal code upholds the principle of ‘innocent until found guilty’. As most of those arrested in the blast case are from the middle and lower middle class it goes without saying that most of them will be unable to able to put up a good defence in court and that could lead to miscarriage of justice. While it is deplorable that police go scot-free in their violation of human rights and the principles of natural justice by imprisoning many of the accused for long periods without a shred of evidence, the more sickening part of the issue is the attitude of the political class, both the Right and the Left, to that tends to ghettoise Muslims from the national mainstream much against the wishes of the community. Therefore, any opposition or support from the political class on the Jamia move has no relevance, particularly since minority issues have now been turned into political football. Since ‘justice should not only be done but it should be seen to be done,’ Jamia’s move is a right step.
This is an editorial published in Oman Tribune on Sept. 27, 2008
Saturday, September 27, 2008
Tuesday, September 23, 2008
Gone with the wind
The old way of doing business on Wall Street is now history
It is said a week is a long time in politics. But on Wall Street last week it was like nanoseconds. In less than a fortnight America’s gargantuan financial system changed, for ever. It was like the ‘Old South’ disappearing after the Civil War as shown in Gone With The Wind. The writing on the wall was clear – the old way of doing business is dead. The Wall Street business model of leverage – using borrowed cash to make high-stakes bets on everything from commercial mortgages to non-US stocks trading – has been deemed too risky for the present times. The model is now gone with the wind and the debris from the financial typhoon is too messy and mangled to be cleared too soon.
On Monday the verdict was out. The US central bank, the Federal Reserve, decided enough was enough and converted the last two independent Wall Street investment banks still in business, Goldman Sachs and Morgan Stanley, into traditional bank holding companies. The measure puts a heavy burden on the operating style of the swashbuckling titans. The new terms include closer scrutiny by banking regulators, need for new capital requirements and worst of all, much lesser profitability that has been the hallmark of these brokerages.
The giants of the Street have always used borrowed cash to play the high-stakes game. They were good at it and it showed. They created wealth, a lot of it, and careers. There was nothing like being a banker on Wall Street. Life was an LSD-laced dream. Work hard, party hard with your million-dollar bonuses – that summed up life of on the Street. It was as New York Mayor Michel Bloomberg, a former trader on the Street, said in his autobiography: “Sometimes I thought I had gone through the looking glass into another world…Funny world, funny money.” Mind you, he was speaking of the 1970s.
The leverage ratio of firms, which shows the risk a company takes with borrowed cash compared to its equity capital, has been rising from last year. Merril’s leverage hit 28 from 15 in 2003. For Morgan it was 33 and for Goldman Sachs, 28. For Lehman Brothers it was an astounding 40.
When the going was good nobody bothered about how the titans were going about with leverage, which involved short-term money market funding. For Lehman, as long as the profits were coming in torrents it was okay. But the music stopped when its shares hit 18 cents last week from a year-ago figure of $50. Leverage can be deadly when share prices plummet. Lehman found it was time to shut shop, and questions are now floating around on the Street’s ability to manage risk.
Blue-blooded investment banks such as Merrill, Goldman and Morgan, with a lower capital base compared with general banks, have historically used leveraged cash. Though the three had tried to reduce their levels of leverage by selling bad assets, the plunging values meant there was hardly anything they could do. And last week’s carnage clearly showed it was a one-way street. There were only sellers, no buyers for distressed assets, which is normally the case when markets go into a tailspin.
When assets prices start falling leverage could turn into a death trap. The danger here was that leveraging was based on the principles of mark-to-market accounting. Accordingly, if the current market value of an asset causes the margin account to fall below its required level, the trader will be faced with a margin call. That was what poked the banks in the eye. They blinked as they had not set aside enough less cash to face the eventuality of falling asset prices.
Therefore, when the banks’ stocks fell like ninepins there was hardly anything anyone could do about it. It was a near-death experience, which has made the giants more amenable to reason.
Now that the Fed has moved in, the landscape has changed for ever. Instead of being overseen by Securities and Exchange Commission, Goldman and Morgan will now have to bow before the diktats of a slew of federal agencies. The implosion on the Street had earlier seen Merrill and Bear Sterns merging with larger banks.
The advantages of turning into normal banks are many, particularly now when most people find leveraging a dirty word. Though normal banks have also got entangled in the credit imbroglio, the fact remains that since commercial banks mostly use their depositors money to fund their business the risks are much lower as run on banks are now history, thanks to government insurance.
More than that, it will allow the Street titans to swear off mark-to-market accounting, which value their assets according to the market price and instead allow them to follow normal banking procedure and mark them as “held for investment”. Though these measures will not provide a fool-proof mechanism, it will keep the titans steady, at least till the next crisis, which is always around the corner for if stock market experts were such experts, they would be buying stocks, not selling advice!
This article was first published in Oman Tribune
Sunday, September 14, 2008
Geopolitical breakthrough
Bush’s India N-deal is as historic as Nixon’s move on China ties was
INDIAN analysts have credited George W. Bush as the US president who has done the most in improving relations with India. In their view, he as president de-hyphenated US ties with India from Pakistan. If tangible proof of this was not available till recently, it was, overwhelmingly, on Saturday in Vienna.
With the Nuclear Suppliers Group (NSG), the worldwide body that regulates the sale of nuclear fuel and technology, unconditionally allowing non-NPT signatory India a one-off waiver for the Indo-US nuclear deal, New Delhi, finally, would not any more be bracketed with Pakistan on the issue of nuclear parity. The irony of the moment is that this comes when the West is wringing its hands over Pakistan’s future and the security of its nuclear weapons.
From the day India conducted the first atomic test in 1974, the country has been treated as nuclear pariah in a no-man’s land – neither a weapon-state nor non-weapon state. Technology denial was the order of the day. ‘Give up your weapons and take the technology for the atomic power programme,’ that was the mantra of the N-apartheid. The waiver allows India to have its cake and eat it too. It gets to keep its weapons and also the best technology to boost its power generation programme. Nothing can be sweeter.
The proof of the pudding lies in the eating. Washington’s heavy hand won the day for India in Vienna and how. New Delhi’s victory followed “intense US pressure at the highest level” – a euphemism for President Bush – which involved overnight phone calls to presidents and prime ministers of holdout countries.
The international community now fully recognises India as a rising power and its position in the geopolitical sphere of the 21st century. It was that what finally clinched the waiver. Otherwise, the chances of global rules being changed for an NPT-holdout country were next to zero. It should also be noted that India’s credentials in the non-proliferation sphere have been spotless, which is something China or Pakistan or even Switzerland, one of the nay-sayers, can claim.
The Bush team was the first to recognise India’s strategic importance. During the 2000 presidential campaign, Condeleezza Rice indicated that a future Bush administration would take a new approach to India.
“India is not a great power yet, but it has the potential to emerge as one,” she wrote in the Foreign Affairs magazine. She was spot on when she said: “India is an element in China’s calculation, and it should be in America’s, too.”
Her visit to India in 2003 saw the beginning of a change in relations. Though it was not fully apparent at that time, she did hint at it with bland expressions, such as “a new relationship” with “great potential”.
Most Indians were sceptical. Uncle Sam was always viewed with suspicion in the sub-continent and not without reason. President Richard M. Nixon’s pro-Pakistan stand during the Bangladesh war was well known. And in the big bad world, the only friend the country had was the erstwhile Soviet Union and its successor, Russia.
Bush kept his word. Now only the US Congress stands between India and the deal. The chances of it sailing through Congress are quite high in view of the strong bipartisan support for India.
Moreover, General Electric, the world’s biggest maker of energy-generation equipment and one of the potential beneficiaries of the deal, has said that it may lose contracts in India to French, Russian and Japanese companies if the US Congress doesn’t ratify the nuclear deal soon after the agreement wins approval from the NSG. Therefore, if the US Congress delays the approval, the gains from the waiver are going to accrue to France’s Areva SA, Russia’s Rosatom Corporation and Japan’s Toshiba Corporation, who will get a head start.
It was Manmohan Singh who opened hermetically closed India to the global economy in the face of the trenchant criticisms from the left, right and the centre. Now he has again shown the way in reshaping India’s geopolitical standing. In his maiden speech to the parliament as finance minister, Singh quoted Victor Hugo: “No power on Earth can stop an idea whose time has come.” Maybe it is time the prime minister rephrased the speech: ‘No one can stop a country whose time has come.’
Ironically, President Bush is seen around the world by many people as a leader with a reverse Midas touch – whatever he touched turned into dust. But he struck gold for India, by providing the long-sought geopolitical breakthrough. Since India and the US strongly believe in democracy, the freedom and liberty of man, relations between the two can only get better.
That’s a long way from the day Nixon referred to former prime minister Indira Gandhi in a private conversation as “that bitch” during the Bangladesh war. Bush’s offer of the nuclear deal is as historic an event as Nixon’s decision to open relations with China. History will record that. Future generations of Indians will thank him.
This article was published in Oman Tribune
INDIAN analysts have credited George W. Bush as the US president who has done the most in improving relations with India. In their view, he as president de-hyphenated US ties with India from Pakistan. If tangible proof of this was not available till recently, it was, overwhelmingly, on Saturday in Vienna.
With the Nuclear Suppliers Group (NSG), the worldwide body that regulates the sale of nuclear fuel and technology, unconditionally allowing non-NPT signatory India a one-off waiver for the Indo-US nuclear deal, New Delhi, finally, would not any more be bracketed with Pakistan on the issue of nuclear parity. The irony of the moment is that this comes when the West is wringing its hands over Pakistan’s future and the security of its nuclear weapons.
From the day India conducted the first atomic test in 1974, the country has been treated as nuclear pariah in a no-man’s land – neither a weapon-state nor non-weapon state. Technology denial was the order of the day. ‘Give up your weapons and take the technology for the atomic power programme,’ that was the mantra of the N-apartheid. The waiver allows India to have its cake and eat it too. It gets to keep its weapons and also the best technology to boost its power generation programme. Nothing can be sweeter.
The proof of the pudding lies in the eating. Washington’s heavy hand won the day for India in Vienna and how. New Delhi’s victory followed “intense US pressure at the highest level” – a euphemism for President Bush – which involved overnight phone calls to presidents and prime ministers of holdout countries.
The international community now fully recognises India as a rising power and its position in the geopolitical sphere of the 21st century. It was that what finally clinched the waiver. Otherwise, the chances of global rules being changed for an NPT-holdout country were next to zero. It should also be noted that India’s credentials in the non-proliferation sphere have been spotless, which is something China or Pakistan or even Switzerland, one of the nay-sayers, can claim.
The Bush team was the first to recognise India’s strategic importance. During the 2000 presidential campaign, Condeleezza Rice indicated that a future Bush administration would take a new approach to India.
“India is not a great power yet, but it has the potential to emerge as one,” she wrote in the Foreign Affairs magazine. She was spot on when she said: “India is an element in China’s calculation, and it should be in America’s, too.”
Her visit to India in 2003 saw the beginning of a change in relations. Though it was not fully apparent at that time, she did hint at it with bland expressions, such as “a new relationship” with “great potential”.
Most Indians were sceptical. Uncle Sam was always viewed with suspicion in the sub-continent and not without reason. President Richard M. Nixon’s pro-Pakistan stand during the Bangladesh war was well known. And in the big bad world, the only friend the country had was the erstwhile Soviet Union and its successor, Russia.
Bush kept his word. Now only the US Congress stands between India and the deal. The chances of it sailing through Congress are quite high in view of the strong bipartisan support for India.
Moreover, General Electric, the world’s biggest maker of energy-generation equipment and one of the potential beneficiaries of the deal, has said that it may lose contracts in India to French, Russian and Japanese companies if the US Congress doesn’t ratify the nuclear deal soon after the agreement wins approval from the NSG. Therefore, if the US Congress delays the approval, the gains from the waiver are going to accrue to France’s Areva SA, Russia’s Rosatom Corporation and Japan’s Toshiba Corporation, who will get a head start.
It was Manmohan Singh who opened hermetically closed India to the global economy in the face of the trenchant criticisms from the left, right and the centre. Now he has again shown the way in reshaping India’s geopolitical standing. In his maiden speech to the parliament as finance minister, Singh quoted Victor Hugo: “No power on Earth can stop an idea whose time has come.” Maybe it is time the prime minister rephrased the speech: ‘No one can stop a country whose time has come.’
Ironically, President Bush is seen around the world by many people as a leader with a reverse Midas touch – whatever he touched turned into dust. But he struck gold for India, by providing the long-sought geopolitical breakthrough. Since India and the US strongly believe in democracy, the freedom and liberty of man, relations between the two can only get better.
That’s a long way from the day Nixon referred to former prime minister Indira Gandhi in a private conversation as “that bitch” during the Bangladesh war. Bush’s offer of the nuclear deal is as historic an event as Nixon’s decision to open relations with China. History will record that. Future generations of Indians will thank him.
This article was published in Oman Tribune
Pontiff has a ball while Atilla the Hun sleeps
Newspaper readers give a damn about the poor Subs who give the pages a shape and look
The old man who walked into the newsroom of a provincial newspaper holding a crumpled newspaper had a sense of urgency about him. He asked to see the News Editor. A Sub Editor ushered him into the NE’s cabin.
The graying, dour NE, as they are, looked up: “Yes?”
“This,” the old man said rather apologetically, opening the crumpled newspaper and pointing to a photo on the page, “is me!.”
Blood drained out from the NE’s face. His jaw collapsed. Staring at him from the obituary page was the man in front of him! The Sub standing on the side covered his mouth, lest the grin would show.
Newspaper howlers, they happen everyday. Healthy men are killed for no reason and dead men walk with a spring in their step.
A just-retired professor who took the night train to his far away home town was received at the railway station the next afternoon by his well wishers with a wreath. Apparently a careless Sub mixed up news of farewells and deaths and killed the poor professor in the day’s newspaper.
Not many readers know how a newspaper gets its shape and content. All of them know of the reporters whose names are emblazoned above their reports. But hardly anyone gives a damn about the poor, unlamented Subs who slog from evening to past midnight to get the grammar and flow of a story right, rechecking facts and finally giving the pages a shape and look.
Since it is a thankless task performed under pressure the temperature in a News Room is the highest in any newspaper office.
Well-produced newspapers have only their excellent production team to thank for, and they are managed by tough-as-nails dictators, known as NEs. Subs form the faceless, anonymous newspaper production army. Good Subs are considered worth their weight in gold and all NEs swear by them. But they are hard to come by. They can make or break any NE’s day.
Since newspapers are considered the record of history-in-the-making, the mistakes also enter history. Therefore, the NE has his work cut out daily – zero tolerance of mistakes, which is easier said than done in the pressure-cooker atmosphere. Shouting, pulverising glares and biting sarcasm are some of the everyday torture the poor Subs endure during the NE’s daily drive to get the facts right.
With this daily dose of abuse, the poor Sub is often left wondering whether taking up the job was part of his Karma.
Therefore, it is no surprise that most Subs have nice ‘names’ for the boss. Many of them are unprintable. The more charitable are ‘Attila the Hun, Hitler, beast, sarcy-barky and so on.
But then the Subs are not babes in the wood. Very resourceful, they are ‘Artful Dodgers’ when it comes to excuses for mistakes. This excuse made my jaw drop: “Sir, I just edited the copy. I didn’t read it!”
Instances of Subs short-circuiting reports are quite common, more often it is because of the time pressure, which leaves little time to think. Sample this instance. The norm in this region when reporting about Jerusalem is to put the prefix ‘Occupied’ (by Israel).
Imagine my consternation when a Sub added the prefix to “the Fatah leader insisted on having ‘Occupied’ Jerusalem as the capital of an independent Palestine state!”
And then there was this Sub in the Delhi newspaper who had a lovely idea on the pontiff’s job profile. Sample this blasphemous headline: ‘Pope beautifies nun.’ Obviously the NE was fast asleep!
New Subs are generally cautioned on some of the ‘dangerous’ headline words, such as ‘public’ and ‘shift’.
James Scotty Reston, America’s top journalist of the 20th century, in his autobiography had written of a Sub who composed a headline: ‘Man falls off bridge, breaks both legs’. Unfortunately for the Sub the ‘g’ in the bridge didn’t make it to the headline.
So how would have the people of Delhi reacted when one leading newspaper reported in bold print: ‘Pubic clocks to be placed at main roundabouts’!
This one from my old Delhi newspaper was luckily stopped just in time: ‘J&K capital shi*s under tight security’
When it comes to bad luck all bets are off. The Financial Times once conducted a multi-page survey of Egypt in 1981. Unluckily for the daily, the survey, which was already into print, came out the same morning President Anwar Sadat was assassinated. The headline of the survey: ‘President Sadat appears to have ridden out the crisis’.
But then for every such instance there has also been wonderful journalism.
Sample this headline on the report on a loony who escaped from an asylum, raped a woman and was on the run:
‘Nut
Screws,
Bolts’!
This article was published in Oman Tribune
The old man who walked into the newsroom of a provincial newspaper holding a crumpled newspaper had a sense of urgency about him. He asked to see the News Editor. A Sub Editor ushered him into the NE’s cabin.
The graying, dour NE, as they are, looked up: “Yes?”
“This,” the old man said rather apologetically, opening the crumpled newspaper and pointing to a photo on the page, “is me!.”
Blood drained out from the NE’s face. His jaw collapsed. Staring at him from the obituary page was the man in front of him! The Sub standing on the side covered his mouth, lest the grin would show.
Newspaper howlers, they happen everyday. Healthy men are killed for no reason and dead men walk with a spring in their step.
A just-retired professor who took the night train to his far away home town was received at the railway station the next afternoon by his well wishers with a wreath. Apparently a careless Sub mixed up news of farewells and deaths and killed the poor professor in the day’s newspaper.
Not many readers know how a newspaper gets its shape and content. All of them know of the reporters whose names are emblazoned above their reports. But hardly anyone gives a damn about the poor, unlamented Subs who slog from evening to past midnight to get the grammar and flow of a story right, rechecking facts and finally giving the pages a shape and look.
Since it is a thankless task performed under pressure the temperature in a News Room is the highest in any newspaper office.
Well-produced newspapers have only their excellent production team to thank for, and they are managed by tough-as-nails dictators, known as NEs. Subs form the faceless, anonymous newspaper production army. Good Subs are considered worth their weight in gold and all NEs swear by them. But they are hard to come by. They can make or break any NE’s day.
Since newspapers are considered the record of history-in-the-making, the mistakes also enter history. Therefore, the NE has his work cut out daily – zero tolerance of mistakes, which is easier said than done in the pressure-cooker atmosphere. Shouting, pulverising glares and biting sarcasm are some of the everyday torture the poor Subs endure during the NE’s daily drive to get the facts right.
With this daily dose of abuse, the poor Sub is often left wondering whether taking up the job was part of his Karma.
Therefore, it is no surprise that most Subs have nice ‘names’ for the boss. Many of them are unprintable. The more charitable are ‘Attila the Hun, Hitler, beast, sarcy-barky and so on.
But then the Subs are not babes in the wood. Very resourceful, they are ‘Artful Dodgers’ when it comes to excuses for mistakes. This excuse made my jaw drop: “Sir, I just edited the copy. I didn’t read it!”
Instances of Subs short-circuiting reports are quite common, more often it is because of the time pressure, which leaves little time to think. Sample this instance. The norm in this region when reporting about Jerusalem is to put the prefix ‘Occupied’ (by Israel).
Imagine my consternation when a Sub added the prefix to “the Fatah leader insisted on having ‘Occupied’ Jerusalem as the capital of an independent Palestine state!”
And then there was this Sub in the Delhi newspaper who had a lovely idea on the pontiff’s job profile. Sample this blasphemous headline: ‘Pope beautifies nun.’ Obviously the NE was fast asleep!
New Subs are generally cautioned on some of the ‘dangerous’ headline words, such as ‘public’ and ‘shift’.
James Scotty Reston, America’s top journalist of the 20th century, in his autobiography had written of a Sub who composed a headline: ‘Man falls off bridge, breaks both legs’. Unfortunately for the Sub the ‘g’ in the bridge didn’t make it to the headline.
So how would have the people of Delhi reacted when one leading newspaper reported in bold print: ‘Pubic clocks to be placed at main roundabouts’!
This one from my old Delhi newspaper was luckily stopped just in time: ‘J&K capital shi*s under tight security’
When it comes to bad luck all bets are off. The Financial Times once conducted a multi-page survey of Egypt in 1981. Unluckily for the daily, the survey, which was already into print, came out the same morning President Anwar Sadat was assassinated. The headline of the survey: ‘President Sadat appears to have ridden out the crisis’.
But then for every such instance there has also been wonderful journalism.
Sample this headline on the report on a loony who escaped from an asylum, raped a woman and was on the run:
‘Nut
Screws,
Bolts’!
This article was published in Oman Tribune
Raiders of the soft dollar
The greenback’s status as the hegemonic currency is here to stay
The just-concluded GCC summit would be one of the few ever in the history of the group which have evinced so much interest among expatriates and even ordinary nationals. The reason for this is well known. Ever since Sultan Nasser Al Suweidi, governor of the UAE central bank, hinted at delinking the dirham from the falling dollar, the buzz was on. The latest issue of the Economist weekly focused on the greenback’s travails just in time for the GCC meeting in Doha, where the media also focused mainly on the chances of the GCC states delinking their currencies from the falling greenback. But is it really workable? Has the once-mighty dollar run its course as the globe’s hegemonic currency? That looks a bit far-fetched.
Most of the Gulf countries, during the 1970s, pegged their currencies to the dollar to stabilise their revenue from their sole revenue earner – oil, which is traded in dollars. With the withdrawal of imperial power Britain from the Gulf, most of the countries, which did not have much expertise in running central bank operations, found it easier to follow the policies of the US central bank, the Federal Reserve, to maintain a stable and strong currency. And this policy has stood the Gulf countries in good stead. That is, so far.
With the subprime crisis exploding over the US banking sector, the Fed has been forced to cut rates. This has led Saudi Arabia, the UAE, Qatar, Kuwait and Bahrain to cut rates in November to mirror the Fed’s decision. The US is now facing a recession and this is forcing the hand of the Fed to go in for more cuts. This has put the Gulf states in a bind. Since the GCC countries’ interest rates are linked with the US rates, it was only a matter of time before they followed the Fed to avoid the unthinkable – capital moving away to currencies with better rates of return. This makes fine economic sense but for one reason. Inflation is galloping in the region which is awash in petrodollar liquidity, thanks to the unprecedented oil prices. Therefore, to rein in inflation, central banks should be raising, instead of cutting, rates, if what the economics text books say is right.
According to the UAE Ministry of Economy, inflation last year hit 9.3 per cent. In Qatar, inflation hit 11.8 per cent last year, and the International Monetary Fund says it could go up to 12 per cent this year. This week, Doha raised taxi fares by a third. Prices are expected to remain high across the Gulf this year. In addition to this, expatriates, who make the bulk of the population of the UAE and also a sizeable chunk of the population in other Gulf countries, have had to endure the double whammy of seeing their remittances losing value as the dollar has lost value against their home currencies also. Also, this exchange rate loss has been making imports more expensive leading to a further rise in prices. This scenario is more or less replicated in most Gulf countries, though in varying degrees.
The strains are the maximum in the UAE, with investors betting on a “depegging”. The chance of making a quick buck once the peg snaps is attracting so much money that deposits in UAE banks have exceeded one trillion dirhams ($272.3 billion) for the first time, which is more than what is deposited in powerhouse Saudi Arabia, reports quote central bank figures.
The greenback’s decline has also to some extent diluted the GCC states’ earnings from the record oil price that is expected to lead to a surplus in excess of $500 billion this year. With the inflation rate expected to remain high for the second year running in the UAE, the government is facing its most difficult fiscal policy challenge since Britain devalued the sterling in 1967, which forced the Gulf states to turn to the dollar as the benchmark currency.
So is there a one-shot cure for this malaise? Kuwait, the third-largest Arab oil producer, was the first to explore. It broke ranks with its GCC peers in May by allowing the dinar to float against a basket of currencies and in a range against the dollar. Will the UAE follow suit? But since the UAE, Saudi Arabia and Qatar have large reserves of dollars, it will be a tough call. Saudi policy is very clear. It was very categorical in Doha – “the dollar peg stays”. Saudi, which pumps out a massive 9.1 million bpd of oil, is fearful a revaluation would cut the riyal value of dollar-denominated oil revenue, which, according to Bloomberg News, is set to hit $163 billion this year, the most in more than two decades. Qatar has also affirmed its position to stay in line. So for the time being, maybe, the UAE, the second biggest Arab economy, which pumps out around 2.8 million bpd of oil, may have to plough a lone furrow.
On the other hand, Oman’s position is that the dollar’s travails are a short-term issue and that that the greenback will soon find its way to its rightful position. Though there are not much takers for this viewpoint in the region now, there is a western school of thought which is slowly veering to this view. They are pointing their fingers at the euro’s travails. The single currency’s rise is affecting European exporters ability to compete in the global market. The head of Airbus has already termed it ‘existential crisis’ and is pondering shifting production facilities to the US. The rise of the sterling has slowed down the UK economy and the Bank of England is eyeing cutting rates.
Therefore, according to a recent article in the Wall Street Journal, if economies outside the US start slowing down, money will start flowing into the US, which could see the greenback rising. Also, thanks to the sub prime crisis, troubled US financial firms may have to sell foreign currency-denominated assets to shore up their balance sheets before the year ends. And repatriating that money home means buying dollars, which could again boost the currency.
This could lead hedge funds and other such speculative funds, which have bet heavily against the dollar, to unwind their bets. That could see the dollar making a fierce rebound. Therefore, the greenback need not be a “worthless piece of paper”, as Mahmoud Ahmedinejad said recently. Uncle Sam’s currency may yet have the last laugh.
This article was published in Oman Tribune in December 2007
The just-concluded GCC summit would be one of the few ever in the history of the group which have evinced so much interest among expatriates and even ordinary nationals. The reason for this is well known. Ever since Sultan Nasser Al Suweidi, governor of the UAE central bank, hinted at delinking the dirham from the falling dollar, the buzz was on. The latest issue of the Economist weekly focused on the greenback’s travails just in time for the GCC meeting in Doha, where the media also focused mainly on the chances of the GCC states delinking their currencies from the falling greenback. But is it really workable? Has the once-mighty dollar run its course as the globe’s hegemonic currency? That looks a bit far-fetched.
Most of the Gulf countries, during the 1970s, pegged their currencies to the dollar to stabilise their revenue from their sole revenue earner – oil, which is traded in dollars. With the withdrawal of imperial power Britain from the Gulf, most of the countries, which did not have much expertise in running central bank operations, found it easier to follow the policies of the US central bank, the Federal Reserve, to maintain a stable and strong currency. And this policy has stood the Gulf countries in good stead. That is, so far.
With the subprime crisis exploding over the US banking sector, the Fed has been forced to cut rates. This has led Saudi Arabia, the UAE, Qatar, Kuwait and Bahrain to cut rates in November to mirror the Fed’s decision. The US is now facing a recession and this is forcing the hand of the Fed to go in for more cuts. This has put the Gulf states in a bind. Since the GCC countries’ interest rates are linked with the US rates, it was only a matter of time before they followed the Fed to avoid the unthinkable – capital moving away to currencies with better rates of return. This makes fine economic sense but for one reason. Inflation is galloping in the region which is awash in petrodollar liquidity, thanks to the unprecedented oil prices. Therefore, to rein in inflation, central banks should be raising, instead of cutting, rates, if what the economics text books say is right.
According to the UAE Ministry of Economy, inflation last year hit 9.3 per cent. In Qatar, inflation hit 11.8 per cent last year, and the International Monetary Fund says it could go up to 12 per cent this year. This week, Doha raised taxi fares by a third. Prices are expected to remain high across the Gulf this year. In addition to this, expatriates, who make the bulk of the population of the UAE and also a sizeable chunk of the population in other Gulf countries, have had to endure the double whammy of seeing their remittances losing value as the dollar has lost value against their home currencies also. Also, this exchange rate loss has been making imports more expensive leading to a further rise in prices. This scenario is more or less replicated in most Gulf countries, though in varying degrees.
The strains are the maximum in the UAE, with investors betting on a “depegging”. The chance of making a quick buck once the peg snaps is attracting so much money that deposits in UAE banks have exceeded one trillion dirhams ($272.3 billion) for the first time, which is more than what is deposited in powerhouse Saudi Arabia, reports quote central bank figures.
The greenback’s decline has also to some extent diluted the GCC states’ earnings from the record oil price that is expected to lead to a surplus in excess of $500 billion this year. With the inflation rate expected to remain high for the second year running in the UAE, the government is facing its most difficult fiscal policy challenge since Britain devalued the sterling in 1967, which forced the Gulf states to turn to the dollar as the benchmark currency.
So is there a one-shot cure for this malaise? Kuwait, the third-largest Arab oil producer, was the first to explore. It broke ranks with its GCC peers in May by allowing the dinar to float against a basket of currencies and in a range against the dollar. Will the UAE follow suit? But since the UAE, Saudi Arabia and Qatar have large reserves of dollars, it will be a tough call. Saudi policy is very clear. It was very categorical in Doha – “the dollar peg stays”. Saudi, which pumps out a massive 9.1 million bpd of oil, is fearful a revaluation would cut the riyal value of dollar-denominated oil revenue, which, according to Bloomberg News, is set to hit $163 billion this year, the most in more than two decades. Qatar has also affirmed its position to stay in line. So for the time being, maybe, the UAE, the second biggest Arab economy, which pumps out around 2.8 million bpd of oil, may have to plough a lone furrow.
On the other hand, Oman’s position is that the dollar’s travails are a short-term issue and that that the greenback will soon find its way to its rightful position. Though there are not much takers for this viewpoint in the region now, there is a western school of thought which is slowly veering to this view. They are pointing their fingers at the euro’s travails. The single currency’s rise is affecting European exporters ability to compete in the global market. The head of Airbus has already termed it ‘existential crisis’ and is pondering shifting production facilities to the US. The rise of the sterling has slowed down the UK economy and the Bank of England is eyeing cutting rates.
Therefore, according to a recent article in the Wall Street Journal, if economies outside the US start slowing down, money will start flowing into the US, which could see the greenback rising. Also, thanks to the sub prime crisis, troubled US financial firms may have to sell foreign currency-denominated assets to shore up their balance sheets before the year ends. And repatriating that money home means buying dollars, which could again boost the currency.
This could lead hedge funds and other such speculative funds, which have bet heavily against the dollar, to unwind their bets. That could see the dollar making a fierce rebound. Therefore, the greenback need not be a “worthless piece of paper”, as Mahmoud Ahmedinejad said recently. Uncle Sam’s currency may yet have the last laugh.
This article was published in Oman Tribune in December 2007
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