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Cablegate: Bahrain Committed to Currency Peg, Resigned To

VZCZCXRO5631
PP RUEHDE RUEHDIR
DE RUEHMK #0535 2201403
ZNY CCCCC ZZH
P 071403Z AUG 08
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 8046
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0268
RUEATRS/TREASURY WASHDC PRIORITY
RHBVAKS/COMUSNAVCENT PRIORITY
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY

C O N F I D E N T I A L MANAMA 000535

SIPDIS

BAGHDAD FOR AMBASSADOR ERELI

E.O. 12958: DECL: 08/07/2018
TAGS: ECON EFIN BA
SUBJECT: BAHRAIN COMMITTED TO CURRENCY PEG, RESIGNED TO
INFLATION

REF: MANAMA 521

Classified By: CDA Christopher Henzel for reasons 1.4 (b) and (d)

1.(C) Summary: Bahrain,s Central Bank governor said he would not take any actions to counter inflation, and that the GOB would limit itself to addressing the effects of inflation through its existing subsidy system. End summary

2.(C) Central Bank of Bahrain (CBB) governor Rasheed al-Maraj told econoff August 6 that the CBB would not take any actions to counter growing inflationary pressures. Restating the CBB's commitment to the existing exchange regime (i.e., the dollar peg), he ruled out monetary policy options and said that the CBB's remaining tool--raising interest rates and slowing economic growth--was not politically viable at this time. Likewise, he said, fiscal policy options are limited as reducing government spending is equally unacceptable politically.

3.(C) Speaking on GOB fiscal policy, Maraj said there is enormous pressure to capitalize on high oil prices to fund public projects, and that these pressures are particularly strong in Bahrain, which does not have abundant oil wealth (reftel). He stated that most Bahrainis see peaking oil prices as a unique opportunity for public development, asking "If the government can't spend when oil revenues are high, when can they spend?"

4.(C) Maraj said that the GOB has decided to not/not fight inflation and instead will try to address the felt effects of rising prices by reconfiguring the GOB's existing subsidy regime to become more progressive without increasing total spending. (Note: the GOB heavily subsidizes and maintains a flat rate far below market prices for gasoline, electricity, and wheat, among other staples. Regular gasoline, for example, has never sold above 81 cents per gallon. Energy subsidies in particular are seen as disproportionately aiding the wealthy who have larger homes that they air condition, and larger less-efficient personal vehicles. End Note.) ********************************************* ******** Visit Embassy Manama's Classified Website: XXXXXXXXXXXX********************************************* ******** HENZEL

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