Bahrain's decision to keep the dinar pegged to the US dollar is strategic and beneficiary, finance minister Shaikh Ahmed bin Mohammed Al Khalifa told Shura Council members on Monday.

He said inflated prices in the country were not just due to decreases in exchange rates, but were also due to increases to production costs worldwide as oil prices surge.

"The increase in basic commodity prices like rice, sugar and wheat is internationally felt, since there is an increase in demand, while production has dropped," said Shaikh Ahmed.

"Bahrain has countered any price increase by further subsidising basic commodities and services such as meat, wheat, electricity, water and oil products.

"The pay-rises given to government employees recently have also minimised the effects associated with inflation.

Shaikh Ahmed said that continuing the US dollar peg was strategic and beneficiary as it was associated to oil prices, which are seeing huge increases.

"Bahrain's use of the dollar peg has always been beneficial to the country's economic development and growth over the past years," he said.

"The decision to link the dinar with the US dollar was done through an Amiri decree in 2001, after a GCC decision to do so in the same year.

"Any decision to change from the US dollar peg would certainly harm the economy, considering the way we do business."

Shaikh Ahmed was responding to a question by council member Rabbab Al Arrayedh on the government's moves to strengthen the dinar's purchasing power in the short and long run.

Al Arrayedh said that Standard Chartered Bank consultants had revealed that the dollar had lost 40 per cent of its purchasing power since 2002, up to last year.

"Another study also revealed that the dinar purchasing power has dropped by 60 per cent over the past eight years," she said.

"Your comments in one of the meetings for the International Bank in New York on April 14, clearly state there is no solution to inflation in the medium run and that rich countries should start helping the poor."

"The Central Bank of Bahrain knew from the beginning that the purchasing power of the dinar was dropping, yet it didn't take any measures to stop the downfall," she said.

"Saudi Arabia and India have already taken counter measures, except for Bahrain, which is not looking for real solutions," Al Arrayedh added.-TradeArabia News Service