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Tying the Persian Gulf countries to the dollar has bought decades of stability and prosperity. The time has come, however, to cut the tie.

The dollar has been a steady friend to the Gulf. In a region of small economies dominated by public sector spending, virtually all revenues have been in the form of dollar-denominated oil sales. As young and often sparsely populated countries in the 1960s and 1970s, they lacked the institutional framework—central banks, capital markets, regulatory agencies, and economic managers—that an effective monetary policy requires. Furthermore, their economic growth was relatively weak for decades. Western impressions notwithstanding, periods of dramatic growth in the Gulf were the exception rather than the rule from the 1970s to 1990s. While there were short periods of exceptional growth, real economic growth only averaged an anemic two percent over three decades.

A fixed exchange rate link to the dollar helped. It provided an anchor of stability as the Gulf economies got on their feet. It also created stable currencies and relatively predictable levels of government income and expenditure.

But in the last decade, everything has changed, and things are unlikely to go back to how they once were. Emerging markets around the world have blossomed, as good economic policies, enhanced governance, and rapidly rising global trade have combined to create some of the most auspicious conditions for growth that the world has ever known. In addition, and in part because of these conditions, persistently strong demand has boosted real commodity prices in a more sustained way than they have been in almost a century.

For the countries of the Gulf, the windfall is nothing short of remarkable. At roughly $140 per barrel, the region is amassing capital at an unprecedented rate, with projected surpluses approaching $400 billion per year, or an average $20,000 per citizen. In smaller, energy-rich countries such as Qatar and the United Arab Emirates, the per capita surpluses are several times higher. In addition, regional governments have learned their lessons from the 1970s and 1980s. Unlike past oil booms, in which governments spent with enthusiastic abandon, the governments of the region have become far more strategic. Now they seek to diversify their economies, to invest in their deficient physical, financial, and social infrastructures, and most importantly in the education of their people.

Even so, economies are overheating. Inflation is in double digits, growth is exploding, consumer loans are at precarious levels of personal income, and speculative bubbles in housing and the stock market threaten medium-term stability. These conditions will undermine the region’s capacity to recruit and retain their workforce—still 40 percent foreign overall and with a much higher percentage in the private sector. These workers, who are paid in Gulf currencies linked to the dollar, have seen the value of their repatriated wages shrink, while high inflation severely limits their capacity to save. Labor unrest is a growing problem, and one with no simple solution.

This decade’s prosperity presents Gulf policymakers with a serious dilemma. They have little control over the oil windfalls flooding into their economies, and the virtual absence of taxation in these countries means that governments lack an important tool of economic governance. The fixed link to the dollar compels central banks to mirror the Fed’s low interest rate policy needed to stimulate the U.S. economy, leaving their own economies woefully over-stimulated. Indeed, the governments have precious few tools to shape their local economies.

Of the few tools at their disposal is a currency float. Doing so now would be especially timely. Foreign exchange reserves are at an all-time high. The managerial talent pool is there. And while it will take time to fully develop the money markets necessary to conduct effective monetary policy, all of the elements are in place to begin that process.

Cutting historic ties to the dollar would be both courageous and controversial. Some would see it as a political act rather than an economic one, as if any close U.S. ally with a major economy ties its own currency to the dollar. In fact, none do.

Others fear that the Gulf nations will lose the security of the greenback. In reality, the opposite is true. A float would grant these countries greater stability, not only to stem inflation now, but even more so were the U.S. economy to grow and interest rates to rise at a time when Gulf economies were in an economic reversal.

The economic security of the move could be enhanced if the Gulf countries coordinated their actions, paving the way for greater regional coordination and integration. Doing so would smooth out speculative portfolio flows, help synchronize economic cycles, fight inflation, and ensure competitive access to both skilled and unskilled labor.

The question is no longer why the Gulf states should depart from their dollar peg. Instead, it is why they should remain tied to the dollar despite the very obvious costs. To their credit, Gulf states are managing their wealth far more prudently now than in past oil booms. Rigidly remaining tied to a dollar peg that distorts their economies is no longer prudence, it is folly.