DIFC Economic Note Recommends Pegging GCC Common Currency to a Basket of Currencies |
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Basket of Currencies should be comprised of US dollar, the Euro, the Japanese yen and the British pound The Dubai International Financial Centre (DIFC) today published an Economic Note, which called for the GCC Common Currency that will be created by the GCC Monetary Union to be pegged to a basket of global currencies comprising of the US dollar, the Euro, the Japanese yen and the British pound.
Titled 'The Exchange Rate Regime of the GCC Monetary Union', the DIFC Economic Note suggested that while the peg of GCC currencies to the US dollar should be maintained for the time being, the new unified currency should be pegged to a basket of currencies at the launch of the Gulf Monetary Union on 1 January, 2010.
Dr. Nasser Al Saidi, the Chief Economist of the Dubai International Financial Centre Authority said: "The historic GCC Monetary Union will need to be accompanied by a re-assessment of the exchange rate policy that links the currencies of GCCGCC
member states to the US dollar. Managing exchange rates against a basket of currencies rather than a single currency will allow adequate flexibility to tailor monetary policy that can address domestic conditions and withstand external shocks. The GCC Common Currency can be an important building block of the emerging post-Bretton Woods global financial architecture. The Gulf Central Bank, (GCB) and currency union in the GCCGCC will be crucial in helping member countries face up to the challenges posed by globalization and the current international financial turmoil."
According to the DIFC Economic Note's analysis, "the trade, output and inflation inter-linkages of the GCCGCC economies with their major trade and economic partners suggests that a common GCCGCC currency should be based on managing a basket of currencies comprising the US dollar, the Euro, the Japanese yen and potentially the British pound." According to it, the weights of an optimal currency basket should be 45 percent for the US dollar, 30 percent for the Euro, 20 percent for the Japanese yen and 5 percent for the British pound.
The unified currency, The Note said, should be pegged to a basket of currencies with an intervention band of 5% around the central parity. This intervention band could be progressively widened as the GCC Common Currency gains credibility in international markets and the monetary policy framework of the Gulf Central Bank is well understood by the public and tested in its daily operational mechanisms.
Switching the peg to a basket of currencies is necessitated by the fact that the US dollar has constrained the monetary policy independence of GCCGCC countries, The Note said. The peg to the dollar has also limited the options of Central Banks in addressing the global financial crisis that started in August 2007, in particular the contagion and spillover effects on the banking sectors, financial markets and the real economy. Similarly, the lack of monetary policy independence prevented an effective response to the surge in inflation over the period 2003-2008 and has stood in the way of containing the volatility of the real effective exchange rate, the DIFC Economic Note said.
-Ends-
About the DIFC
The Dubai International Financial Centre (DIFC) is an onshore hub for global finance. It bridges the time gap between the financial centres of Hong Kong and London and services a region with the largest untapped emerging market for financial services. In just four years, over 750 firms have registered at the DIFC. They operate in an open environment complemented with world-class regulations and standards. The DIFC offers its member institutions incentives such as 100 per cent foreign ownership, zero tax on income and profits and no restrictions on foreign exchange. In addition their business benefits from modern infrastructure, operational support and business continuity facilities of uncompromisingly high standards.
Media enquiries:
Amira Abdulla
Dubai International Financial Centre
Tel: +971 4 362 2433
E-mail: amira.abdulla@difc.ae
Shaima Al Zarouni
Dubai International Financial Centre
Tel: +971 4 362 2432
E-mail: shaima.alzarouni@difc.ae
Iman Ahmad
Dubai International Financial Centre
Tel: +971 4 362 2685
Email: iman.ahmad@difc.ae
© Press Release 2008
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What happened to the objective price stability?
This writer thought that the achievement of price stability within the GCC was one of the objectives of the GCC single currency.
Price stability concerns the relationship between a currency and a basket of goods and services.
How will the GCC central bank be able to maintain price stability, if its currency is pegged, that is, if the value of its currency is itself determined by a basket of currencies?
How will the stability between those two baskets be achieved? [Report Abuse | Email to a Friend | Reply to this Comment]