GCC monetary union key to setting up a central bank |
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A Gulf Monetary Union should be a stepping stone to the formation of a Gulf central bank, said Dr Nasser Al Saidi, Chief Economist at the DIFC.
"One of the critical steps in the preparation for monetary union is the definition of the institutional and governance structure and design of the Gulf central bank. In this area there has been an intense debate among the GCCGCC
authorities, but little has transpired so far. This is the last major hurdle on the road to monetary union," Dr Al Saidi said.The Governors Committee of the GCCGCC
's central banks in 2006 requested the European Central Bank (ECB) to conduct a study about the legal and regulatory framework for the common central bank within a set of guidelines approved by the committee.The ECB study envisages a two-step process: first the creation of a monetary authority to guide the run-up to the monetary union and later the transformation of the authority into the Gulf Central Bank. The ECB study included targets, functions and the organisational structure for the Gulf Central Bank and its relationships with national central banks, said DIFC.
Based on this study and after a discussion within an ad hoc committee, the GCCGCC
Secretariat General, in co-operation with the ECB, prepared a draft agreement on the set up of the monetary authority. This draft, however, did not find unanimous consent and was subject to further scrutiny by the GCCGCC Secretariat and the Governors' Committee.However, on June 9, this year, the Governors' Committee finally agreed on a draft text which will be submitted for approval to the GCCGCC
Finance and Economic Co-operation Committee on September 17. The final step will take place at the end of this year when the final document is signed by the Heads of States of the GCCGCC at their annual Summit, said DIFC.Other issues currently being tackled by various committees are the payment and settlement systems, public debt management and, last but not least, the design of banknotes, their printing and issuance, noted the report titled An Assessment of the Progress toward GCCGCC
Monetary Union, which DIFC released. For a smooth transition, Dr Al Saidi urged the GCCGCC
countries to make a change in the policy towards the fixed peg with the dollar, and maintained that it will be prudent to move to a basket of currencies as opposed to a static US dollar peg. Last year, Kuwait pegged its currency to a basket of global currencies, of which analysts believe the dollar is still a big part. Dr Al Saidi suggested a similar move for the other GCCGCC
countries. "I'm not saying that we should move away from the dollar what we are saying is that we should not be strictly pegged and only pegged to the US dollar," he said. "The US dollar should be part of the currency basket, along with the euro and yen," he suggested.
Dr Al Saidi made these comments during a media roundtable last week to discuss the future of the Gulf Monetary Union.
Justifying the move away from the strict dollar peg, he cited the GCCGCC
countries' trade patterns, which he said were also with the Asian countries and Europe. "From the consumer point of view, the bulk of our consumption goods are those that come from Asia and Europe," he pointed out. "Therefore, if you are pegged to the US dollar at the time the US dollar is weak, then you tend to import inflation," he explained.
Dr Al Saidi brushed aside concerns that moving away from the US dollar will be a political rather than an economic decision.
"There have been a number of pronouncements which are important," he said. "First, Kuwait has gone for a currency basket - that hasn't led to a great wave [of dissent]," he said.
"At the same time," he continued, "Henry Paulson, when he visited the region a couple of months ago, said that the Gulf countries need more flexibility," suggesting that the US Treasury Secretary gave a sort of green light to the move. "When the US Treasury Secretary says 'I think you need greater flexibility,' I think that's giving you green light," Dr Al Saidi said.
"So what we are talking about here is not a break from the policy," he reiterated. "What we are talking about here is greater flexibility for monetary policy and for exchange rate policy," he said referring to the report released by DIFC.
In the report, the office of the DIFC's chief economist maintains that the GCCGCC
states - barring Oman, which has expressed its intention to enter the monetary union at a later stage - are on their way to achieving the requisite criteria for a monetary union. The only thorny issue that remains to be solved, as this paper reported last week, is inflation, which is relatively higher in the UAE and Qatar than the other states.Inflation rates in member countries should not exceed the GCCGCC
weighted average inflation rates plus two percent in each member country. The weighted inflation rate in GCCGCC countries was 6.91 per cent in 2007 (while the simple average of inflation rates was 7.29 per cent). Hence the inflation rate for countries participating in the monetary union should not exceed 8.91 per cent. Based on the latest available data Qatar and UAE exceeded this limit in 2007, said the report, thus, unable to fulfil the criterion for a union.
Main elements
An institutional and governance framework to ensure smooth, transparent and effective decisions on the conduct of monetary policy and other central banks policies, i.e. the modus operandi of the Gulf Central Bank.
A set of reliable, harmonised and timely released statistics for the conduct of monetary policy and the guidance of economic and financial agents.
A payments system that would ensure a uniform interest rate and swift transfer of funds throughout the GCCGCC
countries.By Shuchita Kapur
© Emirates Business 24/7 2008
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