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Mar 26 2009

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Middle East economy: Brave face on monetary union

Gulf Arab central bank governors and Gulf Co-operation Council (GCC) officials are battling to preserve the credibility of their plans for monetary union and for the creation of a common currency, while acknowledging that the 2010 target for completing the process is unrealistic. The next big test of whether the project is feasible will be the establishment of the monetary council, whose statutes were approved at the GCC summit conference in Muscat, the Omani capital, at the end of December.

The gathering of central bank governors at a banking conference in Bahrain on March 24th and 25th provided the first opportunity to gauge the progress of monetary union since the Muscat summit. News agencies ascribed to an unnamed GCC official the statement that the deadline for monetary union would be extended beyond 2010. However, none of the central bank governors concerned nor any of the senior GCC officials present were willing to state on the record that a postponement was in prospect. There was also no indication of what a new timetable might look like.

Low definition

The original deadline for the launch of the common currency was announced in 2001, when GCC leaders first endorsed the strategy of monetary union. However, as the deadline has come nearer, the six-member body has appeared to alter the definition of the launch, suggesting that this could be taken to mean the establishment of the legal and institutional framework for the common currency. (Along the way, Oman also announced its decision to opt out; the other five member states—Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates—are still committed to the union.)

The governor of the Central Bank of Bahrain , Rashid al-Maaraj, said that "realistically" there was not sufficient time left to launch the common currency by 2010. However, in remarks to Asharq Alawsat, a Saudi-owned daily, he said that he preferred not to use the term "postponement" as this might suggest that there were obstacles or opposition to proceeding with monetary union, which he insisted was not the case. Mr Maaraj said that the next step to be completed would be for the governments concerned to ratify the agreement on the establishment of the monetary council. Once the council has been set up, its tasks will include setting up a Gulf central bank, which in turn would issue the actual currency. It would also have to deal with issues such as co-ordinating monetary policy, drawing up legal statutes and developing a statistical system. The potentially divisive question of where the central bank would be located has yet to be resolved. Mr Maaraj acknowledged that there is still a lot of work to be done, but he refused to be drawn on how long the process might take.

Being positive

Mr Maaraj said that it was important that "the Gulf street" saw the positive aspects of monetary union, and did not become fixated on the delays. Mohammed al-Jasser , the newly promoted governor of the Saudi Arabian Monetary Agency (SAMA ; the central bank), made a similar point, saying that he feared that the achievements that had been made so far might be overshadowed by the debate on timing. He cited the efforts to achieve economic convergence, which he said were advancing in leaps and bounds, and the decision to allow the free movement of GCC national labour within the bloc.

The reluctance of the central bankers to specify when the common currency might go into circulation may stem from their desire not to pre-empt a meeting of GCC heads of state that is scheduled to take place in May to evaluate progress with monetary union, following on from the Muscat summit.

Moving away from the dollar peg

Most GCC currencies are at present based on a fixed peg against the US dollar—Kuwait's currency is based on a basket that is heavily weighted towards the dollar. This has greatly limited the room for manoeuvre of the monetary authorities in the Gulf states, as they have been obliged to harmonise their interest rate policies with those of the US Federal Reserve.

There is a growing consensus in the Gulf financial community that the launch of a single currency linked to a basket of international currencies is long overdue. One of the most insistent advocates of this argument has been the Dubai International Financial Centre , which observed in a note issued ahead of the Muscat summit that the basket should consist of a 45% US dollar weighting, with 30% for the euro, 20% for the Japanese yen and 5% for sterling, based on the GCC 's trade, output and inflation linkages. It suggested that there should initially be a 5% intervention band around central parity, with the band being progressively widened as the common currency gains credibility in international markets.

SOURCE: ViewsWire