While there are question marks over the ability of the six GCC member states to achieve monetary union by the 2010 deadline, it is political opposition rather than economic convergence criteria that is giving monetary officials the biggest headache, according to MEESsoundings. While most governments have been careful to publicly support the 2010 deadline for the single currency, recent weeks have seen some Gulf leaders private reticence over the plan spill over into public reservations.

Following Omans late-2006 decision to withdraw from the 2010 deadline on the basis that its commitment to public infrastructure spending would make convergence tough (MEES , 18 December 2006), GCC officials have been more willing to accept publicly that the deadline may have to be pushed back. While UAE Central Bank Governor Sultan bin Nasir al-Suwaidi said on 27 April that the GCC currency union was on course to meet the deadline, others have been less sanguine. On 8 May, Bahrains Crown Prince, Shaikh Salman bin Hamad Al Khalifa, said economic convergence delays could push back the deadline. I find it increasingly unlikely [that we will] meet that date, he said. There are two specific issues that look unlikely to be resolved in the near future: the establishment of a common market (free movement of capital and labor) by end-2007; and the location of a future GCC central bank. Even so, analysts believe that official support for the deadline will likely continue until there is consensus among GCC central bankers on a new timetable for achieving currency union.

In pursuit of a single GCC currency, member states approved a set of fiscal and monetary convergence criteria in 2005. These included caps on budget deficits at 3% of GDP; public debt at 60% of GDP; inflation at the GCC average plus 2%; interest rates at the average of the lowest three states plus 2%; and foreign exchange reserves covering 4-6 months of imports (MEES , 2 April). While the current bout of inflation across the Gulf exacerbated by the weakness of the dollar against the euro and sterling is making the achievement of some of these targets more difficult, there is evidence that reservations over sovereignty issues may be uppermost in the mind of policy-makers. According to Middle East and Africa Economist at Calyon Bank Koceila Maames, Oman has enough financial flexibility to keep its public debt level (currently at 10% of GDP) below the 60% ceiling. So the issue is not really one of being able of meeting the convergence criteria, but rather one of achieving properly certain preconditions, which call for consensus and unprecedented sovereignty sharing, he said.

Sharing Sovereignty/Central Bank

Concerns over sovereignty sharing have also hindered the establishment of a common market: to date, the free movement of capital and labor is generally restricted to GCC nationals as opposed to GCC residents. The symbolic geographical location of a regional central bank is also set to be a sticking point. While it is difficult to argue the case for six individual currencies, there is growing concern that currency union will give Saudi Arabia, whose economy dwarfs its neighbors, new monetary tools with which to project regional economic and political hegemony. According to Muhammad Moabi, Executive Manager Economics and Research at Qatar National Bank (QNB), it is not so much a question of meeting convergence criteria, although the inflation rates are different, it is more a question of a political will. For its part, the IMF in its World Economic Outlook: Spillovers and Cycles in the Global Economy published in April 2007 pointed out that important policy consensus was also lacking issues that needed to be agreed before the transition to full monetary union. These include a better definition of monetary policy objectives; using more uniform monetary instruments; establishing an institutional framework to improve the coordination of monetary policies; and establishing the planned customs union.

While a single currency is unlikely to have significant impact on oil and gas trading, it can be expected to provide greater currency stability and boost levels of foreign direct investment (FDI) and portfolio investment, analysts believe. The effects of a single GCC currency on hydrocarbon exports will largely depend on the foreign exchange regime of such a currency, said Mr Maames. I doubt that a single currency would be managed by a free float, since this would require GCC central banks to have an alternative anchor policy as well as more sophisticated monetary tools to preserve price stability, Mr Maames told MEES . A dollar peg would not yield major changes while a peg against a basket of currencies, the most likely option in his opinion, would raise the question of whether the GCC states should price their oil exports in dollars or other currencies. A peg to a trade-weighted basket (with a significant euro component) would help GCC economies limit imported inflation, which has been fueled by the decline in the value of the US dollar against the euro and sterling, he added. While most are skeptical of the success of efforts to switch the pricing of oil away from the US dollar given the absence of non-dollar denominated hedging instruments, Gulf bankers pointed out that in a scenario where GCC oil sales were priced in the Gulf currency instead of the dollar, more oil revenues would be retained regionally instead of being invested in the US economy. The new currency could even become strong enough for MENA and Islamic central banks to decide to anchor their national currencies to it, they said.