Gulf grapples with obstacles to common currency

September 21st, 2008 - 4:34 pm ICT by IANS  

Dubai, Sep 21 (IANS) Will the Gulf nations be able to have a single currency by the deadline of Jan 1, 2010? Sceptics say time is too short for achieving such a monetary union. Others say it is still possible.International Monetary Fund (IMF) director general Dominique Strauss-Kahn is among the pessimists.

“Achieving monetary union will be a major challenge as much needs to be done to enable the creation of a common currency,” he was quoted as saying in media reports.

However, Governor of Qatar Central Bank Sheikh Abdullah bin Saud Al-Thani said that there were no obstacles impeding the creation of the Gulf unified currency.

Their comments came in the wake of a crucial meeting of heads of central banks of Gulf nations followed by a meeting of Gulf finance ministers this week in Jeddah, Saudi Arabia. The meetings were held to approve a framework for monetary union in the region as the January 2010 deadline crept up.

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) form the GCC.

It was in December 2000 that the GCC members decided to officially peg their respective currencies to the greenback. A year later, they signed the GCC Economic Agreement, which envisaged, among other things, a common currency for the region by the beginning of 2010.

Since then, however, the process has been bogged down by several delays with member states not in consensus about delinking from the dollar.

In January 2007, Oman pulled out from the currency union pact for the time being, citing its confidence in the US currency.

In May 2007, Kuwait, on the other hand, delinked its dinar from the dollar and linked it to a weighted basket of currencies of countries that have significant trade and economic ties with it.

Recent developments, however, have enforced the need for a common currency for the region sooner than later.

The spiralling global oil prices have shielded the Gulf countries from the global economic crisis no doubt, but the link to the dollar has not helped. The falling value of the greenback has sparked off unprecedented inflation across the Gulf nations and the calls for a common currency have increased over recent months.

The US sub-prime crisis has also put weight to the pro-currency union bandwagon. This is but one side of the story. On the other side is the emergence of new global economic powers like India, China, Brazil and Russia.

As the world settles down to a new global economic order, it has become all the more imperative for the small GCC nations to retain their voice. And there is no better way to do this than to have a common currency.

“To counter potential undesirable consequences of this (global economic) revolution, smaller countries such as those belonging to the GCC need to join forces by establishing forms of cooperation that would allow them to achieve durable stability and gain ‘voice’ within the new international economic order,” said a recent study on the monetary union process by the Dubai International Financial Centre (DIFC).

According to the DIFC, there are four important policy issues that need to be addressed if the Gulf Monetary Union (GMU) has to move forward:

* an institutional framework for effective decisions in the conduct of monetary policy and other central bank policies, or, in other words, a Gulf central bank;

* dealing with inflation which in itself is good enough a rationale to depeg from the dollar;

* investing in building regional statistical capacity, which can provide harmonized, comparable economic and financial data; and

* investments in financial infrastructure (including legal and regulatory), payment systems, and the development and linkage of money markets and capital markets.

Core among these is the formation of the monetary policy authority or a common Gulf central bank. Without the central bank coming up, currency union will be virtually impossible.

Till now, a major hurdle to the establishment of a Gulf central bank has been the lack of agreement concerning its institutional framework. Now that the Gulf ministers have approved such a framework, has the path to January 2010 smoothened out?

The DIFC argues that there are feasible alternatives to meet the deadline and that it is largely a matter of political will.

Yet the fact that the Gulf ministers, though approving the framework, did not come to an agreement on how much independence such a monetary authority will enjoy has spurred speculations.

Which again brings us back to the question: will the Gulf nations be able to have a single currency by the set deadline of Jan 1, 2010?

It was with a simple “I don’t know” that Qatar’s Finance Minister Youssef Kamal, who chaired the finance ministers’ meeting, responded when this question was put post-Jeddah.

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