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Economists say Monetary Union Accord would be a Landmark

DUBAI - Gulf Cooperation Council (GCC) Monetary Union will be a landmark development in the formation of common currency and monetary policy for the Gulf countries once it approved by the member countries.

GCC Monetary Union is likely to be announced in a high-level Summit starting today in Muscat. Mohammed Al Mazroui, Assistant Secretary-General at the GCC Secretariat, had told Khaleej Times last week that the issue was on top of the agenda and the summit would come up with a final action plan for the unified monetary regime. The GCC countries, with combined economy of over a $1 trillion, sit on 40 per cent crude oil and 25 per cent gas reserves in the world.

Dr Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi (NBAD), said that the agreement would establish a Monetary Authority as a precursor to the formation of the GCC Central Bank. The members of the European Union had also formed a similar EU Monetary Council prior to the formation of the EU Central Bank (ECB).

The GCC Monetary Authority is likely to be vested with the responsibilities to prepare the roadmap for the launch of the GCC Central Bank and work out the guidelines for the common monetary policy and financial regulations for the GCC countries. The Authority may also have to come up with the policy options on the exchange regime of the proposed common GCC currency, Al Mazroui had said.

Dr Gokkent said the establishment of the GCC Monetary Authority marks only the second phase in the long-drawn-out efforts to the launch of the unified monetary regime for the GCC countries, and the final step would begin only with the launch of the GCC Central Bank. He also said there were still several challenges in achieving the goal of a ‘GCC Monetary Union’ by 2010.

Finalising the exchange regime for the new currency will be one of the major challenges. While the countries like Saudi Arabia, the UAE and Qatar have more or less pegged their currencies with the dollar, Kuwait is currently using a currency basket regime.

Even though there have been persistent demands from several quarters that the Gulf countries must de-peg their currencies from dollar, experts like Dr Gokkent are of the view that it would be better to continue with the dollar pegging in the ‘transition period’. Sticking to the existing dollar peg will offer ‘continuity, stability and simplicity’, he said.

However, the recent rate cuts by the US Federal Reserve and talk about a large amount of fiscal spending to stimulate the US economy has raised the possibility of renewed dollar weakness. “Pegging to a basket would cause less local currency volatility in case of renewed dollar weakness, which I think will occur again given the current US deficit spending, so the time to repeg would be now,” said Dr Eckart Woertz of Gulf Research Centre. He also added that 1 January 2010 target is not likely to be met as the authorities are behind the curve with preparations such as printing the money, educating the banks and companies.

Another key challenge for the GCC countries will be that they will have to frame common monetary policies and financial regulations before the launch of the GCC Monetary Union. There could be sensitive debates in this issue as the member countries would be keen to ensure that the unified monetary regime won’t undermine their sovereignty.

“Right now Gulf states are reacting on individual basis and not part of larger efforts to get unified,” said Dr John Sfakianakis, chief economist of Saudi British Bank. “Having a Monetary Union would create a positive impact when there is a crisis like what we have now. Cohesiveness is something very important and can be accomplished as we move closer to unifying currency in the years ahead,” he said.

It also remains to be seen how many among the six members of the GCC would join the proposed GCC Monetary Union. Oman has already made it clear that it will not join the common monetary regime in the initial period though it would like to be part of the proposed union of GCC countries.

· abdulbasit@khaleejtimes.com, ramavarman@khaleejtimes.ae