• Home
• /
• Local business

GCC single currency should track basket, say DIFC economists

The GCC single currency, expected to be named as “Al Khaliji,” should track the greenback for a short period soon after its creation and then track a basket of currencies comprising the dollar with a weight of 45 per cent, the euro (30 per cent), the Japanese yen (20 per cent) and the British pound (five per cent), they said in an Economic Note.

The common currency, which signifies the inception of the GCC Monetary Union on January 1, 2010, should have an intervention of five per cent around the central parity, the note titled “The Exchange Rate Regime of the GCC Monetary Union” suggested.

The GCC Summit in Muscat on December 29 and 30 is expected to give the final go-ahead to complete the remaining steps towards the landmark monetary union. The summit may also discuss the formation and location of the Gulf Central Bank.

Dr. Nasser Al Saidi, Chief Economist of the Dubai International Financial Centre Authority, said the intervention band could be progressively widened as the GCC Common Currency gains credibility in international markets and the monetary policy framework of the Gulf Central Bank is well understood by the public and tested in its daily operational mechanisms.

The value of the single currency is expected to be calculated as a weighted average of each GCC currency with its GDP for 2007.

“The historic GCC Monetary Union will need to be accompanied by a re-assessment of the exchange rate policy that links the currencies of GCC member states to the US dollar. Managing exchange rates against a basket of currencies rather than a single currency will allow adequate flexibility to tailor monetary policy that can address domestic conditions and withstand external shocks. The GCC Common Currency can be an important building block of the emerging post-Bretton Woods global financial architecture. The Gulf Central Bank, (GCB) and currency union in the GCC will be crucial in helping member countries face up to the challenges posed by globalisation and the current international financial turmoil,” Dr. Saidi said.

“The trade, output and inflation inter-linkages of the GCC economies with their major trade and economic partners suggests that a common GCC currency should be based on managing a basket of currencies to comprise the US dollar, the euro, the Japanese yen and potentially the British pound initially. The basket currency weights should be reviewed on a periodic basis to rebalance the portfolio of currencies in the event that there have been large changes in trade patterns, output or inflation co-movements as a result of structural or policy changes.”

Also, depending on the changing trade patterns and economic scenario, other currencies including the Chinese or Indian rupee could be included in the basket at a later stage, they said.

Dr. Saidi said switching the peg to a basket of currencies is necessitated by the fact that the US dollar has constrained the monetary policy independence of GCC countries.

“The peg to the dollar has also limited the options of Central Banks in addressing the global financial crisis that started in August 2007, in particular the contagion and spillover effects on the banking sectors, financial markets and the real economy. Similarly, the lack of monetary policy independence prevented an effective response to the surge in inflation over the period 2003-2008 and has stood in the way of containing the volatility of the real effective exchange rate,” he said.

issacjohn@khaleejtimes.com