Crisis a 'catalyst' for Single currency

Economists say GCC leaders will have a renewed sense of urgency when they address key issues at their annual summit.

A single currency for the region could help protect Arab countries better manage external financial shocks.

GCC leaders will have a renewed sense of urgency when they address key issues such as monetary union and the possible location of a Gulf central bank at their annual summit in Muscat this week, economists say. Tomorrow and Tuesday, the leaders will decide whether to approve a specific set of recommendations drafted in September by GCC central bank governors and finance ministers during a meeting in Jeddah. However, much has changed since then: Gulf stocks have dropped, slowing economic growth has replaced inflation as the chief economic concern, and states have taken independent measures to protect their national economies from the financial crisis. Despite the turmoil, analysts say the continued threat of the global downturn has made the importance of long-term regional co-operation more apparent. "The current financial crisis is likely to concentrate the minds of the GCC states on monetary union, as the benefits of such a union are clearer at a time when policy co-ordination is necessary to manage the various challenges facing these economies," said Farouk Soussa, a credit analyst at Standard and Poor's. The monetary union project, which has been a work in progress since 2001, will include all of the Gulf states except Oman, which chose in 2006 not to join. Although meeting the original deadline of Jan 1 2010 may prove difficult for the five remaining states, the financial crisis could help speed up the process, according to Imran Ahmed, the managing director of asset management at Mashreqbank. "I think there has been a realisation among policymakers at the senior level that if there is co-ordination, perhaps these efforts will yield greater results more quickly," he said. "The global crisis will certainly act as a catalyst to increase co-operation and co-ordination among the countries... and raise some of the more difficult issues to the forefront so they can be addressed." According to Nasser Saidi, the chief economist at the Dubai International Financial Centre, the crisis should demonstrate to Gulf leaders that they cannot withstand a global shock without co-operating. "If there is anything that we have learned from the financial crisis, it's that we need to protect ourselves. And there is no better protection than our getting together, having a common central bank and a common currency," he said. The Gulf leaders are expected to decide on the location, structure and mandate of the monetary council. Once established, the council will decide the new currency's exchange rate and name. One possibility, the "khaliji", Arabic for "of the Gulf", has been informally suggested by observers so far. If the GCC decides to create a fully fledged Gulf central bank at a later stage, it is likely to be located in the same place as the monetary council. For this reason, all of the GCC countries have expressed interest in hosting the council, although established financial centres such as Dubai, Doha and Kuwait City are the most likely candidates, economists say. If the heads of state reach a consensus, they will still have to present the terms to their respective governments for ratification. To fully ratify the monetary union agreement, a country must deposit signed copies of it with the GCC secretariat in Riyadh. Once that is done, the agreement will then function as a contract, binding the member state to implement the terms according to a set timeline. So far, the road towards regional co-operation has been bumpy. Last year, Kuwait surprised other member nations when it de-pegged its dinar from the dollar. Oman also threw the project off track in 2006, when it decided it would not join the monetary union on the planned date in 2010. Most observers acknowledge that the GCC is behind schedule and that extending the timeline might be a smart decision at this stage. What should be expected from this week's summit, they say, is some sort of statement of commitment to the union, with less of an emphasis on the original Jan 1 2010 deadline. "The diminished likelihood of meeting the 2010 target does not in itself undermine the commitment of member states to monetary union, but reflects the time required to overcome the technical and political challenges such a historic step entails," Mr Soussa said. [e-mail]