GCC single currency should stand on its own

The planned GCC single currency is unlikely to become a key global reserve currency until the countries involved can demonstrate a greater degree of monetary independence, economists say. Saudi Arabia, Kuwait, Qatar and Bahrain are debating the most effective exchange-rate regime for the currency following the withdrawal of the UAE and Oman from planned monetary union.

A peg to the US dollar is considered the most likely option for the currency initially. All GCC members except Kuwait peg their currencies to the dollar. "The GCC single currency project clearly demonstrates the region's wish to obtain a status which will allow it to play a role in the international payment system," said Tim Fox, the chief economist at Emirates NBD in Dubai. "Before the GCC can move towards its own floating or semi-floating currency regime it will probably have to demonstrate a greater degree of self-confidence," he said.

The GCC currency needed to become the reference currency for the region or for other Islamic countries to ensure that it became important in the global system, he said. Philippe Dauba-Pantanacce, the senior economist for the MENA region at Standard Chartered Bank, said: "The goal of achieving monetary independence seems very far away. The majority of the countries already have dollar pegs and we know in the short term, it [the union] will keep the dollar peg in place so should not expect a lot of changes in monetary policy."

The other option for the union was to follow the example of Kuwait, which pegged its dinar against a basket of currencies, heavily weighted in dollars, he said. Sultan al Suwaidi, the Central Bank Governor, told Bloomberg last week the UAE remained committed to the concept of a single currency in the region, but the timing remained an issue. A common market should be established before the union, he said.

The UAE withdrew from the currency project in May last year following the selection of the Saudi capital of Riyadh as the location for the headquarters of the Monetary Council, the future central bank. Oman withdrew in 2007. The remaining four states will meet on Tuesday, their first gathering since a board for the Monetary Council was named. They will discuss a time frame for the setting up of a joint central bank and developing a currency regime.

The schedule for establishing the single currency has been pushed back from an original target date of this year. @Email:[e-mail]