Gulf union advised to de-peg

Gulf states should use the planned GCC monetary union as an opportunity to de-peg their currencies from the dollar, two banks say.

Analysts say the Gulf states' commitment to the dollar peg is holding back their economies.

Gulf states should use the planned GCC monetary union as an opportunity to de-peg their currencies from the dollar, two international banks said yesterday. The Gulf monetary union project, which suffered a serious setback last month when the UAE withdrew, still provided an opportunity for Gulf states to adopt a more suitable monetary policy away from the US Federal Reserve, bankers said.

For this reason, they said, Gulf states should still try to move forward with it despite political differences. "I'm a bit disappointed," Youssef Nasr, the chief executive of HSBC Bank Middle East, said yesterday at a conference in Dubai. "The lack of progress on the common currency means we're back now on a reaffirmation of dollar pegs. "And I don't see in the next three to four years the behaviour of the US economy being similar to the expected behaviour of the GCC economy."

Although many Gulf states, including the UAE and Saudi Arabia, have recently reaffirmed their commitment to maintaining the dollar peg, analysts say such a policy is holding regional economies back. "Gulf countries now have an opportunity to adopt a [more] flexible exchange rate system that would allow for the effective use of autonomous macroeconomic policies and also support diversification efforts," Serhan Cevik, an analyst at Nomura International, wrote yesterday in a note to clients.

Since the UAE's decision to withdraw from the monetary union in protest against not being chosen as the host country for a planned Gulf central bank, analysts have said the viability of the entire project is now in jeopardy. UAE officials have since said they were not considering re-joining. "The GCC currency union project has been pretty badly harmed by the recent withdrawal of the UAE from the project," Tristan Cooper, a sovereign analyst at Moody's Investors Service, said yesterday.

"I am not sure whether it is going to survive those setbacks and I am rather sceptical about when and whether the project will be achieved." Oman withdrew from the project in 2006, leaving only Saudi Arabia, Bahrain, Kuwait and Qatar now planning to move ahead with the currency union. This week, the remaining four countries demonstrated their continued commitment to the plan by signing an agreement to create the precursor to a Gulf central bank.

But analysts have questioned whether they will be able to introduce even an electronic version of a new common currency by the original deadline of Jan 1 next year. "We doubt that institutional preparations and technical requirements will allow the introduction of a new currency in six months," Mr Cevik said. [e-mail]