Monetary union 'possible by 2010'

Sultan bin Nasser Al Suwaidi, the governor of the Central Bank of the UAE, has said the GCC monetary plan would be implemented in stages.

GCC monetary union is still achievable by 2010, but states must work to bring down inflation if they are to meet the deadline, an economist at the Dubai International Financial Centre (DIFC) said yesterday. Monetary union, which would remove trade barriers, bring into circulation a new currency and create an EU-style monetary authority, has been beset by delays and political infighting since it was proposed in 2001.

But Nasser Saidi, the chief economist at the DIFC, said that almost all the financial and economic pieces were in place well ahead of the Jan 1, 2010 deadline. All of the "convergence criteria", aside from those regarding inflation and pegs to the US dollar, had been met, he said. "If the will is there, it can be done," he said yesterday at the DIFC while presenting the results of a study on the progress towards union.

Mr Saidi said in the study that inflation "should be the priority item on the agenda". "Once monetary union is achieved, the [proposed] Gulf central bank should adopt inflation targeting and create the monetary tools to achieve its goals," he said. Mr Saidi's optimism, however, is not widely shared. As the 2010 deadline approaches, high-ranking officials and economists have expressed scepticism about that date, citing a lack of banking infrastructure and continuing debate over where to locate a regional central bank.

Hamad al Sayyari, the governor of the Saudi Arabian Monetary Agency, indicated this year that monetary union was unlikely by 2010. Sultan bin Nasser Al Suwaidi, the governor of the UAE's central bank, has said that the plan was to put the monetary union into place "in stages", and that it would be "an accomplishment" if one or two of those stages were in place by 2010. Adding to the difficulties, Oman last year withdrew from the union, and Kuwait last May removed its currency's peg to the US dollar in favour of tracking a basket of world currencies. Maintaining pegs to the dollar ahead of the union had been one of the agreed-upon convergence criteria.

The 2010 deadline is approaching at an inconvenient time for Gulf countries, which are wrestling with high and volatile inflation rates not seen since oil prices skyrocketed in the late 1970s. One of the convergence criteria - which are modelled on those within the Maastricht Treaty that was the basis for the EU - stipulates that "inflation rates should not exceed the GCC weighted average inflation rates plus two per cent in each member country".

This has become an increasingly impractical target as inflation rates have soared. In the UAE, inflation stood at 11.1 per cent last year, the latest official figure available. Inflation in Qatar stands at around 14 per cent, the highest in the region. Year-on-year inflation in Saudi Arabia recently crossed the 10 per cent barrier, according to monthly government data. Only in Bahrain, where annual inflation was 3.1 per cent in June, does it appear to be under control.

Mr Saidi said he expected inflation to moderate in the region next year due to a strengthening US dollar and declining global commodity prices, paving the way for the adoption of a common currency. "Inflation is a relatively recent and temporary matter, and it will come back down again," he said. Aside from the problems of inflation and Kuwait's de-pegging of its currency from the dollar, all the ingredients are in place for a monetary union, Mr Saidi added.

Short-term interest rates are similar in GCC countries because of the dollar pegs; all of them must conform to the interest rate decisions of the US Federal Reserve. Foreign exchange reserves are strong, as are fiscal surpluses, because of high oil revenues. No GCC country runs a fiscal deficit. Progress has already been made towards the union. A GCC customs union normalising tariffs across the region was formed in 2003, and a GCC common market, meant to ease restrictions on the flow of money and labour, was declared in January.

In June, the GCC endorsed an agreement on laws and regulations to govern the union.
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