The GCC can meet its 2010 monetary union deadline if all five participating members have the "political will", according to a report released by the Dubai International Financial Centre (DIFC). Nasser Saidi, the chief economist at the DIFC, disagreed with the popular belief that the GCC would not be able to meet its original deadline to establish a monetary union. "Feasible alternatives that can be rapidly implemented to meet the Jan 1 2010 deadline exist. It is largely a matter of political will," he wrote in a report he co-authored. "Believe me, people were just as sceptical about the euro when it was being created."
The report comes as GCC central bank governors and finance ministers met in Jeddah for some of their most ambitious talks to date on the proposed monetary union. The outcome of their discussions is expected to be announced tomorrow. Several economists in the report were also already speculating about what shape a Gulf central bank might take. Though the Gulf states could choose to establish a monetary union that lacked a Gulf central bank, they would be ill-advised to do so, Mr Saidi said. A Gulf central bank with a permanent headquarters and staff should be created "as soon as possible" and given a "strong mandate" if the region was to achieve its full economic potential.
Mr Saidi did not speculate on the location of the bank, but said some of its departments - such as the one responsible for producing and designing banknotes - could be located separately from its headquarters. According to Mr Saidi, a Gulf currency with an efficient central bank behind it would number among the five major currencies in the world. International investors and central banks would likely want to acquire assets denominated in the Gulf currency in order to hedge against inflation and oil price shocks, he said.
If the GCC does not create a central bank, it could instead form a council of national central bank governors. Such a council could meet periodically in each of the GCC states to decide on monetary policy. However, Mr Saidi said that a GCC without a central bank would be unable to convince international investors that it was capable of maintaining a stable common currency. Mr Saidi suggested a Gulf central bank based on the European Central Bank model with an executive board of three members: president, vice president and chief economist. They would vote alongside the heads of the national central banks on all major monetary-policy decisions, with the president acting as a tiebreaker.
The main objectives would be to fight inflation and ensure stability in the financial sector. "Inflation is the largest obstacle we face right now," Mr Saidi said. Once the Gulf monetary union is established, it should be able to use monetary policy to keep inflation between 0.5 per cent and 3.5 per cent in the medium term. "We advocate that a common monetary policy for the Gulf monetary union should be explicitly and publicly endorsed as inflation-targeting," Mr Saidi wrote in the report.
Though most of the Gulf countries peg their currencies to the dollar, Mr Saidi implied that they would have to eventually "de-peg" if they were to exercise monetary policy independently. He suggested that the GCC common currency would likely be pegged to a basket of currencies. tpantin@thenational.ae
