Single currency dream fades away

Bloomberg

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The global financial crisis appears to have claimed a new casualty: the Persian Gulf dream of creating a common Arab market in the next few years with its own currency modeled after the European Union.

Gulf central bankers met yesterday in Muscat, Oman to discuss plans to create a unified currency, a vision whose near-term prospects are in doubt as the oil-rich states draw up their own plans to deal with the impact of crude prices that have tumbled almost 70 percent from their highs. The six-nation Gulf Cooperation Council last month dropped its Jan. 1, 2010 deadline for a common currency.

"All attention is now focused on the global financial crisis," said Eckart Woertz, an analyst with the Dubai-based Gulf Research Center. "It’s important to develop a greater degree of unity to go down the path of monetary union. Now it’s every man for himself."

The failure to advance with the single currency prevents the Gulf Arab states from pursuing a monetary policy that is independent of the U.S., as all except for Kuwait peg their currencies to the dollar. It also marks a setback for efforts to create a fully integrated economic zone.

Since the global financial crisis began, the United Arab Emirates and Kuwait have guaranteed deposits while Saudi Arabia, the largest Arab economy, has cut interest rates five times since October. Bahrain in March reduced its reserve requirements for commercial banks, following similar moves by Saudi Arabia and Oman last year. Saudi Arabia plans to spend $400 billion on infrastructure to support its economy in the next five years while the U.A.E. and Kuwait are bolstering financial institutions.

"Even before the economic crisis deepened, monetary union in the near future was seen as unlikely," said Simon Williams, chief economist at HSBC Holdings in Dubai. "It now has to compete for attention with the impact of the global downturn on the Gulf - issues that are being dealt with at a national level rather than a regional basis."

Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman agreed in 2001 to form a European Union-style monetary union by 2010 to boost regional trade. Oman pulled out in 2007.

Pressure to unify mounted last year as inflation accelerated above 10 percent in five of the six countries. All of the member states except Kuwait tend to follow the U.S. Federal Reserve when setting interest rates because of their dollar peg. This fueled price rises last year because of the need to match cuts in U.S. interest rates at a time when inflationary pressures were increasing.

On Dec. 30, the five Gulf Arab leaders confirmed an agreement to set up a single currency and agreed to establish a Monetary Council, a precursor to a central bank, by Dec. 12, 2009. That timetable has since been postponed.

With inflation now easing as commodity prices fall, the urgency to stop pegging the currencies to the dollar has subsided.

Saudi central bank Governor Mohammad al-Jasser said March 25 that monetary stability was "essential" in the current environment and expressed confidence in the dollar peg that his country adopted in 1986.

Saudi inflation slowed to 6.9 percent in February, a one-year low, as global commodity prices fell. Inflation in the United Arab Emirates may ease to between 5 percent and 8 percent this year as the global credit crunch reduces commodity and real-estate prices, Minister of Economy, Sultan Bin Saeed al-Mansouri, said March 9.

No timetable

There won’t be a new timetable for monetary union until the countries establish a Monetary Council, said Nasser Al-Kaud, GCC deputy assistant general for economic affairs. "There is no definite timetable for that," he said by phone from Riyadh.

Al-Jasser on March 25 cautioned against attempts to rush into monetary union, saying member states needed more time to prepare.

"It took the European Union 45 years" to put together a single currency, al-Jasser told a GCC banking conference in Manama, Bahrain.

Woertz said the "earliest possible date" for the introduction of the single currency is 2012, noting that the countries haven’t even been able to agree on where the central bank will be located.

The root cause for the delays is an absence of political will, John Sfakianakis, chief economist at Saudi British Bank, said on April 1.

"The technical issues are not the ones creating the obstacles - it’s the politics," he said.