Arab states attempt single currency by 2010

Saudi Gazette, Sept 26 – PETTY politics and diverging inflation rates are the main risks to Gulf Arab attempts to set up an EU-style monetary union by 2010, although the single currency plan still has a good chance of success.

The Gulf Cooperation Council (GCC), grouping Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman, has already set up a customs union, and this month GCC chief Abdul-Rahman Al Attiya said the currency plans were on track. Al-Attiya said work had already begun on the look of the new currency, and one Gulf economic source told Reuters that ‘karam’ meaning “generosity” in Arabic was a possible name for it.

“Overall … the project looks like it will go ahead on schedule. Everyone seems to be on the same page. The vast majority of fundamentals are already in place,” said Steve Brice, Mideast economist for Standard Chartered bank in the UAE city of Dubai “The currencies are already pegged to each other, the conversion criteria are already met. The only one I don’t think they’ll meet is inflation,” Brice added.

Inflation, one of five criteria already agreed by GCC committees, is running at less than 2 percent in Saudi Arabia, while in the UAE it is over 9 percent. “All of the substantive issues can be solved,” the Gulf economist said. “But will some of the small states agree to remove their ruling family’s pictures and do away with the symbols of sovereignty?”

One issue is where to host the central bank. The UAE has suggested Abu Dhabi, but Saudi Arabia is the largest GCC state with 24 million people and over 50 percent of combined GDP.

The six Gulf states, which currently peg their national currencies to the US dollar, might hold onto the peg simply to avoid squabbling, but Brice said it would be a mistake to take this easy path.

“In an ideal world, you have to think that the Gulf central bank would be in a better position to set interest rates than the US Federal Reserve,” Brice said.

“Some central bankers are already there (on accepting that), but I’m not sure that Saudi Arabia is yet, so how voting rights are split is very crucial.”

Last week, the head of the UAE’s central bank said after a meeting of the GCC bank chiefs that the planned common currency will probably be pegged to one foreign currency at first then allowed to float a few years after monetary union.

Another risk is that economic criteria are not adhered to.

“You might get a watered down version to satisfy everybody, but that’s not going to work. You have to be firm,” Brice said, suggesting the EU’s euro opt-out might work for the GCC, provided the UAE and Saudi Arabia joined the union.