Last month in Singapore, the Governor of the UAE Central Bank, Sultan bin Nasser Al-Suweidi, said that it had been decided that Abu Dhabi would be the seat of the new GCC Central Bank as soon as the monetary union is established in 2010. Although this comment was later retracted, it has brought into focus the imminent monetary union of the GCC countries.
At a meeting of Central Bank governors in Abu Dhabi on October 30, Al-Suweidi suggested that the UAE would still like to house the new central bank, however he suggested that Qatar and Bahrain are also interested seeing it established on their territory.
Al-Suweidi also suggested that any such single currency in the GCC should lose the peg to the dollar in the longer term. He argued, "It would not make real sense to have a single currency and keep it linked to a strong hard currency. By 2015 I think we should have a free-floating currency." He dismissed linking it to a basket of currencies arguing that within such a basket there would always be one dominant currency anyway.
Senior Economist at Standard Chartered Bank Steve Brice, agreed and said, "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." He further asserted that there seems to be some acknowledgement of this within the region although there are still some stumbling blocks. Brice warned, "It is important that the central bank's intentions are flagged some time in advance, so businesses can protect themselves against the different currency and interest rate exposures they will face."
One particular concern regarding the proposed union is the differing inflation levels in the various participating countries. For example, the UAE has a much higher rate of inflation than Saudi Arabia. Of all the convergence criteria including public debt, currency reserves and interest rates, inflation will be the most difficult to meet before the single currency. Brice said, "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. 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."
However, Brice was adamant that strict criteria must be met otherwise the union will not work. Much like the Euro, there could be an opt-out option that would allow certain countries to work towards such targets.
However, Muhammad al-Mazrouei, assistant secretary general for economic affairs at the GCC is not worried. At a meeting of GCC Central Bank governors in Abu Dhabi on October 29, al-Mazrouei said that such inflation is transitory and limited to certain sectors such as real estate. He further argued that it will not be the end of the world if all the criteria are not met. Even the Europeans violated the criteria, and still launched the single currency," al-Mazrouei said.
Meanwhile, at the same meeting, Al-Suweidi said that the UAE is looking to diversify its foreign currency reserves. He commented, "The bank hopes to lower the dollar share of its foreign currency reserves to a range of between 50-90%." Currently, 98% of its foreign currency reserves are in dollars, which amount to $25bn.
The meeting of the GCC central bankers in Abu Dhabi also discussed sovereignty issues surrounding the move towards monetary union. The issues included determining the exchange rate, the issuance of the single currency, and the requirements for altering national banking and financial regulations to fit within the GCC framework.
The participants also drew up a six-point memorandum of recommendations to be put to finance ministers. The conclusions of discussions on these points will be put to the Heads of State at a meeting in Riyadh in December for final approval. However, the full implications of these recommendations are not yet clear. Al-Suweidi said, "We cannot disclose the recommendations we have agreed today, until they are presented to the meeting of GCC finance ministers and Central Bank governors taking place in Jeddah on November 4-5."
However, it is clear that plans for monetary union are moving ahead a pace. Moreover, despite slight concerns over meeting the necessary economic criteria such as inflationary targets, there is a general air of confidence that the union will prove successful.