GCC plans to form monetary union

Jul 31, 2001 02:00 AM

The Gulf petro-monarchies are edging towards the goal of forming a monetary union in the next 10 years, but analysts are divided about how to achieve a single currency. The central banks of the six-member Gulf Co-operation Council (GCC) are due to present a timetable for monetary union at a GCC summit in Oman at the end of this year.
The principle was approved by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) last January. Although they failed to set a firm date, 2010 was leaked as a time-frame when GCC officials met at a follow-up session on June 28 in Manama. The GCC, riding the oil price boom, is already committed to a 2005 target to unify customs tariffs, a key step on the road to a joint currency.
"Monetary union in the Gulf is attainable from now, and users in the region could get used to it quickly," said Saudi economist Abdullah al-Mojjel, who heads a private research centre in Manama. "The currencies of the GCC circulate freely throughout the six member countries and their interbank rates have been largely stable for more than 30 years," Mojjel said.

All Gulf Arab currencies are pegged to the dollar with the exception of the Kuwaiti dinar, which is linked to a basket of seven currencies, in which the greenback is dominant. It is better that "a single Gulf currency be pegged to a basket of currencies because it will lend its strength to the power of the Gulf countries' economies, where the industrial sector is coveted by foreign investors," argued Mojjel.
However Bahraini currencies specialist Ahmad al-Yusha'a said GCC members should "provisionally link their national currencies to that of the country whose economy is the most powerful, in this case Saudi Arabia." He also recommended that the Saudi riyal should be pegged to a "basket of the world's leading currencies and move with market conditions."
"But this currency should be supported by all the central banks in the GCC, whose own currencies will be linked to both its highs and lows." Bymoving with the market's fluctuations, the price of a currency "will defend itself better despite the risks of collapse for economies based largely on one product, oil," in the case of the Gulf monarchies, Yusha'a said.
"While removing their currencies from the dollar in favour of a floating exchange rate, these monarchies must forge ahead in diversifying their sources of revenues." GCC countries, which account for 45 % of the world's oil reserves and provide around 20 % of global crude, have been trying since 1981 to agree on a customs union, an essential prerequisite for setting up a common market in the Gulf.

But implementation has been held back by different import tax levels, ranging from 4 % in the UAE to 20 % in Saudi Arabia. A customs union will have the direct effect of setting up an economic bloc representing annual imports of more than $ 50 bn.
The establishment of such a union among the Gulf monarchies is a requirement of the European Union before it will sign a free trade agreement, which the GCC badly wants to gain access to the European market for its powerful petrochemical and aluminium industries. "A single currency should be the crowning of an integration process between member states," said Khalid Abdullah, analyst at Bahrain-Kuwait Bank.

Source: Agencies via Xinhua
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