Gulf seeks momentum for FX union
Dubai, September 11, 2008
Gulf central bankers hope to restore momentum to their monetary union project at key meetings next week as the US dollar's rebound dampens speculation of immediate reforms to the region's dollar pegs.
With less than 15 months to go before a self-imposed 2010 deadline to issue a common currency, the Gulf Cooperation Council (GCC) risk losing credibility if they fail to achieve monetary union in some form by that target.
Central bank governors and finance ministers from Saudi Arabia and four of its neighbours are set to finalise a monetary union deal and decide the location of the Gulf central bank at their September 17 meeting in the Saudi Red Sea port city of Jeddah.
But financial markets remain sceptical about whether the GCC -- which also includes the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain -- will be able to breathe new life into a project beset by obstacles for years.
"It's going to be a pivotal meeting for the credibility of the single currency project," said Simon Williams, senior regional economist at HSBC.
"There are no expectations that a single currency will be in operation by January 1, 2010. What we are looking for is evidence that the GCC has reached agreement on some of the key outstanding policy issues and laid out a credible timetable."
Any decisions at the joint meeting, and a two-day central bankers meeting from September 15-16, would have to be approved by Gulf leaders at their annual summit in the Omani capital Muscat this November.
For the past two years, central bank chiefs have made little progress at biannual meetings overshadowed by dollar weakness, US interest rate cuts and mounting inflation.
Policymakers emerged from meetings saying the 2010 target would be difficult to meet, but without laying out an alternative. "These meetings don't tend to produce any big statements but time is running out," said Caroline Grady, regional economist at Deutsche Bank, who doubts the Gulf's autocratic leaders will be willing to hand over sovereignty to a regional central bank to set monetary policy.
The region's US allies remain committed to fixed exchange rates economists argue are inappropriate as the US economy tilts toward recession and Gulf states witness the biggest economic boom in their history.
"These states just don't seem to have the enthusiasm to hand over these decisions," Grady said. "It still means that 2010 is not happening."
A lack of political will had pushed the Gulf monetary union project, unveiled in 2001, off the rails; Oman declared in 2006 it would not join just months before Kuwait broke ranks with its neighbours and dropped its dinar's link to the weak dollar.
Kuwait's move triggered a spell of currency market speculation that other Gulf states could follow its lead to fight inflation, and undermine a single currency project that demands unification not divergence.
But Gulf policymakers closed ranks earlier this year, agreeing they would not reform their dollar pegs unilaterally and refocused efforts on jumpstarting the currency project, a move that helped kill off speculative bets on their currencies.
"At the official level, they are accepting the monetary union idea more and more now," GCC deputy secretary-general Naser Al-Kaud told Reuters this week.
"If it is approved, a monetary union agreement (next week) will be a very powerful step to continue with the project." Since GCC central bankers met in June to finalise their monetary union agreement, the dollar has recouped its 2008 losses and the US Federal Reserve has held interest rates.
But decades-high inflation across the world's biggest oil-exporting region will continue to pose challenges to the project, which demands countries keep inflation at no more than 2 percent above the weighted regional average. Financial markets want a clear idea of what will happ