Central bank governors of five Gulf states, meeting in Jeddah yesterday, approved a draft agreement to create a common currency but deferred a decision on when the new money will be launched. The single currency would represent an enormous step towards integration of the economies of the UAE, Saudi Arabia, Kuwait, Bahrain and Qatar, and could be a precursor to greater political union for the bloc of 37 million people. Oman withdrew from the process last year.
The draft agreement will be passed today to Gulf finance ministers who are also meeting in Jeddah, said Sheikh Abdullah bin Saud Al Thani, Qatar's central bank governor. Heads of state need to give their final approval at a meeting in Muscat before the end of the year. It must also be ratified by national parliaments or their equivalents. "The single currency will be launched, but the time has not been specified," Sheikh Abdullah said.
"We have made a big achievement today, which is the completion of the final draft of the monetary union." Progress on the proposal has eased pressure on GCC governments to revalue their currencies against the dollar or drop their pegs completely. The governments could wait until a summit of Gulf rulers in Muscat in November to decide on the location of a unified central bank, said Mohammed al Mazrouei, the assistant secretary general for economic affairs at the GCC Secretariat.
Jeddah is one of the front-runners, along with Bahrain and Dubai. The central bankers are still aiming at a 2010 target for monetary union, which some analysts think may be difficult to meet because there are still several obstacles to overcome. "The target is aggressive and optimistic," said Mahdi Mattar, the chief economist at Shuaa Capital. "Each country has a different level of inflation, so if they decide to keep the peg to the dollar they are going to have to use other tools, such as increasing reserve requirements, to control inflationary levels."
Inflation in Qatar rose to a 16.59 per cent in June, according to data released yesterday. But the rate in Bahrain is below five per cent. "Rising inflation will require extra efforts in order to stabilise our economies and provide the appropriate environment in order for monetary union to be launched and to succeed," Sheikh Abdullah said. Analysts expect the Gulf central bank to have an independent monetary policy in the long run, and the currency - which does not yet have a name - to become one of the world's benchmarks.
Inflation has risen across the Gulf, partly because of demand for housing but also because of food prices and the collapse of the dollar. However, as the dollar rises and food prices stabilise, economists hope that inflationary pressures will ease. Most Gulf states are pegged to the US dollar and are consequently forced to import US monetary policy, including cutting interest rates to combat recession. That only exacerbates inflation in the Gulf.
Sultan bin Nasser al Suwaidi, the governor of the Central Bank of the UAE, said earlier this year that inflation was more about "bricks and mortar than pegs and baskets". He said the property market was the root cause of rising prices, not the dirham's peg to the dollar. "Inflation is a short-term, temporary issue here because it is derived from the real estate market, which must eventually stabilise. The same goes for food commodities, because supplies will increase since agriculture is of a cyclical nature."
Economists are waiting for new inflation figures from the Department of Planning and Economy. Growth in money supply, an indicator of future inflation, grew more than a third in the year to June, according to data published yesterday. @Email:shamdan@thenational.ae