Currency union nations tidy central bank loans to fit new rules

Four GCC countries planning to adopt a common currency will take another step towards that goal by selling off central bank loans made to public companies, according to media reports. Al Riyadh, a Saudi daily newspaper, said yesterday that the central banks of Saudi Arabia, Kuwait, Qatar and Bahrain would liquidate loan portfolios to the public sector. The draft monetary agreement prohibits central banks from lending to public-sector companies.

The move is meant to free a future central bank from subsidising the public sector in individual countries. "They are implementing the European model so an independent central bank does not lend to government-owned or quasi-government entities," a Dubai-based economist said. "They want all banks to start on a clean sheet and to send the signal that the GCC central bank would not be in the business of lending to the public sector. For example, the US$10 billion (Dh36.7bn) loan that the Central Bank of the UAE made to Dubai earlier this year would not be in the spirit or letter of the guiding principles of the monetary union that was signed in December."

The UAE dropped out of the plans for monetary union last month after Riyadh was selected as the location of the unified central bank. Some analysts have speculated whether monetary union can be achieved without the UAE, since it is the second-largest economy in the region and a global financial hub. One economist said yesterday the Saudis had accelerated the pace of currency union to prove that monetary union would continue.

"They are resolving a number of critical issues that had been dormant for a long time," he said. mjalili@thenational.ae