GCC asks EU for currency advice

From The Daily Star, Lebanon, 14 October.

At this week's meeting of Gulf central bankers in Riyadh, the six Arab states vowed to press ahead with plans for monetary union and the start of a single currency.

Member states Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, UAE, decided to seek the help of the European Central Bank, which rolled out euro notes and coins at the start of the year with very few glitches.

As an important step toward economic integration, GCC Finance ministers meeting in Riyadh finalized over the weekend plans to start their customs union as of January. The states have brought forward the launch of a planned customs union from 2005 and they aim to achieve monetary union by 2005 and issue a single currency in 2010.

The Kuwaiti government also announced Sunday plans to fully link its currency to the dollar from 2003, ending 27-year-old monetary policy pegging the dinar to a basket of currencies.

Kuwait's government announced the measure following its weekly Sunday meeting.

The Kuwaiti dinar is the only Gulf Arab currency linked to a weighted basket of currencies. It was introduced in March 1975. This basket is dominated by the dollar but includes the euro and the Japanese yen, which has helped the dinar enjoy relative stability. It said in a statement that a draft decree sanctioning the move was passed and would go to the OPEC state's ruler, Emir Sheikh Jaber al-Ahmed al-Sabah, for his approval.

GCC Finance Ministers also approved a recommendation made Tuesday by GCC central bank governors to set up a specialized department at the secretariat general to oversee moves to adopt the monetary union and single currency.

Henry Azzam, chief economist at Jordan Investment Trust Group, said monetary union should be relatively easy to achieve in the Gulf since all six currencies are already at least partially pegged to the dollar.

"It's a political rather than an economic decision," he told BBC News Online. "All it needs is for someone at a very senior level in Saudi Arabia to take the decision to push forward."

The countries need to create one central bank for the region, decide who has the power to set monetary policy, agree on what to call the new currency and better coordinate fiscal policy, he said.

But Steve Barrow, currency strategist at Bear Stearns in London, said it is likely to take a long time for plans to gain real weight. He said the key advantages of Gulf monetary union were greater price transparency and the elimination of transaction costs, thus enhancing trade.

But some of the advantages behind the creation of the euro would not apply to the Gulf.

Arab currencies are only very thinly traded and would never rival the supremacy of the dollar, and the dollar peg already protects them against the volatility of minor currencies.

"Monetary union is in vogue at the moment," Barrow said, referring to similar ideas that have been raised in both Asia and South America. "But it is likely to take a very long time for the plans to move from the talking phase to reality."

The states have given the European Central Bank six months to produce a study on the best way to proceed.

Hamoud al-Zadjali, governor of Oman's central bank, opened the meeting in Riyadh by urging all the states to exert more effort in ensuring that the timetable is met. And he warned of the "dangerous political and economic developments" taking place in the rest of the world, and the negative impact on gulf economies.

Among the measures approved by the GCC finance ministers was a mechanism for the payment of customs revenues and a computer linkup between the points of entry-exit of GCC states.