Policymakers from Saudi Arabia and four of its neighbours preparing for monetary union refuse to admit defeat on the deadline because they want to save face and avoid embarrassment.
They have renewed efforts since April to put forward a united front on the project and made headway on signing key initial deals, hoping to deter currency bets that one or more states could follow Kuwait’s lead and sever their dollar pegs.
But behind the smokescreen, little progress has actually been achieved toward getting a European-style single currency into circulation in the world’s biggest oil-exporting region by a 2010 deadline set years ago.
“There are few expectations – if any – that the 2010 deadline will actually be met in full but there is time for the Gulf to show that currency union is at the top of their agenda,” said Simon Williams, regional economist at HSBC.
“What we are looking for is evidence that the renewed enthusiasm for the single currency project isn’t just talk, but is being backed up by concrete and meaningful action.”
The longer it takes to issue common notes and coins, the greater the risk Gulf states will once again tip the balance in favour of unilateral currency reform as inflation spirals to record peaks, spurred partly by pegs to the ailing greenback.
At an extraordinary meeting on Monday, central bank governors from all Gulf states except Oman approved a draft of the monetary union deal and a set of rules governing a monetary council that will form the first leg of a common central bank.
But, not surprisingly, they skirted the key question about when a Gulf currency will be circulated.
Qatar’s central bank governor told Reuters, “we are not talking about the currency” when referring to the 2010 deadline, and refused to be drawn into further detail.
Experts have long dismissed the 2010 deadline as unreachable.
But knowing how long it will take to introduce the currency is crucial to understanding the raging debate about Gulf dollar pegs that bind the US allies politically, diplomatically and economically to Washington.
Gulf states had agreed to keep their pegs intact until achieving the single currency – a promise that became problematic as the dollar tumbled to record troughs against the euro and a basket of major currencies this year and last.
The pegs have forced booming Gulf states to slash interest rates in tandem with the US Federal Reserve and driven up their import costs, spurring inflation.
Against this backdrop, the currency project was sent off the rails twice after Oman decided in 2006 not to join and Kuwait broke ranks with its neighbours by dropping its dollar peg in May 2007 partly to fight imported inflation.
Expediting the single currency could prevent other Gulf states, namely Qatar and the United Arab Emirates, from following Kuwait’s lead as they contend with the region’s fastest rates of inflation.
Qatar’s prime minister, who said this week he would not revalue the riyal or tinker with the dollar peg in the medium term, made a plea in February for Gulf states to expedite the single currency, and float it “like the Japanese yen”.
But while Gulf rulers probably will sign a final monetary union agreement in November, circulating the currency will take at least three years longer in a best-case scenario understood to have been presented to central bankers this week.
Hammering out the technical details of the currency union – including agreeing on payment settlement systems, banking supervision regulations and exchange rate policy – will delay the currency’s issuance to as far as 2015.
