Six years ago, the members of the Gulf Co-operation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – agreed to merge their currencies by 2010.
With the deadline fast approaching, the countries should by now have been in the final stages of drawing up the scheme. Instead, the entire project is in jeopardy, amid political wrangling between the fiercely competitive Gulf states.
Earlier this year, Oman pulled out of the plan. In another blow, Kuwait then abandoned its four-year-old dollar peg, going it alone with a peg on a basket of international currencies.
At the end of a meeting of Gulf Co-operation Council finance ministers and central bankers in Jeddah over the weekend, Hamad al-Sayari, governor of the Saudi Arabian Monetary Agency, the country’s central bank, confirmed what has become increasingly obvious: that the entire project will have to be postponed. Some fear it may be shelved permanently, though Mr al-Sayari insisted: "The situation will be assessed in order to set a new date for monetary union."
The united Gulf currency’s fate is likely to be decided at a big summit in Qatar in December. The issue is vital, for the region, for currency markets worldwide and for the US dollar in particular. Leaps in the oil price mean the Middle East is once again one of the world’s richest regions, pumping money into the City and Wall Street. Significantly, most of this cash has, originally, been dollar-denominated, since the Gulf states receive their oil revenues in dollars, and their own currencies have traditionally been pegged to the greenback.
If the Gulf states were to turn their back on the dollar and float a single currency, in so doing stopping their bulk purchases of American Treasury bonds, the result could be an even sharper fall in the dollar. However, this scenario now looks less likely, because of the ingrained differences between the Gulf states.
One of the main problems has been the dramatic differences between each state’s oil and gas reserves. For instance, Qatar and Saudi each have massive gas and oil revenues, while UAE member Dubai and Oman have very little. Ironically, Oman had stood to gain the most from the union for precisely this reason, yet its central bank governor, Homud al-Zidjali, said he was withdrawing because "we do not want to restrict our monetary and fiscal policies at present".
The challenge for the Gulf Co-operation Council, Michael Klawitter of Dresdner Kleinwort says, is that its member states are starting from even further behind than the European Union did when the euro was introduced, lacking many of the base regulations.
"This takes lots of time," he says. "You have to have so many new regulations and financial systems – and let’s not forget there are huge differences within the financial services system in the Middle East."
Nevertheless, the dollar’s recent weakness has reinforced the arguments in favour of monetary union. The International Monetary Fund warned dollar-pegged Gulf economies yesterday that they face significant increases in inflation at the same time as the US cuts interest rates. To keep their pegs working, the Gulf countries usually have to cut rates in step with the US. However, Saudi policymakers opted not to mirror the Fed’s half-percentage point cut earlier this year.
There is suspicion that, as the dollar falls further, the Gulf Co-operation Council states may consider moving to a joint basket, and then reinstating their single currency plans. The next clues to their intentions will be their interest rate moves if the Fed, as expected, cuts interest rates again this week.
