It’s not about putting up arbitrary dates," Rasheed Al-Maraj told Reuters in an interview. "Now we have come to a stage where we have almost completed our draft monetary agreement. This is a major milestone toward reaching our objectives." Asked when Gulf states could revise the 2010 target, Maraj said: "I don’t think this is going to be decided this year. Next year we will have a better or clearer picture.
Saudi Arabia’s Central Bank Governor, Hamad Saud Al-Sayyari, told Reuters last week Gulf states would decide on a "feasible" schedule for rolling out the single currency after reviewing the 2010 target at meetings this autumn. At a meeting in June, Gulf central bankers finalised a draft monetary union deal as well as an agreement to set up the nucleus of a regional central bank.
But rapid economic growth spurred by a seven-fold surge in oil prices since 2002 and inflation that is soaring to record and near-record peaks were placing hurdles before a 2010 deadline set in 2001, Sayyari said. Monetary union first hit trouble when Oman chose not to join in 2006 and Kuwait broke ranks, severing its dollar peg in 2007. Bahrain, the smallest Gulf Arab economy, would likely expand 6.5 percent this year and between 6 and 7 percent next year, Maraj said, adding the rapid regional economic growth was a driver of inflation.
High oil prices had helped strengthen the economy, he said. "The main impact of higher oil prices is that it gives the government more to spend and when the oil price is high it also improves confidence in the economy," he said. But with huge oil windfalls and regional growth powering ahead, he said finessing interest rates would have little effect. "If I was to raise rates by one or two percent it would have little impact on growth," he said.
Bank of England governor Mervyn King last week accused countries with dollar pegs of fuelling worldwide commodity price inflation through setting unrealistically low interest rates to maintain those pegs as US interest rates have tumbled. Dollar pegs in all Gulf states but Kuwait have exacerbated inflation as the US currency weekend, driving up import costs from countries other than the United States. Gulf central banks have been forced to track seven US interest rate cuts since September to defend their pegs, driving real interest rates – after allowing for inflation – into negative territory.
Bahrain’s inflation was 6.2 percent in April, compared with a central bank one-week deposit rate of 2 percent and lending rates of 5.25 percent.
Maraj said while he could not speak for other countries, Bahrain would hold its peg and was happy with its interest rates at current levels. Overall, he said rocketing volatile oil prices were unhealthy for economies around the world including the Gulf, although the government was able to use the oil revenues to subsidise food and fuel to limit inflation. "The dollar is only a minor factor in inflation," he said, blaming high global prices and regional growth. "You are seeing this in all countries… the high oil price is hurting us all".
