UAE exit may slowdown reforms

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Political tensions over the plan increased in May when the UAE expressed reservations about the decision to place the headquarters of the common central bank in Saudi Arabia. This reflected worries that Riyadh would be overwhelmingly powerful within the Union.

“The main concern was that with many of the GCC (Gulf Cooperation Council) institutions going to be based in Saudi Arabia, Saudi Arabia was going to dominate the common currency,” said Marios Maratheftis, regional head of research at Standard Chartered Bank. Oman had already pulled out in 2006, leaving the other members of the GCC — the UAE, Saudi Arabia, Qatar, Bahrain and Kuwait — to pursue the project. The absence of the UAE, a major financial centre and the region’s most open economy, may now further slow progress towards a single currency. But after a cooling-off period, other GCC members may try to negotiate the UAE’s return. “I would like this move by UAE to be a bargaining move rather than a final one, I’d like to believe that and that’s conceivable. They are playing it very tough and raising the ante,” said Emirati political scientist Abdel-Khaleq Abdullah. Public opinion in the region generally favours closer political and economic ties, and the GCC partly promoted currency union as meeting popular wishes. The ruling families of each country are not democratically elected representatives, which both isolates them from public opinion to some extent and leaves open the possibility of sudden, dramatic gestures of reconciliation between rulers.

Reform
Legal and administrative reforms that could boost economic efficiency in the Gulf, and possibly lead to more competitive markets, could be the biggest casualty if monetary union fails.

As in the case of the European Union, monetary unions tend to usher in a period of change to countries’ institutions and practices, as member states strive for common standards.

Without the spur of a single currency, individual states’ efforts to improve primitive, opaque data reporting standards and statistical measures could quickly lose momentum, for example.

Pressure to coordinate fiscal policies, which might make policy-making more effective, would also decrease.

Trade
But a failure to achieve monetary union in the Gulf would probably do less damage to long-run economic prospects than the failure of a currency union elsewhere in the world. Gulf currencies are all tied to the US dollar, with the exception of Kuwait, which closely manages a basket of currencies.

So any union would not bring some of the benefits enjoyed by currency unions such as the euro zone. With currencies pegged, the Gulf already has a stable currency environment. And analysts have long argued that developing the regional customs union would do more to boost trade within the GCC than any agreement on a common monetary unit.

A major reason for the low level of trade is the lack of economic diversification — a problem which monetary union would not necessarily do much to change. It is also possible that the UAE would prosper more outside a currency union than within one. Dubai has thrived over the past three decades partly because of light regulation of business and its ability to seize emerging opportunities, such as tourism and transport, faster than its neighbours.

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