The collapse of the single currency?

Hamad Saud Al-Sayari slams his official GCC monetary union papers down on the table, rises and prepares to leave the boardroom. This meeting is over. But while other GCC central bankers rise to follow Saudi Arabia's central bank governor, a large proportion remain seated, or, when half standing, decide to slump back heavily into their leather upholstered chairs despondent at the day's outcome. Significant agreement over the Gulf single currency has failed once again, and the 2010 deadline appears increasingly untenable. What's more, this time things look ominously, and rather depressingly, more permanent.

"They have some major issues to deal with and many of them can't see any solution coming soon," an insider who attended the meeting told Arabian Business as he left the Riyadh summit last weekend.

Sadly, over the last six months to a year the 2010 GCC common currency has looked increasingly doomed. The severe weakness of the US dollar and rising inflation levels have made the shortcomings in existing foreign exchange regimes increasingly apparent. The US dollar is at a 26-year low against the British pound; a global credit crunch has sent US and European stocks plummeting to modern-day lows with large investment banks and mortgage brokers feeling the pinch more than most; ratings agencies potentially face being investigated for a conflict of interest; and the dirham in the UAE, for example, reached new highs last week against its sliding peg, sending the cost of living in the Emirates spiralling. Bids for dirham firmed at 3.6718 per dollar, the highest level since July 26 ­- the day after Kuwait allowed the dinar to appreciate to an 18-year high against the weak dollar. Things couldn't be worse.

So it wasn't surprising that central bankers of Saudi Arabia, Kuwait and four other oil producers cited "exceptional economic developments" as the reason the 2010 deadline for a monetary union project would be "difficult to meet".

Local investment bank EFG-Hermes was as unsurprised as any organisation within the local finance community. Once the meeting was over it immediately drafted a report entitled Monetary Union Even More Distant, which set out several key points on the economics behind the fiscal failure.

Its author, analyst Monica Malik, says EFG knew exactly what the outcome of the meeting would be even before the bankers convened.

"There were limited expectations ahead of the GCC Central Bank governors meeting that any important decisions would be taken, bringing the planned 2010 monetary union back on track." Malik even goes so far as to say that EFG believed that there was "little to no chance" that the monetary union deadline could be met.

"Following the meeting, our reservations over the union and the deadline have increased, owing to comments made regarding inflation policy," she adds.

Several Gulf governments remain stubbornly fixed to their currency pegs. Last week the UAE and Qatar reiterated their adamant stance on maintaining the dollar peg and rejecting any move towards a basket of currencies and boldly suggested that they expect rising inflation, fuelled by the soaring cost of accommodation in both countries, to decline. Confident, considering the incessant rise of inflation.

Qatar's Central Bank governor HH Sheikh Abdullah bin Saud Al-Thani said his country had no plans to depeg its riyal from the weakest greenback in a quarter of a century, and that measures to control rent rises and other prices would "reduce" inflation. "We are committed to the peg and also to the march of the GCC countries towards monetary union," Sheikh Abdullah said.

"We are taking measures to control prices and rents which would lead to a gradual decrease in inflation."

UAE Central Bank governor Sultan Nasser Al-Suweidi also defended his decision not to ditch the dollar. "I have always defended the peg to the US dollar because all the basic facts that determine the peg of a currency to another are in favour of the US dollar." Inflation in the UAE, which hit a 19-year high of 9.3% last year, has already started to decline, Al-Suweidi pointed out.

And there lies the sticking, rather than the tipping point of the entire common currency debate - every Gulf country has different inflation policies and unless some form of harmonisation begins to be discussed, let alone applied, progress will never be made, suggest experts.