Single currency suffers serious setback

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Postponed: Sultan Qaboos of Oman has delayed the decision to join the Gulf monetary union.

Oman has dealt a huge blow to the campaign for a single GCC currency by postponing its decision to join the Gulf monetary union scheduled to come into effect in 2010.

During the Gulf Cooperation Council summit in Riyadh Sultan Qaboos of Oman announced that the country would delay its decision on the single currency due to not being able to meet the required criteria in time.

In a further setback Saudi Arabian finance minister Ibrahim al-Assaf called the 2010 deadline “ambitious” and that the five remaining countries could delay the currency launch if “obstacles” arose. Saudi Arabia makes up 58% in the GCC commitment, and is an essential part of the currency union’s success.

In terms of the union’s criteria, however, Oman (the second smallest GCC economy) has performed better than Qatar and the UAE where accelerating rents and supply blockages have seen inflation conditions exceeded limits.

Oman’s decision to delay joining a common GCC currency has very limited implications for monetary policy in either the Sultanate or the Gulf as a whole. According to a report by Deutsche Bank, the 20-year de-facto peg against the US dollar in all the GCC countries (with the exception of Kuwait which trades within a +/-3.5% against the US dollar) means that monetary policy has been stable for two decades now in the Gulf with interest rates set by the US Federal Reserve.

The introduction of a single currency, the report says, might eventually allow an independent exchange rate regime — which might be a reason for Oman opting out at this early stage.

With a current account surplus of 15.4% of its GDP in 2005 and a budget surplus of 14.5% of its GDP Oman’s trade imbalance is not as large as other GCC countries. The Sultan therefore does not suffer heavily from a currency that is pegged to a weak dollar in order to buy expensive euro imports, so he might not be concerned over the possibility of currency misalignment.

Regardless of the statements by the Saudi finance minister, the remaining five GCC countries reaffirmed their commitment to continue to work towards the proposed 2010 deadline, suggesting the US dollar pegs should remain firmly in place until then.

Statements by the Kuwaiti central bank last week suggested a possible widening of the 3.5% trading band but a possible delay to the 2010 date could increase speculation over possible realignment.

The GCC has been working towards a currency union since the early 1980s but has yet to agree on key details. The completion of a customs union in the GCC is already a year behind schedule and the final details of the convergence criteria have yet to be agreed upon.

With an estimated US$590bn economy, a current account surplus on a similar level with China at US$160bn (2005) and a significant chunk of the world’s oil reserves, a common currency in the GCC would represent a significant economic trading block.

GCC convergence criteria includes inflation no higher than 2pp above that of the weighted GCC average, short-term interest rates no higher than 1.5pp above the GCC, budget deficit of less than 3% of GDP or less than 5% when oil prices are “weak”, national debt of less than 60% of GDP, reserves no less than four months of import cover.

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