GCC to decide 'feasible' currency schedule

Gulf Arab oil producers will decide on a "feasible" schedule for rolling out a single currency after reviewing a 2010 target for monetary union this year, Saudi Arabia's central bank governor said.

In an interview with newswire Reuters, Hamad Saud Al-Sayyari reiterated the monetary union timeline has become very difficult due to high inflation and an unsustainable boom in the economy, but said regional commitment to the project is firm.

"It's a tight schedule, it's very difficult to meet. But that doesn't mean that the union is out, we've already agreed on the framework," Al-Sayyari said on Monday in the Swiss city of Basel.

"The original schedule to issue a currency, that is very difficult to meet. So we will review this schedule and decide on a schedule that is feasible... because 2010 was supposed to be the date for issuing new banknotes."

Any revisions to the timeline must be decided at the meeting between Gulf central bank governors and finance ministers in September and Gulf rulers in November, Al-Sayyari said.

"It is premature to say what's going to happen," he said.

The project is facing hurdles as inflation spirals to record and near-record highs across the world's biggest oil-exporting region and the economies boom on a rapid rise in oil prices.

Oil prices soared above $143 a barrel on Monday, a seven-fold increase since 2002. Gulf governments have poured their oil windfall into developing infrastructure, real estate and industry, a key factor behind soaring inflation.

Apart from price rises, Al-Sayyari said key economic variables which the region needs to meet before a union were either too high or too low because of an economic boom.

"There is a boom that influences various variables that are abnormal now," he said.

The monetary union project was already pushed off the rails when Oman decided in 2006 it would not join and Kuwait broke ranks with its neighbours in 2007 and severed its dollar peg.

The recent surge in oil prices means there could be a big decline in the future and such volatility is unwelcome as it hits the economy, Al-Sayyari said.

"It's not welcome because increases will be a seed for a substantial fall in the future. We would like stability and reasonable prices," he said.

"This boom and bust is very unhealthy for the economy and we don't welcome volatility."

Surging energy costs have led to increased money flows for Saudi Arabia, the world's biggest oil exporter, and as a result inflation has been driven up to a more than 30-month high above 10 percent earlier this year.

Al-Sayyari said adjusting exchange rates would not solve the issue of high inflation, despite suggestions by some officials including Bank of England Governor Mervyn King that low interest rates in some countries that peg their currencies to the dollar are helping to fuel commodity price inflation.

Gulf dollar pegs have contributed to inflation by making imports from Europe more expensive as the dollar tumbled to record troughs against the euro this year.

"Global inflation is imported but not because of exchange rates. There is some [effect] but very limited. Adjusting it will not solve the inflation problem," Al-Sayyari said.

With renewed impetus to get the monetary union back on track, it is logical to have a time lag between forming a monetary union and issuing a single currency, just as there was a lag of two years for the euro zone between launching the euro and issuing banknotes, Al-Sayyari said.

"Theoretically, you can start... in stages. Just like the Europeans," he said. The United Arab Emirates, Qatar and Bahrain are also part of the project.

This year, Gulf policymakers are set to approve the final draft of a monetary union deal as well as a draft agreement to set up a monetary council that will be the first leg of a central bank.

But complying with convergence criteria could take some time. An inflation target of no more than 2 percent above the regional average "is not achievable at the moment", Al-Sayyari said, declining to comment whether Gulf states could reconsider that target.

Inflation in Qatar was almost 15 percent in the first quarter while in Bahrain it was just above 6 percent in April.

"This is one of our challenges. Still, we cannot set a new target before we evaluate the situation," he said. (Reuters)

Print | Email | Discuss this article |

USER COMMENTS (0 COMMENTS)

POST A COMMENT

CLICK HERE TO POST A COMMENT

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Security Code *
Please click post only once - your comment will not be published immediately.