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Sun 28 Oct 2007 01:46 AM

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Currency decision date agreed

GCC leaders will decide in December whether to delay monetary union among the six member states.

Gulf Arab rulers will decide in December whether to delay monetary union among six oil producers that are divided over how to respond if more US interest rate cuts test currency pegs to the sliding dollar.

Gulf finance ministers and central bankers met in Saudi Arabia to review the 2010 deadline for creating a single currency in the world's top oil-exporting region - a timetable all six say will be difficult, if not impossible, to meet.

With a widely-anticipated delay prompting investors to bet on the appreciation of dollar-pegged Gulf currencies, the six states agreed to keep foreign exchange policy unchanged, although each would steer its own course on interest rates.

"There is a margin for each state to follow monetary policies that correspond to its domestic conditions," Hamad Saud al-Sayyari, governor of the Saudi Arabian Monetary Agency, told reporters after the talks in the port city of Jeddah.

Oman's Central Bank Executive President Hamood Sangour al-Zadjali echoed the position, saying: "Each country has its own economic situation."

The International Monetary Fund said the Gulf needed monetary policy that was consistent with dollar pegs, after the six states broke ranks on their response to a US interest rate cut last month, raising speculation about currency revaluations.

A dollar peg "requires following monetary policy that is coherent with that alternative", IMF Managing Director Rodrigo Rato told reporters after meeting Gulf Arab officials in Jeddah.

When the US Federal Reserve cut rates on September 18, Saudi Arabia, Oman and Bahrain declined to follow, opting to ride out pressure on their currencies to appreciate, rather than stoke inflation. Inflation hit a 16-year high of 6.47 high in Oman and a seven-year peak of 4.4% Saudi Arabia in August.

Qatar and the United Arab Emirates cut some key rates along with Kuwait, the only Gulf Arab state that does not peg its currency to the dollar. Inflation in the UAE hit a 19-year high of 9.3% in 2006 and price rises were 12.8% in Qatar in June.

Kuwait's central bank dropped its dollar peg in May and started tracking the dinar's rate against a currency basket, saying dollar weakness was fuelling inflation by making some imports more expensive.

Investors drove the Saudi riyal to a 21-year high after the Fed cut, taking divergence on monetary policy as another sign that the deadline for creating a single currency was out of reach and that more revaluations would follow.

Analysts polled by Reuters last month were unanimous that the deadline would not be met. UAE Central Bank Governor Sultan Nasser al-Suweidi told a magazine this month that the timetable could slip beyond 2015.

"We did not discuss setting a new date," Sayyari said. Gulf Arab rulers would decide on the date at a meeting in Qatar in December "depending on the economic situation in the region." he said.

Monica Malik, senior economist at EFG-Hermes investment bank, said the rulers would also consider the outlook for the dollar, which hit life lows against a basket of six currencies this month, and has fallen 9% versus the euro this year.

"The US dollar is structurally weak so it removes a lot of the advantages the peg had for Gulf states," she said.

Gulf currencies strengthened again on Friday, with the Qatari riyal gaining to its strongest since 2003, as investors bet central banks would let exchange rates appreciate.

"There was agreement that there is no need to change the current foreign exchange policy with consensus from all member states," Sayyari said.

Deutsche Bank economist Caroline Grady said Gulf states could not simultaneously maintain currency pegs, free capital accounts and independent monetary policy.

"A delay would open up the scope for more moves in these currencies," said Grady, who expects the UAE to revalue its dirham this year.

Deutsche expects the Fed to cut rates by 25 basis points at its next meeting on Oct 30-31, taking the gap between interest rates on the Saudi riyal and US dollar to one percentage point for the first time 2002, Grady said.

Saudi Arabia's benchmark repo rate is 5.5% and the Fed Funds rate stands at 4.75%.

The Fed is expected cut its benchmark this year either at an Oct. 30-31 meeting or in December, a Reuters poll of economists showed on October 15.

The monetary union deadline began slipping when Oman opted last year not to join by 2010, saying it did not want to meet the spending curbs agreed with its neighbours. Kuwait blamed the delay for a decision to drop its peg to the dollar in May.