Saudi Arabia is facing a challenge to push the planned monetary union forward.
Saudi Arabia is facing a challenge to push a planned Gulf monetary union forward as the economic power of fellow oil exporters rises, limiting the appeal of the project.
Saudi Arabia, Kuwait, Qatar and Bahrain continue to pursue the long-delayed project after the United Arab Emirates withdrew in protest last year; three years after Oman did the same. But what will monetary union mean for the remaining Gulf states and what are the hurdles to its completion?
State of the union
- The four states launched the forerunner for the joint central bank in March. Saudi Arabian Monetary Agency head Muhammad al-Jasser is the first chairman of the council and Rasheed al-Maraj, the central bank governor of Bahrain, his deputy.
- Both terms will last one year. The council's statute does not say whether they may be re-elected. Countries have equal voting rights in the Riyadh-based council, which should meet at least six times a year. The chairperson has the casting vote if there is a tie.
- Decisions are unanimous in objective matters and by absolute majority of governors present in criminal matters.
- The meeting quorum is valid if two thirds of the board members are present.
- Its statute says that neither the council nor any member of its board of directors or executive body shall receive instructions from any GCC bodies or any member governments that would influence performance of its tasks and duties.
- The council will draw up a joint monetary policy until the common central bank is established.
- The council should enable the monetary union partners to align their monetary policies in terms of currency, payment and settlement systems, reserves and budgetary procedures.
The currency question
- Jasser said in March the monetary council would only announce new dates for the single currency and central bank launch when everything is ready.
- Gulf officials have previously left the door open saying the single currency could be either pegged to the US dollar or a currency basket.
- Analysts say the members are likely to opt for the greenback peg initially to ensure a smooth transition and also given their dependence on oil revenues. However, a future change of the foreign exchange regime is not ruled out.
- Kuwait is the only Gulf Arab country that abandoned the dollar peg in the past due to soaring inflation, linking its dinar to a currency basket in 2007. In March 2009, the Gulf Cooperation Council (GCC) countries abandoned a 2010 target for issuing common notes and coins.
Hurdles to monetary union
- GCC Secretary General Abdulrahman al-Attiyah said in May the single currency was unlikely to be launched by 2015. Kuwait has said a single currency may take up to 10 years.
- The union is seen proceeding at a slow pace due to a list of technical difficulties ahead, including the rising power of economies such as Qatar, the European debt crisis that exposed problems in fiscal discipline, as well as lacking and timely economic data.
- The UAE, the second largest Arab economy and the Gulf trade hub, has no motivation to rejoin the union unless it is on a more equal footing with Saudi Arabia. Oman has ruled out any comeback.
- The dominance of Saudi Arabia, the top Arab economy and the world's largest oil exporter, may prove problematic. Last year, Saudi Arabia's economy accounted for more than 67 percent of the currency union's gross domestic product. While the kingdom will be instrumental in driving the integration process, it is difficult to see an equal relationship with smaller states. As a result, Qatar, whose economy is growing at a double-digit pace, may be less attracted to stay in the Saudi-dominated bloc. (Reuters)