Central bank governors cemented moves towards monetary union on Tuesday but said more efforts were needed to curb soaring inflation, which threatens to undermine the project.
Bankers of the six-member Gulf Cooperation Council (GCC) meeting in Jeddah reached agreement on the charter governing the monetary council that will form the nucleus of a future common central bank.
Qatari Central Bank Governor Sheikh Abdullah bin Saud Al-Thani, who chaired the meeting, said the council had "completed 85 percent" of what it needed to achieve a single currency.
But inflation across the Gulf has been rising, mainly because of surging demand for real estate as the economy has expanded, spurred by a near five-fold increase in oil prices since 2002.
Furthermore, a widely expected interest rate cut by the Federal Reserve later on Tuesday is only likely to intensify inflationary pressures as most of the region's currencies are pegged to the US dollar.
"Rising inflation will require extra efforts in order to stabilise our economies and provide the appropriate environment in order for monetary union to be launched and to succeed," Sheikh Abdullah said.
New data on Tuesday showed inflation in one key Gulf country, Qatar, hit a record 16.6 percent in June, while money supply growth in another, the United Arab Emirates, accelerated to 36 percent, signalling more inflation ahead.
"We need to tighten monetary policy to fight inflation but instead we are forced to loosen because we have to follow the monetary policy of the Fed. We are in completely different... phases," said Mahdi Mattar, chief economist at Shuaa Capital.
"If today the Fed decides to cut by 25 or 50 basis points, the countries in the GCC have to follow or they will fall under speculative attack and that will just deepen their predicament."
The Gulf's status as a growth region has shielded it so far from any direct impact from the US financial crisis, even if Arab stocks have plummeted in recent days due to fear of fallout stemming from the collapse of Lehman Brothers .
Gulf Arab central bank governors said on Tuesday they saw little systematic risk from the US crisis as their exposure to Lehman and US sub-prime assets was limited.
"At the moment... I don't see any risk but this crisis has just started yesterday," said Saudi central bank governor Hamad Saud Al-Sayyari.
Qatar's Sheikh Abdullah said Gulf central banks had succeeded in resisting calls for them to revalue their currencies or drop their pegs as the dollar weakened.
Yet paradoxically, one way they could further shield themselves from US economic problems is by achieving a monetary union that would finally allow them to peg to a basket of major currencies rather than tie their fate to the greenback.
The GCC, a loose political and economic bloc comprising Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman, agreed in 2001 to launch a single currency by 2010.
But that deadline has lost credibility over the past two years with Oman's decision to withdraw from the monetary union project and Kuwait's to drop its dollar peg.
And although governors say they have put monetary union back at the top of their agenda and agreed on its basic structure, many key questions - including a date for the launch of the single currency and a decision on the location of the common central bank - remain unanswered.
"Everybody is interested in hosting the central bank," UAE Central Bank Governor Nasser Al-Suweidi said, adding that the question would be raised at a meeting of GCC finance ministers in Jeddah on Wednesday.
One GCC official suggested however that a decision could be deferred to the heads of state, who are meeting in November.
"The ultimate disagreement so far among GCC institutions and authorities is fiscal management, that is how they manage the system, which is extremely difficult," said Hany Genena, senior economist at Gulf Finance House.
"One year before the scheduled deadline, they are still discussing a monetary council. So agreement on institutions and regulations need to be accelerated at this stage," he said. (Reuters)For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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