Gulf Arab central bankers agreed to create the nucleus of a joint central bank next year in a major step forward for monetary union but signalled that a new common currency would not be in circulation by an agreed 2010 target.
Confronting record-high inflation that threatens to derail the project, central bank governors from the GCC on Monday laid out a roadmap leading toward common monetary institutions before 2010.
"This is a very big step forward," said Salim Al-Gudhea, head of the monetary union unit at the GCC Secretariat General.
The timetable calls for the central bank draft proposal to be approved by finance ministers at a meeting in September and for Gulf rulers to sign a final deal in November, Al-Gudhea said.
"This is the first time that the draft is going up in the hierarchy rather than back to the technical committee," he said.
Each Gulf state would have to ratify the deal before the monetary council begins operations. The council would not have monetary policy decision-making power but would eventually be converted into the Gulf central bank, he said.
Inflation threatens to ravage the Gulf countries, whose loose monetary policies and windfall profits from record-high oil prices have driven price increases to unprecedented levels and threaten to destabilise their booming economies.
Ahead of the meeting, one leading central bank governor warned that skyrocketing prices had led to disagreements about the launch.
"High inflation rates were never a concern before, and, although it is a temporary phenomenon, yet now it is indeed the factor behind the differences in opinion at this stage, and it can defer the issuance of the single currency beyond 2010," said UAE Central Bank Governor Sultan Nasser Al-Suweidi in UAE daily Gulf News.
The currency plan has already been thrown into disarray twice after Oman decided in 2006 not to join and Kuwait severed its dollar peg in May 2007.
"The draft has been approved by the governors," Naser Al-Kaud, deputy assistant secretary-general for the GCC Secretariat, told newswire Reuters.
A draft for setting up a new monetary council, which would serve as a forerunner to a common central bank, was also approved on Monday, Qatar Central Bank Governor Sheikh Abdullah bin Saud Al-Thani said, telling Reuters the body would likely be operational "this year or next year".
Founding a monetary council similar to what the European Monetary Institute did as a forerunner to the European Central Bank will help anchor the project, Al-Gudhea said.
"We have reached a point in the monetary union process where you need an existing body that operates on a daily basis," he said.
But Sheikh Abdullah left open the date at which the common currency - which has yet to be named - would actually come in circulation and replace member states' coins and notes.
"2010 will be the date for the creation of a monetary council or a monetary authority for the Gulf Cooperation Council countries," Sheikh Abdullah said after an extraordinary meeting of the central bank chiefs in the Qatari capital of Doha.
"We are not talking about the currency," he told Reuters.
Inflation has been hitting record or near-record peaks across the world's biggest oil-exporting region, where most states peg their currencies to the ailing US dollar, driving up import costs.
Dollar pegs have forced Gulf states to track US interest rate cuts even though their economies are booming on a more than six-fold increase in oil prices in as many years. Oil prices posted their largest ever one-day gain in dollar terms on Friday, but Gulf currencies have not strengthened in tandem.
An inflation target of no more than 2 percent above the regional average has been one of the most contentious of the EU-style criteria agreed by the six Gulf states.
But inflation has been converging across the Gulf, with price rises likely to average at least 9 percent this year in five of the six states, a Reuters poll showed last month.
"They've been very successful in showing there is greater unity in forging ahead with this," said Monica Malik, an economist at EFG-Hermes investment bank. "But they're still at the very early stages of completing anything concrete."
Bets on currency reform mounted at the end of 2007 after policymakers in the UAE and Qatar indicated they were considering currency reform as they battle inflation. Gulf states had agreed to keep their dollar pegs until the union.
Investors are still maintaining bets on revaluations, with forward rates showing investors betting the UAE dirham and Qatar riyal will rise 3.9 percent and 7.8 percent, respectively, in two years. (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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