Even bigger hurdles in the quest for a Gulf Arab single currency lie ahead after Tuesday’s decision to base a planned regional central bank in Saudi Arabia cleared one obstacle to monetary union, analysts said on Wednesday.To avoid new snags that may further delay the union, initially planned for 2010, Saudi Arabia may have to counter any perceptions it is overly dominant in the region by leaving the central bank’s governor job to another bloc member.
“It’s not going to be a smooth ride,” said John Sfakianakis, chief economist for HSBC’s Saudi affiliate.
Gulf Arab leaders on Tuesday chose the Saudi capital Riyadh as the base for a joint monetary council that will evolve into the Gulf central bank, although they were still undecided on when to launch a single currency.
Deciding the bank’s location is a show of political will for monetary union, which lost credibility after Oman decided in 2006 not to join and Kuwait severed its dinar’s dollar peg in 2007, breaking a deal to keep it intact until union.
But the United Arab Emirates, up to now a major candidate to host the bank, said it had “reservations” over the decision to locate it in Saudi Arabia. In what was seen as a diplomatic slight, UAE’s President Shaikh Khalifa bin Zayed did not attend the summit.
“Khalifa was not there which indicates his disapproval. The United Arab Emirates could be compensated by choosing a governor for the central bank,” an Abu Dhabi-based official said.
Saudi commentators saw the decision as a victory for the kingdom. “The centre of the oil industry adds a new dimension: The financial capital of the Middle East,” read a headline on leading business daily al-Eqtisadiah.
Gulf policymakers have said global financial turmoil and a collapse in oil prices has made achieving monetary union more urgent.
Key portions of the project could be completed in 2010 if the region is able to resolve differences over terms such as deficits, Qatar’s finance minister said in newspaper remarks on Tuesday.
Another challenge is the need for the Gulf Cooperation Council (GCC) to agree whether to peg the single currency amid growing concerns among emerging markets about the long-term value of the dollar, which the currencies of many of the bloc’s member states are linked to.
The GCC needed to choose a venue before a monetary council could begin operating, but the decision has been caught up in political wrangling for the past year.
“The UAE’s feedback indicates there will be obstacles … Saudi Arabia has now to strike a delicate balance to soothe concerns that this bank does not end up being a Saudi institution. It’s similar to the situation of the Germans and the rest of Europe with the European Central Bank,” Sfakianakis said.
The choice of Riyadh is a fresh sign that the kingdom is regaining some of the prominence it had lost to the UAE in finance and economics even before Oman opted out of the monetary union plan and Kuwait chose to abandon the dollar peg.
The biggest economy in the Middle East has escaped the sort of pain that other GCC members, including the UAE and Kuwait, have suffered as a result of the global economic and financial crisis.
While the Saudis have been investing their surpluses in low-risk foreign assets, Kuwait, Qatar and the UAE have been snapping up stakes in global household names, such as J. Sainsbury and Citigroup.
This prompted Muhammad al-Jasser, the governor of the Saudi central bank, to say in February that “now they want to kiss our foreheads”.
A senior Arab diplomat said the process of choosing the location of the central bank “was politicised”.
“The key argument was who is the biggest … It’s normal when the GCC lacks the sort of democratic institutions that the European Union has. While it (GCC) cares for the public interest, this is not paramount,” he said. (Reuters)
Follow us on
