Gulf Arabs face bumpy road to launch of single currency
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The six-member Gulf Cooperation Council (GCC) greenlighted at its 30th summit on Tuesday the establishment of the monetary union, a prelude to the launch of the single Gulf currency.
The step will pave the way for the creation of the GCC Central Bank, which will be responsible for issuing the euro-style common currency.
Introducing the single currency will have many positive impacts on the Gulf countries' economy, particularly in deepening the concept of common market, reducing financial risks and promoting intra-GCC trade, tourism and investment.
However, the road leading to the final launch of unified bank notes and coins is bumpy, and another decade might be needed to achieve the final goal.
Economists said the single currency zone has to be built on the basis of the unified inflation rate, financial deficits, government debts, long-term interest rate and currency fluctuation. The inflation rates among the six GCC countries differentiate from each other dramatically, ranging from 4.5 percent to 15 percent in 2008, according to a report of the International Monetary Fund.
Regarding the concept of similar inflation rates, the Gulf governments have taken initiative to peg their currency to U.S. dollars in the past decade.
But some countries found it hard to be on board the program of achieving a single currency. Oman dropped out of the monetary union plans in 2006, saying its economy is not ready for the program.
Kuwait, which gave in to the domestic pressure of inflation rate, quit its dollar peg in 2007, and started pegging to a basket of currency. The different levels of economic development also made it difficult to fill the gap between other economic indicators such as long-term interest rate and currency fluctuation among those countries.
The GCC, established in 1981, groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The bloc in 2001 decided to spend 10 years in materializing a common currency in order to strengthen economic integrity and reduce financial risks.
But GCC officials acknowledged in March this year that the 2010 deadline will be extended and another 10 years might be needed before people in Gulf countries can really use the unified currency.
Effective steps have been taken by five Gulf countries including Bahrain, Kuwait, Qatar, Saudi Arabia and UAE to set up the monetary union since a customs union was launched in 2003, and all the requirements to ensure GCC market were completed in 2007.
But the UAE, the second-largest Arab economy after Saudi Arabia, withdrew from Gulf Arab plans for monetary union in May this year, after Riyadh was chosen as the location for the region's monetary council, a precursor to the future GCC Central Bank.
The exit of the UAE, the world's third-largest oil exporter, came as a major blow to the monetary council, and complicated the way to materialize the single currency. Fully aware of this, GCC officials tried to persuade the UAE and Oman back to the track of the monetary union at the GCC Kuwait summit.
GCC Secretary General Abdulrahman al-Attiyah said that "Oman and UAE are pioneers in joint Gulf action and always took the lead in implementing resolutions of Gulf summits, so they are always at the center of the common Gulf action."
On Friday, Kuwaiti Finance Minister Mustafa al-Shamali also called on the two countries to come back to membership, as the project would help cement regional economic growth.
But no word has been heard from the UAE yet about its return to the monetary union.
The UAE had improved its profile in recent years with the rise of Dubai as one of the region's trade and tourism centers.
But the choice of Saudi Arabia to host the monetary council showed that the region's largest economy has regained some prominence it had lost to the UAE.
The covert struggle between the two countries for a prominent position in the Gulf region poses as another hurdle for launching the single currency.
However, the Gulf countries still showed huge resolution for the launch of the single currency, the highest form of achieving economic unity.
Four member states including Saudi Arabia, Bahrain, Qatar and Kuwait have ratified the GCC monetary union agreement, and the Riyadh-based money council is working on a timetable and technical details of launching the single currency.
"Although the process seems to have taken a longer time than we expected, we are still steadily moving along the direction of forming the unified currency system," said Attiyah at the press conference after the closing ceremony of the GCC 30th summit on Tuesday.
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