Issac John / 16 September 2011
DUBAI — The launch of the Gulf single currency, which had been delayed following the withdrawal of the UAE and Oman, is on track, Saudi Arabia’s Central Bank Governor Muhammad Al Jasser said.
Al Jasser said on the sidelines of a meeting of Arab central bank governors in Doha that the economic conditions in the Gulf are “excellent” for forming a monetary union and that a plan to launch a Gulf single currency was on track.
“There was no postponement, and I have said from the beginning that there will not be a specific date [for the single currency launch]… the economic situation in our countries is excellent and nothing is delaying the currency,” he was quoted as saying. The UAE and Oman have withdrawn from the Gulf single currency plan. The UAE abandoned the plan in May 2009 withdrawing in protest against placing the forerunner of the future joint central bank in Riyadh.
The Institute of International Finance, or IIF, has pointed out that a monetary union between the other four countries of the GCC would be delayed due to a lack of progress in putting institutional arrangements in place, the IIF said.
Although most of the technical and policy convergence criteria have been achieved, a monetary policy framework and a common system of payments and settlements are yet to be put in place, said the Washington-based institute.
According to economists, it is unlikely that a GCC currency will be active within the next few years.
Economists argue that the Gulf monetary union needs to establish monetary independence for member countries, all of which are pegged to the US dollar, except Kuwait. Al Jasser said the kingdom had no plans to revalue the riyal at this time.
The UAE and Saudi Arabian central bank governors said on Thursday that they were happy with current interest rate levels in their countries.
Sultan bin Nasser Al Suweidi, the UAE Central Bank Governor, said on the sidelines of the meeting that the current interest rates were good and there was no need to change them.
Al Jasser also said he was happy about the rates. The Saudi central bank has been keeping its repo rate at two per cent since January 2009 and the reverse repo rate at 0.25 per cent since June 2009.
Saudi Arabia’s currency is pegged to the US dollar, which limits the central bank’s scope to combat inflation because it needs to keep interest rates closely aligned with US benchmarks to avoid excessive pressures on the riyal. Al Jasser said that “everyone” was concerned over the fragile state of the US economy and Europe’s ongoing sovereign debt crisis. His comments did not provide a vote of confidence for the United States, nor for the eurozone, as he also said Saudi Arabia would not consider purchasing eurozone debt.
With the US dollar under pressure since Standard & Poor’s unprecedented US debt downgrade, speculation has also grown over whether GCC countries might consider revaluing their currencies. While Al Jasser drew attention to the fact that Saudi Arabia is not interested in incurring risk by buying eurozone debt, he didn’t address any Middle East exposure to the eurozone debt crisis via other ties.
Outside market watchers, however, can point to possible risks for the area. Arab countries hit by unrest may need to turn to financial support from international institutions such as the World Bank and the International Monetary Fund as growth slows in the region, central bank governors said.
“They [Arab central bank governors] expressed their fears from an expected drop in growth rates this year,” they said after the meeting. The central bank governors also said they would offer support to each other. “The governors expressed their support to all central banks in Arab countries that are witnessing political developments and transformations,” they said.