DUBAI (Reuters) – Gulf Arab nations on Tuesday insisted they were committed to creating a single currency despite Kuwait’s weekend decision to drop its peg to the dollar, but analysts are increasingly doubtful.
“Monetary union still stands,” Sultan Nasser al-Suweidi, central bank governor of the United Arab Emirates, said on Tuesday at a banking conference in Kuwait.
Kuwait shocked its Gulf Cooperation Council (GCC) partners on Sunday by dropping its four-year-old peg to the weakening U.S. dollar in favour of a basket of currencies, dealing a body blow to a plan by the six oil-producing Gulf nations to create a single currency by 2010.
Kuwait moved from a currency basket system in 2003 and agreed to join its peers — Saudi Arabia, the UAE, Qatar, Oman and Bahrain — in pegging its currency to the dollar in preparation for monetary union.
But its move back to a currency basket has thrown these plans into disarray.
“The GCC may, or may not, make a formal announcement on delay but it seems inevitable at this stage,” said Emma Lawson, an analyst with Merrill Lynch in London.
Apart from Kuwait, Gulf Arab oil producers have long pegged their currencies to the dollar, arguing it has generated stability and confidence.
Oil, on which the countries depend for about a third of their combined gross domestic product, is priced in dollars.
“We will continue to stick to the Gulf monetary union and coordinate with the others,” Qatar’s central bank governor, Sheikh Abdullah bin Saud al-Thani, told Reuters on Monday.
“For me, while timing has value, it is more important to do it right.”
Missing the 2010 deadline has been on the cards since December when Oman pulled out of the timeline, saying it could not meet some of the requirements. These include coordinating fiscal and interest rate policy.
The setback proved too much for Kuwait, which identified rising inflation caused by a sliding dollar as the main reason for dropping the peg. The dollar has declined 28 percent against the euro since Kuwait adopted the peg on Jan. 1, 2003.
Monetary union “was delayed… and therefore we went back on this decision”, Kuwait’s Deputy Prime Minister Faisal al-Hajji said on Sunday, referring to its 2003 move to the peg.
The move is likely to delay currency union further and put pressure on other Gulf States either to revalue or follow Kuwait in dropping the peg as they too fight inflation.
“We didn’t think the single currency was likely, at least by the 2010 deadline, and we are getting less convinced that it is going to happen at all,” said Steve Brice, Middle East economist at Standard Chartered.
Kuwait’s decision “reduces even further the likelihood”, Brice added.
It also raises the possibility that, if and when the six nations agree on a single currency, it will be pegged to a basket of currencies rather than just the dollar, Merrill
Lynch’s Lawson said.
Within a year, at least four of the six nations may have dropped the peg in favour of a basket, giving them more leeway to combat inflation, Lawson predicted.
“It’s less about raising the value of the currency than about having greater flexibility,” she said.
With more than half the countries off the dollar peg, it would be more likely the six oil producers would agree to link a single currency to a group of major currencies, she said.