DOHA, (Reuters) – Gulf Arab central bankers will try to close ranks on a regional monetary union plan at a meeting on Monday as soaring inflation threatens to place new hurdles before the beleaguered single currency project.
Central bank governors from the six-member Gulf Cooperation Council (GCC) are holding the special meeting in the Qatari capital, Doha, amid doubts they will meet a 2010 deadline and deter bets they may unilaterally reform their dollar-pegged currencies.
The governors, who typically meet twice a year, decided to have an extra meeting in June to try to remove obstacles to a single currency plan thrown into disarray after Oman decided in 2006 not to join and Kuwait severed its dollar peg in May 2007.
But soaring inflation could delay the common currency project and is leading to disagreements about the launch, United Arab Emirates Central Bank Governor Sultan Nasser al-Suweidi was quoted by newspapers, including Gulf News, as saying on Monday.
“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,” Suweidi said.
The governors were in a closed-door meeting and unavailable for comment.
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 U.S. dollar, driving up import costs.
Dollar pegs have forced Gulf states to track U.S. 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.
Suweidi said Gulf countries were “currently working on rearranging priorities according to the new circumstances,” Gulf News said.
Annual inflation hit an at least 30-year peak of 10.5 percent in Saudi Arabia in April and soared 14.75 percent in Qatar in the first quarter.
“The timeframe depends on the recent circumstances and developments where we find structural changes, in addition to the growing inflation,” Suweidi was quoted as saying.
An inflation target of no more than 2 percent above the regional average has been one of the most contentious of the European Union-style criteria agreed by the six Gulf states.
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.
“We believe that the GCC countries will give a strong message after the meeting highlighting progress to reduce speculation of unilateral currency reform,” EFG-Hermes economist Monica Malik said in a note on Monday.
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.
But investors have scaled back bets after central bankers agreed at their April meeting on fresh impetus for monetary union project. Any change in foreign exchange policy would be taken collectively by Gulf states, Suweidi said on Sunday.
Still, investors are 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.
Trying to offset the impact of inflation on their populations, Gulf states have tightened bank lending curbs, raised wages, boosted subsidies on imported foods and introduced rent caps.
Kuwait is considering subsidies on 100 products, al-Watan daily reported on Monday ahead of a parliament meeting on Tuesday to discuss a plan on tackling inflation.