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Gulf Cbankers Meet on FX Union, Reform Pressures Grow | ASHARQ AL-AWSAT English Archive 2005 -2017
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DUBAI/RIYADH, (Reuters) – Gulf central bankers will try to keep a monetary union plan on track next week, but their meeting may highlight increasing fissures over currency reform as inflation soars, the dollar sinks and interest rates tumble.

In the seven months since central bank chiefs of the six Gulf Arab states last met, the dollar has plunged almost 14 percent against the euro, the U.S. Federal Reserve has slashed interest rates six times, and inflation in Saudi Arabia has almost doubled.

Gulf states that had agreed to keep their dollar pegs intact until they create a single currency in 2010 are now diverging, with Qatar and the United Arab Emirates rethinking their pegs as Saudi Arabia, the largest Arab economy, stresses it has no reform plans.

“It has definitely become much more difficult to maintain the status quo over the past seven months,” said Caroline Grady, regional economist at Deutsche Bank.

“Inflation is probably the biggest macro-risk in the Gulf. A lot of the discussion will focus on inflation because it is the most important issue and a common currency is so far off.”

It has been almost a year since Kuwait — one of the six members of the Gulf Cooperation Council (GCC) — broke ranks with its neighbours by severing its peg.

Other Gulf states mulling reform are clinging to the hope the region can iron out differences on a single currency to avert unilateral revaluations.

The official agenda of the meeting in the Qatari capital, Doha, on Sunday and Monday is to discuss ways for the world’s biggest oil-exporting region to speed up the single currency project, Kuwait’s central bank said this week.

Gulf officials were close to finding a middle ground on how to deal with inflation, helping them evaluate the timetable for monetary union before the next meeting of Gulf Arab rulers in December, Qatar’s central bank governor said last month.

Qatar, the world’s biggest exporter of liquefied natural gas, holds the revolving chair of the GCC, which also includes Oman and Bahrain.

“Qatar will seek to build consensus rather than divergence,” said a GCC Secretariat official, who declined to be identified because he is not authorised to speak publicly to the media.

“We have nine months to go before the summit convenes for a final decision on the deadline,” he said.

Economists widely expect the deadline for creating the currency will be pushed back after Oman threw the plan into disarray in 2006 when it said it would not join by the 2010 deadline. It has since decided not to take part at all.


Rising inflation and currency turmoil are likely to sidetrack the central bank governors from the official agenda at their twice-yearly meeting, economists said.

Rifts are growing among Gulf states on how to tackle inflation, which is at a 27-year peak of 8.7 percent in Saudi Arabia, a 19-year high of 9.3 percent in the UAE and just off a record at 13.7 percent in Qatar.

The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming and inflation is spiralling.

Weakness of regional currencies is also stirring discontent among migrant workers who make up the backbone of the labour force in wealthy Gulf Arab states.

“The economic rationale for currency flexibility is very strong and too sound to ignore,” said Mushtaq Khan, regional economist at Citigroup. “But the political resistance to currency flexibility has also become very, very clear.”

Prime ministers of the UAE and Qatar — the two states economists regard as most likely to revalue their currencies this year — have said their governments are studying currency reform, but will retain their dollar pegs for now.

Central bankers in Saudi Arabia, Qatar and the UAE have also said in the past month they thought the dollar’s decline past $1.50 to the euro was temporary, giving them less reason to reform currency policy.

As they grapple with inflation partly driven by their dollar links, Gulf states have tightened bank lending curbs, raised subsidies, slashed customs levies on imported goods and introduced rental caps and other price controls.

Saudi Arabia, the world’s largest oil exporter, is the strongest supporter of fixed exchange rates.

“They are trying to focus on non-monetary policy tools to respond to inflation,” said Hany Genena, director of economic research at Bahrain-based Gulf Finance House.

“It seems like there is a lack of consensus over the exchange rate issue at this stage,” he said.