Gulf is far from currency union

Dubai: Gulf central bank governors meeting in Saudi Arabia yesterday hinted at Gulf states moving towards independent monetary policies to tackle inflation, which could mean a move away from pegged currencies ultimately jeopardising the Gulf monetary union.

The Saudi Central Bank Governor Hamad Saud Al Sayyari said monetary union among Gulf Arab states will be difficult to achieve by a 2010 deadline and the central banks have agreed to deal with the inflation problem separately.

"Each member state will examine the possible options [to reduce inflation] because the levels are different across the region and the options are different," he told reporters yesterday.

Meanwhile, the finance ministers and central bank governors in the Gulf states will meet in October to discuss the monetary union.

Economists and currency market analysts see the statement as the clearest yet from a Gulf central bank governor on the future of the GCC states' monetary policies in the context of the rising inflation. Due to currency peg, Gulf central banks follow the US policies.

"In the absence of a free floating currency the only option is re-pegging that is modifying the exchange rate with the dollar, or pegging to a currency basket instead of a pure dollar peg," said Dr Eckart Woertz, Programme Manager, Economics, Gulf Research Centre.

The UAE central bank governor Sultan Nasser Al-Suwaidi did not comment on the possibility of a revaluation of dirham, while Al Sayyari said that the Gulf central banks would continue to stick to the currency peg.

Bankers and analysts are speculating that after admitting the non-feasibility of achieving the monetary union by 2010, the next step by Gulf states will be to revalue their currencies.

"The deadline is not realistic in any case and an announcement of its postponement can be expected during the course of the year," said Woertz.

"We expect a one-step move in the dirham later this year and an official announcement that the 2010 common currency has been pushed back," Deutsche Bank said in a report last week.

In the context of a growing prospect of US rate cut, analysts said the Gulf could no longer afford to follow the US interest rate policies, as it would further accelerate the inflation.

Recent official data showed inflation hitting a seven-year high of 3.83 per cent in Saudi Arabia in July, a two-and-a-half year high of 5.9 per cent in Oman in June and 12.8 per cent in Qatar at the end of the second quarter.

According to the Ministry of Economy, the UAE inflation was at 9.3 per cent last year.