Business | Economy
GCC 'is still far from convergence criteria'
Gulf countries targeting common currency by 2010 are not anywhere near achieving two vital convergence criteria, according to a recent report released by BNP Paribas.
- By Gaurav Ghose, Financial Features Editor
- Published: 23:39 June 8, 2008
Dubai: Gulf countries targeting common currency by 2010 are not anywhere near achieving two vital convergence criteria, according to a recent report released by BNP Paribas.
"The real effective exchange rate [REER] shows divergence and not convergence since the beginning of the currency union plans," according to the report titled Gulf Outlook: the Word of the Camel, released in May.
Real effective exchange rate is the weighted average of a country's currency relative to an index or a basket of currencies adjusted for inflation. Except Kuwait, which adopted a currency basket, all the other countries are pegged to the US dollar. Oman announced in early 2007 it would not be ready to join in 2010.
In 2004, the countries had agreed in "principle" on key convergence criteria, which mirrored the Eurozone criteria: size of budget deficit, inflation rate, interest rates, foreign reserves and ratio of public debt to GDP.
However, the report points out that on three issues the status of the states are acceptable: public debt which is 60 per cent of GDP, budget deficit which is three per cent of GDP and foreign reserves stand at four months of import coverage. But the status of the countries diverges on inflation and interest rates.
Also, the convergence is in question because intra-regional trade remains low. "Saudi Arabia trades more with France than it does with the GCC altogether. Intra-GCC trade is around 5 per cent and grows very slowly, " the report says.
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