Business | Economy
Inflation targeting key to Gulf currency union
The Gulf monetary union's target launch date of 2010 is achievable and inflation targeting should be on top of the Gulf countries' policy agenda, said Dr Nasser Al Saidi, chief economist of the Dubai International Financial Centre on Tuesday.
- By Babu Das Augustine, Banking Editor
- Published: 23:32 August 19, 2008
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Dubai: The Gulf monetary union's target launch date of 2010 is achievable and inflation targeting should be on top of the Gulf countries' policy agenda, said Dr Nasser Al Saidi, chief economist of the Dubai International Financial Centre on Tuesday.
Releasing a report 'An Assessment of the Progress towards GCC Monetary Union', by the DIFC, he said the GCC countries are nearly on schedule on meeting the monetary union convergence criteria by 2010, although inflation remains a problem in some countries.
Gulf states agreed in 2001 on EU-style convergence criteria toward achieving a single currency by 2010. The criteria include an inflation target that should not exceed the GCC weighted average inflation rates plus two per cent.
In 2007, the weighted average Gulf inflation rate was 6.9 per cent, a level far exceeded by the UAE and Qatar.
In the context of the changing composition of the Gulf's trade partners and weak dollar, Al Saidi said Gulf central banks should seek more dynamic inflation targeting policies.
"Increased economic and trade diversification with Asia and the weakness of the dollar calls for monetary policy away from pegged regimes to keep the inflation within the target range," he said.
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According to the DIFC report, to meet the inflation targeting objectives, the union needs to be supported by investments in financial infrastructure, payment systems and swift transfer of funds throughout the GCC.
"Union should have both policies and tools to intervene in both money markets and capital markets to influence both supply of money and cost of funds [interest rates]," said Al Saidi.
Although Saudi Arabia, Bahrain and Oman meet all the convergence criteria, Oman has said that it is not willing to join the union at its inception. Qatar and UAE are away from inflation criteria, while Kuwait differs in exchange rate as its currency is not pegged to the dollar anymore.
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