Dubai: The Gulf states are moving ahead with plans for Gulf monetary union as the final draft has been approved, according to an economist at Dubai International Financial Centre (DIFC).

The Central Bank governors of five Gulf States are still deliberating on the timeline after a meeting in Jeddah on Tuesday but Fabio Scacciavillani, economist at DIFC believes that they will meet the Monetary Union January 2010 deadline.

"In the last two to three months, the mood has switched dramatically to a state of readiness and they are on track to meet the deadline," Scacciavillani said, adding that over the past few days, "there has been a determined effort to get this project to full completion in the shortest possible time."

De-pegging

The International Monetary Fund (IMF) has encouraged the de-pegging of the greenback from Gulf Cooperation Council (GCC) currencies and the adjustment exchange rates. The say the move would help bring down inflation.

Speculation is that the GCC's European Union-type single currency would be pegged to a basket of currencies instead, according to Nasser Saidi, chief economist, DIFC Authority and one of the authors of the report. Economists are saying that the GCC single currency would be one of the major global currencies and could be a reserve currency.

A report titled The Institutional Framework of the Gulf Central Bank, issued by DIFC says, with the establishment of the new GCC common currency, international investors and central banks around the world would be "keenly interested in holding assets denominated in the new currency, as a safe haven and a hedge against oil shocks and inflation, thereby boosting its international role."

The writers of the reports say that it is clear the new currency would be among the top five worldwide. "This would also boost the sophistication of local GCC financial markets, extend their depth and strengthen their governance."

"We believe that a Gulf currency will be major world currency alongside the dollar, the euro and the Japanese yen and it can be one of the international reserves for other countries," Saidi said earlier.

Structure

The report by DIFC economists proposes the setting up of a body that would preside over the union and details its institutional and governance framework.

The body, Gulf Central Bank, would be a "supranational institution", with permanent staff, an appointed president and an executive board, which together with the national governors would form a monetary policy council responsible for the setting of monetary policy instruments and taking decisions in all the main areas of monetary policy, the report suggests.

The creation of a new bank with its own staff and executive board, "would strengthen the authority and sustainability of the institutional arrangement and create an organisation that is an effective counterpart of the other major international central banks and financial markets.

For the union to take place, economists suggest the criteria for convergence of the Gulf currencies. While inflation in the Gulf states is converging to the double-digit rate, econ-omists say that it should not exceed two per cent for the common currency.

Many experts are saying that inflation could be the biggest challenge for the move towards the union.

Additionally, the report says that short-term interest rates should not exceed by more than two per cent of the lowest three rates, foreign exchange reserves should cover goods imports for at least four months, annual fiscal deficit should not exceed three per cent of the gross domestic product (GDP), the public debt ratio should not exceed 70 per cent of GDP for the central government.

Another criterion for the currency union is the peg to the US dollar, econ-omists say.

The report also touches upon the voting system for council. It suggests that each member of the council could be given equal voting rights, or a voting power "weighted according to the economic and financial size of each country, with some corrective counterweight mechanism such as a specific voting weight for the President and/or the Executive Board to provide checks and balances."

Stressing the importance of an authority over the union, the report says that "the intermediate phase in the run up to the launch of the single currency should not be left to a temporary institution, like a monetary institute with weak powers.

"The bank must be created as soon as possible with a strong mandate to clear the obstacles while testing and fine-tuning the decision-making mechanisms in all areas."

Coordination

Urging the speedy establishment of the single currency, economists say that the increasing international economic and financial openness of the GCC countries requires "policy coordination and concerted action within a well-conceived economic policy framework, to avoid the risk of being swept away by developments that individual countries do not have the power to resist or control."

Economists say that prior to the launch of the euro, the European Central Bank was preceded by the European Monetary Institution (EMI) which was responsible for the technical details to ensure the smooth functioning of the EMU and the functions of the EMI were agreed upon many years before the euro came into being.

Economists say that an institute similar to the EMI is not in place yet in the case of the Gulf union.

"With such a short time left before the deadline, it would be a waste of energy and political capital to set up some sort of monetary institute that in a few months would cede powers to the bank."

The report thus urges the quick establishment of a bank, with sufficient capital, human resources and transfer of foreign reserves necessary to conduct interventions in the market if the need arises.

"In a nutshell, the plan for the Gulf monetary union can be interpreted as moving the GCC countries from a monetary union in which they did not enjoy any monetary autonomy to an arrangement in which monetary policy can be more readily tuned to countering inflation, addressing economic fluctuations, adapting to business cycle developments and reacting to changing global economic conditions," the report says.