The UAE's decision to opt out of the planned GCC monetary union is a fundamental setback to the planned Gulf single currency, and illustrates a deep concern at the heart of all monetary unions - that of ceding sovereignty over economic and monetary policy.
The announcement from Riyadh that the Kingdom - already home to the GCC Secretariat - will host the GCC central bank, clearly illustrates its desire to exert control over the monetary union's decision making bodies.
This, of course, is of particular concern to its smaller neighbours, as exemplified by Abu Dhabi's response. It indicates that in a future monetary union, the Kingdom might attempt to steer future joint economic and monetary policy to suit its own domestic economy.
Objectively speaking, the UAE had the strongest case to host the bloc's central bank. With its high standards of regulatory quality, excellent banking infrastructure and a critical mass of banking institutions and expertise, the UAE has justifiably earned its international reputation as the Gulf's financial centre. Indeed, other central banks in the region, such as Kuwait, also appeared to favour the UAE as a 'safe' location.
Whether or not the loss of national control over economic and monetary policy is perceived as too burdensome by the smaller GCC states remains to be seen.
With Oman already out of the picture, Kuwait's peg to a basket and Qatar's on-off relationship with the Kingdom, could a Bahraini-KSA monetary union take place in 2010? Even this may be unlikely, recalling that Bahrain, not so long ago, forged ahead unilaterally with a US Free Trade Agreement.
For the UAE, the utility of its dollar peg is likely once again to resurface, for it is no longer a requirement of the GCC integration process. A move to a trade-weighted basket peg, à la Kuwait, would perhaps better serve the UAE's economy.
Emilie Rutledge is author of Monetary Union in the Gulf: Prospects for a Single Currency in the Arabian Peninsula, Routledge 2009 and is Assistant Professor of Economics at UAE University.
Your comments
Only from the perspective of monetary policy freedom , I think it is prudent for UAE to move away from USD peg. The economic state of US and UAE may not move in tandem, hence you can't really follow similar/same monetary easing/tightening as US does. If you don't have monetary policy freedom and to retain the peg you follow US policies, you may end up having expansionary policy at a time when contractionary policy better fits the local economy.
Ahmad Jahangir
Dubai,UAE
Posted: May 21, 2009, 15:22
I also believe that such a strong economy like UAE should release this USD peg to increase the purchasing power of Dirhams. Even Obama cannot make an impact on the deteriorating US economy which is adversely affecting UAE's economy. It think its time for the central bank to think about the dollar peg.
Santhosh
Abu Dhabi,UAE
Posted: May 21, 2009, 10:19
Please join GCC and be united. We have to show the world that we are united.
Sajjad Shaikh
Dubai,UAE
Posted: May 21, 2009, 09:06
I think it would be of great help to the UAE economy to release this USD peg as the UAE and most of the GCC countries enjoy a very stong banking systems along with some reliable financial instututions.
Khalid Kamel
Dubai,UAE
Posted: May 21, 2009, 00:49
