GCC urged to speed up formation of monetary union

GCC central bank governors have reviewed progress made in their quest for establishing monetary union next year, a common market in 2007 and a single currency in 2010.

GCC customs union was launched in January 2003, representing an important first step in the process of integration.

"The decision of the GCC leaders to achieve monetary union is an urgent need to tackle various challenges related to economic policies especially the fiscal ones," said Shaikh Salem Abdul Aziz Al Sabah, the Governor of the Central Bank of Kuwait, in his opening speech.

"There is a need to bring economic performance closer, based on specific standards besides working out organisational, legislative and institutional arrangements necessary for monetary union, the common market and the single currency to be established on schedule," Shaikh Salem added.

The key standard criteria for economic and fiscal integration budget deficit, the ratio of public debt to Gross Domestic Product, inflation and interest rates among others were approved by the governors of all six Gulf states in April 2004.

The IMF had earlier urged the GCC states to co-ordinate their fiscal policies, underscoring the fact that a centralised monetary policy of fiscal discipline would be crucial.

The IMF also warned that the large differences in fiscal discipline between member states could lead to political disagreement and block key macro-economic union.

Salem added that the GCC needs to issue new legislation and amend existing rules and charters to speed up the process of monetary union.

He also reaffirmed that amending legislation would in effect mean conceding national sovereign powers evidenced by the importance of setting up a completely independent GCC Central Monetary Authority.

"We believe it is necessary to set up specialised agencies which include highly experienced members from the international finance community," Salem said without elaborating further.

In October 2002, the GCC states met in Riyadh and decided to seek the help of the ECB to study the requirements and procedures needed for monetary union.

The GCC leaders had also approved dollar as a yardstick for a single currency to be effective by 2010.

The currencies of the GCC member states are pegged to the dollar except the Kuwaiti dinar which is pegged to a basket of currencies, but mainly the dollar.