GCC monetary union 'dead'

Was anybody counting on a single currency for the Gulf?

From Arabian Business

by Soren Billing and Tom Arnold, Wednesday, 20 May 2009

The GCC monetary union is "dead" as a result of a decision by the UAE to pull out of the plan, leading UAE economists pronounced on Wednesday
The UAE's move, which came just three weeks after a decision to base the bloc's central bank in Riyadh, was the result of a clash of egos, according to a Saudi expert, who urged Gulf politicians not to let egos get in the way of rational decision.
Dubai-based economist, Eckart Woertz, said that he was surprised by the decision, adding that the monetary union was “dead” without the UAE’s involvement.
In his opinion the decision to withdraw was due to the Saudi capital being named as the headquarters of the regional central bank, Woertz, an economist at the Gulf Research Center, told Arabian Business.
“I would guess they (the UAE) are upset at the decision to set-up the Central Bank in Riyadh instead of Abu Dhabi. There seems to be some connection.
“The monetary union is dead if the second largest GCC economy is not participating. Oman is already out, now the UAE, so it doesn’t justify the effort now and my guess it will not materialise now under these conditions," he said.
Analysts at EFG Hermes also believe that the monetary union project is now “effectively dead”, senior economist Monica Malik told newswire Bloomberg.
However, John Sfakianakis, chief economist at HSBC’s Saudi affiliate, Saudi British Bank (SABB), urged leaders of the remaining four states not to let one country “hijack” the project.
“I think that the egos and the politics should be put aside…I think the UAE should reconsider and not necessarily react in an emotional way,” he told Arabian Business.
“It is unfortunate that the UAE at this point cannot join. They will be welcome to join at a later stage,” he added.
Meanwhile, Standard Chartered bank warned the withdrawal of the UAE from the GCC monetary union represented a serious setback to plans for a single currency, but added that the market impact of the decision would be limited.
It was questionable as to whether the proposed single currency would now go ahead, the bank said in a research note.
The UAE’s decision to pull out follows the withdrawal of Oman from the monetary union plans in 2007.
There were growing concerns in the UAE over the dominance of Saudi Arabia in the common currency area, according to Standard Chartered.
“With the GCC secretariat already based in Saudi Arabia and with the decision to host the GCC central bank in Saudi Arabia as well, UAE concerns intensified,” said analysts Marios Maratheftis and Mary Nicola in the note.
The economic cost of the UAE’s withdrawal should be limited, with UAE trade with the rest of the GCC representing only about 10 percent of total trade, the bank added.
Simon Williams, regional economist at HSBC Middle East, said that the withdrawal of the Gulf’s second largest economy from monetary union was a major blow to the single currency project.
“However, we had long assumed that the single currency would not be launched on schedule at the start of 2010, and the UAE’s withdrawal therefore has no meaningful impact on our view on economic performance or on regional monetary policy,” he said.