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The Week That Was

Source: NCB Capital

Slow but steady progress of the Gulf Monetary Union

Despite the setback caused by the UAE’s pullout in May, the Gulf Monetary Union (GMU) has demonstrated resilience, with the remaining four members now seemingly fully committed to bringing the project to fruition. While delays from the original 2010 deadline are accepted as inevitable, the long-term benefits of the project have gained recognition; it is generally expected that the UAE and Oman will eventually rejoin the project. The Union presents an important positive initiative and agenda for the Gulf, not least because of its potential for reviving regional integration. A single currency will boost monetary policy autonomy and place the GCC in a better position at a time when global balance of economic power is changing. However, the ultimate impact of GMU will depend critically on the nature and powers of the new central bank.

GMU has experienced a turbulent year. Following early indications of strengthened resolve to push through with the project, the UAE’s May decision to withdraw from the Union “for now” dealt, what many saw, a fatal blow. The move, although justified in part by the challenges posed by Dubai’s troubles and weakness in the banking sector, was generally viewed as the result of a dispute on the location of the Gulf central bank. The decision to award the headquarters to Riyadh, which already hosts the GCC Secretariat, caused considerable dismay in Abu Dhabi, which had seen itself as a front runner. Oman had withdrawn in 2006, citing inability to meet the agreed-upon timetable.

While an early compromise with the UAE cannot be completely ruled out, it now appears that the project will initially take off with only four members, all of them now seeming firm in their commitment to push ahead with the venture. The Saudi Cabinet has approved the GMU accord ahead of a Shura Council discussion and a final royal decree. The government of Bahrain and the foreign relations committee of the Kuwaiti parliament have also ratified the deal, pending parliamentary approval in October. The process in all four countries is likely to be completed by the end of this year. The decision to create the Monetary Council as an institutional driver this year was a critically important practical step to drive the process forward.

The member countries have also held consultations with leading international agencies to assist in their preparations to create the world’s second largest monetary union. In a recent working paper, the IMF proposed a marginal appreciation of the currencies of Saudi Arabia, Kuwait, Qatar, and Bahrain against the US Dollar, before the common currency is launched. However, the necessary realignments are small—less than 5%. The IMF further suggested that the adjustment would decline from 2010 to 2013, making it easier for the member countries in their efforts to attain greater economic convergence that was temporarily reversed by the current global downturn.

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