Gulf nations are losing the political will to launch a landmark monetary union that will cap nearly three decades of merger plans and give birth to the largest oil bloc in history, a leading financial centre said.
Riyadh-based Jadwa, a financial and investment consultancy firm, said a big gap still existed within the Gulf Co-operation Council regarding the creation of a single currency.
It said contrary to the general belief that the global financial crisis would prompt the 28-year-old economic, political and defence alliance to merge monetary systems, the crisis appeared to be delaying the project.
Jadwa was commenting on recent press reports quoting GCC officials that the launch of the monetary union, preliminary set for 2010, has been postponed and a new timetable would be set by GCC heads of state when they hold their biannual consultation summit in May.
"There has not been sufficient progress in putting the institutional arrangements in place for a functioning single currency to be launched next year and the political will to push it through appears to be waning," Jadwa said in its April economic bulletin.
"With unprecedented tension among countries using the euro and GCC members adopting differing monetary policies to deal with global financial crisis, delaying the project appears sensible."
It referred to comments by senior GCC officials at the end of March that the currency union, which could be the world's second after the EU, would not be physically introduced in 2010. It said this view was supported by comments from regional central bank governors at a meeting in Muscat on April 6.
"These comments illustrate what has been highly likely for some time, that the launch of the single currency will be delayed. It is possible that a revised timetable will be unveiled at a GCC heads of state summit in May."
Jadwa said it believed Oman's decision in 2006 not to join the single currency by the 2010 deadline and the floating of the Kuwaiti dinar six months later have long raised questions over the timely launching of the single currency.
"In addition, this year is likely to see a greater divergence in economic performance across the region, which will prevent some countries from attaining the economic convergence criteria (though these are guidelines, rather than preconditions to entry)," it said. "Notably, some countries will record budget deficits greater than the threshold of the percent of GDP."
But the study admitted progress has been made in forming the necessary institutions for monetary union. It pointed to the December approval by the GCC leaders of the monetary council to manage the transition to single currency and eventually evolve into regional central bank. However, there are still many important issues that need to be resolved, it added.
"Regulations, payment and settlement systems and economic data need to be harmonised across the region, which requires improved transparency. Agreement is required on how the assets of the central bank, including its reserves, are managed, the name of the new currency and the location of the central bank. Most importantly, exchange rate policy (whether the new currency is pegged to the dollar) and the rates at which the currencies are fixed to one another (whether any country wants to make a one-time adjustment to its peg prior to entry) need to be addressed," Jadwa said.
"It has been argued that the global financial crisis and ensuing recession should increase the urgency of introducing the single currency. We don't think this is the case. Since the crisis began, countries across the GCC have taken different approaches to interest rate policy."
It said that Saudi Arabia, the largest GCC member, has aggressively cut interest rates to encourage greater bank lending.
In contrast, inflation concerns mean that Qatar has kept interest rates unchanged and instead taken other steps to support its banking sector.
"Under a single currency and central bank, this approach would not be possible. Furthermore, the global economic crisis is causing serious tensions in the eurozone since the single currency was launched (the euro is the model for the GCC single currency)."
Jadwa concluded that while the gains from a GCC monetary union are less pronounced than for the EU, the current system of long-term exchange rate pegs also means that the losses through the permanent fixing of exchange rates are limited, as countries in the region have already effectively ceded the bulk of their monetary policy autonomy to the US.
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