GCC currency union suffers setback

Member states had previously acknowledged their inability to meet the 2010 deadline and Oman, which had earlier stated it would not join the union in 2010, finally announced its decision to pull out altogether from the proposed common currency after experiencing the highest inflation rate in the GCC since 1991.

The question now is: will the monetary union ever come to fruition? Dr John Sfakianakis, Chief Economist at Sabb, said Oman’s decision does not “bode well” for the proposed union. “It will put pressure on the core countries to take a decision to move forward, and now it is up to Saudi Arabia to push ahead.”

The direct economic benefits of the proposed GCC monetary union are fairly obvious. A union would drive transaction costs down as businesses could export goods and services by using one currency instead of five. This would increase the flow of trade among GCC countries and further strengthen the customs union. In addition to increased trade, there are psychological and political benefits that are not easily measurable. Dr Sfakianakis said the common currency will have “a psychological impact on citizens and make them feel part of a union”.

And as the GCC would act collectively with regard to fiscal policy and inflationary measures, it would “confront the outside world as a true trading block, just like the EU, Nafta and Asean do”.

Luai Butainah, Chairman of Investment Management at Oman Arab Bank, said Oman’s decision not to join the single Gulf currency came due to contradictions between requirements of the single currency and the Omani monetary policy.

“In my opinion, Oman’s decision to keep its rial will have no affect on its economy or economic relations with other GCC countries,” Butainah said.

“It is more important to complete the customs integration projects and the GCC common market, which will have a positive impact on economies in the whole region. The UK did not join the euro zone and there was no impact on the British economy,” he added.

However, Butainah expressed concern over the GCC currencies’ peg to the dollar. “Although the Governor of Oman’s Central Bank, Hamood Sangour Al Zadjali, made a statement that there are no plans to sever the rial’s peg to the dollar, GCC countries will have to revaluate their currencies or drop the dollar peg in the near future.

 

Inflationary pressures are very high on Gulf economies because of the depleting value of the dollar. This will have negative impact on growth,” Butainah said.

The benefits of a union are far greater than the cost.

Dr Sfakianakis said the remaining countries should co-operate and move forward without Oman.

Even without Oman, Saudi Arabia, the UAE, Bahrain, Qatar, and Kuwait could still form the union, just as the EU was established without the UK.

“The EU functions perfectly well without the contribution of the UK. It is to the disadvantage of the British economy not to be part of the EU,” he said.

While some analysts will take Oman’s withdrawal as a reason for the UAE or Qatar to revalue or drop the dollar peg, Dr Sfakianakis said the GCC would benefit by acting in unison if such a measure were to be taken. But the move by Oman will undoubtedly intensify the dollar peg debate.