Monetary union may not follow euro model

(ASHOK VERMA)    

Gulf states planning to form a monetary union with a single currency may have to abandon the euro as their model and develop their own criteria, economists have said.

They were speaking after UAE Central Bank Governor Sultan bin Nasser Al Suwaidi yesterday said the Gulf countries might not adopt the euro model as they struggled to meet the economic convergence criteria.

“GCC countries might not follow the example of the euro,” Al Suwaidi told a conference in Abu Dhabi.

Trying to follow the criteria used by the European Union (EU) in its Maastricht Treaty was causing “some problems” for the six GCC states, he revealed. He did not specify what the difficulties were.

The UAE and the other GCC states enlisted the EU’s help in 2002 to develop plans to launch a single currency by 2010 to boost regional trade.

The plan was in doubt in 2006 when Oman said it would not be able to meet the deadline, citing an unwillingness to be bound by spending targets.

Last May Kuwait dropped the dinar’s peg to the dollar, breaking ranks with the other GCC members that have kept the link in preparation for the new currency.

Under the 1993 Maastricht Treaty euro candidates must hit targets for budget deficits, debt, interest rates, inflation and currency stability.

The rules can be changed only by a unanimous vote of EU leaders.

Monica Malik, senior economist at EFG-Hermes, told Emirates Business: “Some of the Maastricht criteria are not that useful for the economic conditions within the GCC. For example, the fiscal criteria [that budget deficits have to be less than three per cent of gross domestic product] and, to a lesser degree, the debt criteria under Maastricht may not be appropriate for GCC countries as meeting these targets are dependent on hydrocarbon revenues.”

Standard Chartered economist Mary Nicola said: “The budget deficit criteria of the Maastricht treaty are not appropriate in a region with such high oil revenues.

“In the UAE alone oil revenues comprise about 20 to 30 per cent of GDP, resulting in high surpluses. Also, the Gulf has a relatively lower debt-to-GDP ratio than Europe. In 2006 the debt-to-GDP ratio in the Gulf was the highest in Qatar, at about 42 per cent, while in the UAE, it was between five and 10 per cent.”

The big problem for the GCC appears to be inflation. According to the Maastricht rules, euro members need to keep inflation within 1.5 percentage points of the 12-month average of the three EU nations with the lowest rate.

Malik said: “Inflation seems to have been an area of difficulty for the GCC, although inflation levels are becoming closer with the rise in inflation in the wider region.”

Nicola agreed that the GCC needed to deal with the problem of inflation before implementing a currency union.

She said: “Inflation rates in the Gulf are still in the high single digits on average. That is a concern.”

Inflation in Saudi Arabia, the world’s biggest oil exporter, accelerated to a record seven per cent last month as the cost of rents and food soared, the Kingdom’s Ministry of Economy and Planning said yesterday.

Next month the UAE may announce that inflation in 2007 jumped to 10.9 per cent from 9.3 per cent a year earlier, according to the National Bank of Abu Dhabi.

Economists seem to agree that developing its own criteria for monetary union would be more appropriate for the region.

Malik said: “If the GCC states decide not to use the Maastricht convergence criteria they could devise their own goals and targets for currency union.”

Nicola said: “The Gulf is very different from Europe in terms of its economic conditions and growth targets. So it would make sense for them to look at developing their own criteria.

”Nicola said it was unclear whether the GCC states would see a currency revaluation or dollar depeg this year.

Al Suwaidi did not comment on the 2010 deadline, but said: “The single currency is a long-term goal of the GCC.”

The first step was for the states to eliminate foreign exchange transaction costs, to improve the efficiency of capital flows, and to unify legislation within a common market, he said.

The GCC states agreed to form a common market this year. It will give Gulf citizens equal rights to buy stocks and property in member states.

“Before we have the  common market working at its desired efficiency level it wouldn’t make sense to have a single currency,” he said.