Gulf oil producers could decide to peg a planned single currency to a basket of major world currencies but the weak US dollar is expected to be its main component, officials and experts said yesterday.
In its early stages, the proposed currency could remain attached to the dollar before the six Gulf Co-operation Council (GCC) states switch to a more balanced basket of currencies to offset any fluctuations in the greenback, they said.
At talks in Doha on Monday, GCC central bank governors agreed on the formation of a monetary council that will pave the way for the creation of an EU-style GCC Central Bank, which will decide on the joint currency.
"A basket is a good choice and it is one of the strong options for GCC members," said a source at the Riyadh-based GCC Secretariat.
"The link to the dollar could remain in the beginning before a final decision on the peg in the long term is taken… anyway, it is up to the Central Bank."
Except for the Kuwaiti dinar, which is pegged to a basket, the currencies of the other five GCC members – UAE, Saudi Arabia, Bahrain, Oman and Qatar – have remained attached to the dollar, the price of their oil exports. The five members have ruled out quitting the dollar or a revaluation pending an agreement on the landmark monetary union, which they have set for 2010 as the Middle East's first full monetary merger.
Economists ruled out the issuance of a single currency at that date because of a delay in the creation of the GCC Central Bank. "I don't think the six members will be able to issue a common currency in 2010 because the monetary council and the central bank should have been created two or three years earlier to meet that deadline… my expectation is that the common currency will be issued two or three years after the announcement of the monetary union in 2010," said Mohammed Al Asumi, a Gulf economist.
"As for the type of this currency, it could be linked to the US dollar in the beginning but could be later fixed to a basket of currencies, in which the dollar will be the main component – say 70 per cent… this is because their oil exports are priced in dollar and it seems this system will not change.
"Anyway, all this will depend on the regional and global monetary and financial conditions."
According to the draft framework of the monetary council, published in the Qatari Al Raya Arabic daily yesterday, the GCC Central Bank is to be founded at least six months before the issuance of the common currency. Once it is issued, the currency will have a fixed exchange rate against local GCC currencies for a transitional period, during which those currencies are gradually phased out, according to the draft framework. "The existing GCC currencies will remain in force after the common currency is released and become the only legal currency in the monetary union's zone… their rate to the common currency will be fixed and irrevocable.
"These currencies will remain in effect for a period that will be set by the GCC Central Bank for the sake of exchanging them with the single currency," the newspaper said.
"According to the draft framework approved yesterday, the GCC Central Bank will enjoy full autonomy and its main objective is to guarantee the currency stability in the monetary union's zone, draw up monetary policies for the single currency, manage foreign reserves in that currency and issue coins and notes."
The framework also "forbids any GCC government institution or department to issue any instructions that could affect the functions of the Central Bank".
GCC states have not yet reached agreement on the headquarters of the joint central bank but the UAE is pressing for hosting the institution on the grounds it has the necessary financial and infrastructure environment.
GCC heads of state are expected to decide whether to stick to the 2010 deadline for the monetary union when they hold their annual summit in Oman late this year.
Experts believe the monetary union could be partially launched in 2010 on the grounds postponing it could send a bad message to markets. The creation of a GCC monetary union, which follows the launching of a customs union in 2003 and a common market in early 2008, will give birth to the largest oil bloc in history, with proven crude reserves of more than 480 billion barrels, nearly 45 per cent of the world's oil deposits.
They are also among the 20 largest economies, with a combined gross domestic product peaking at around $750 billion (Dh2.7trillion) in 2007. GCC officials expect the 27-year-old economic, political and defence alliance to become the sixth largest world economy within 10 years given the rapid growth in their GDP.
GCC economies have galloped by at least 15 per cent in current prices over the past five years because of a surge in oil prices, which also sharply boosted their foreign currency reserves. They soared to around $317bn at the end of 2007 from nearly $276bn at the end of 2006.