Heads of state meeting at the GCC summit in Abu Dhabi on 18-19 December approved the economic convergence criteria to be put in place ahead of the planned monetary union in 2010. The five measures had earlier been recommended by the six finance ministers.

The five criteria, due to be implemented by 2007, closely mirror those used by the eurozone countries. They are: a cap on the budget deficit at 3 per cent of gross domestic product (GDP); a ceiling on public debt of 60 per cent of GDP; inflation to be kept within 2 per cent of the GCC average; interest rates to be no more than 2 per cent above the average of the three lowest rates; and foreign exchange reserve coverage of four-six months of imports.

'Most of the criteria should be relatively easy to hit,' says Steve Brice, senior economist at Standard Chartered Bank. 'Even if the oil price starts to fall in 2007 as we expect, the debt and deficit targets are manageable. Interest rates don't diverge much anyway because of the dollar peg. The main challenge will be inflation, where there is considerable divergence and governments don't have the monetary policy tools to control it.'

A decision has yet to be taken on the location of the GCC central bank. 'Bahrain and Dubai would make sense from a financial services industry perspective, but with half the bloc's economy accounted for by Saudi Arabia, Riyadh is the most likely option,' says one analyst.

GCC leaders discussed other economic issues. On the subject of drawn-out talks on a GCC-EU free trade agreement (FTA), they expressed hope that a deal was imminent. A plan recently agreed by labour ministers to cap the duration of expatriate job contracts at six years was returned to the ministers for further study.