Lyons raises doubts over GCC common currency

17 February 2006

The GCC is not ready for a single currency, Standard Chartered Bank's chief economist and group head of global research Gerard Lyons told MEED on 8 February in Dubai. 'In a single currency, one size fits all. I'm not convinced it fits here,' he said. 'You need monetary and financial infrastructure in place. It's more of an optimal currency region [than elsewhere], so theoretically it could work, but institutionally more needs to be done.' Optimal currency region theory states that an area primed for monetary union must have labour and capital mobility, price and wage flexibility and a fiscal transfer mechanism, including taxation redistribution. GCC countries have committed to launching a common currency in 2010. Central Bank of the UAE governor Sultan bin Nasser al-Suwaidi told MEED in December that the economic convergence criteria were complete but supervision, IT and technical issues, as well as political questions over a common currency, remained to be resolved (MEED 2:12:05).

GCC governments' monetary policy is not geared to the region and authorities need to control the amount of money in circulation if they cannot control its price, Lyons said. 'By tying to the US dollar, you tie to the policy of the US. It gives monetary credibility, but if your economy accelerates relative to the US, where interest rates are low, it fuels speculation, for instance in housing,' Lyons said.

The economic boom in the Gulf is sustainable if governments create more investment opportunities, Lyons said. 'There's a phenomenal amount of money and people here. The big challenge is to diversify and open the economy and make the service sector buoyant and dynamic.'

www.meed.com/economy

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