Since its proposal in 2003, GCC monetary union has been the subject of much controversy. With Oman announcing in December 2006 that it would not take part in any future GCC currency, Kuwait depegging from the dollar in May 2007, and the GCC now focusing on its response to the global financial turmoil, many regional observers have voiced concerns that the project might never happen.

Developing proposals

In a bid to make progress on the creation of a single GCC currency, the Dubai International Financial Centre (DIFC) published a report in December 2008 proposing how it might be valued.

The report argues that the optimal currency weighting should be 45 per cent dollar, 30 per cent euro, 20 per cent yen and 5 per cent sterling.

The report was designed to coincide with the annual GCC leaders’ summit in December 2008, which heralded at least one notable breakthrough: the final draft of an accord on monetary union. The accord provides for the creation of a monetary council that will evolve into a GCC central bank.

This will be charged with issuing the currency and completing the technical agreements for the union.

At the meeting, the heads of state also directed the GCC economic integration committees to accelerate their work and set a date for the General Monetary Union (GMU) council to meet by the end of the first quarter of 2009.

“Once set up, the council will be charged with producing the common monetary policy and developing proposals regarding the formal creation of the GCC central bank, which will then be considered by the respective leaders before June [2009],” says Nasser al-Saidi, chief economist of the Dubai International Financial Centre Authority and author of the DIFC report.

In the meantime, the five countries joining the union – Saudi Arabia, the UAE, Kuwait, Qatar and Bahrain – have adopted the accord that outlines the legal and organisational framework for the currency, with the aim of implementing it before the end of 2009.

While the project is clearly gathering pace, many observers are sceptical about meeting a 2010 deadline. Crucial aspects of the institutional framework, such as the currency’s denomination and name, which country will host the GCC central bank, and who will govern it, remain unanswered.

“[The year] 2012 seems a more realistic date to me,” says Eckart Woertz, programme manager of economics at Dubai-based independent think tank the Gulf Research Centre.

“They [GCC states] are too behind the curve with simple organisational details, such as printing the money and educating the banks.”

Furthermore, no final decision has yet been reached on the foreign exchange regime that will be used, although pegging to a basket of currencies is the most likely option.

Marios Maratheftis, regional head of research for the Middle East at the UK’s Standard Chartered Bank, supports the DIFC’s proposal but says it is unnecessary to include sterling.

“To start with, a simple basket of the dollar, yen and euro would suffice, and then the basket should evolve to accommodate more Asian currencies, namely the Indian rupee and the South Korean won, to reflect the trade patterns of the Gulf,” he says.

“The methodology for using the weightings will be looked into but will be based on the trade, output and inflation inter-linkages of the GCC economies with their major trade and economic partners,” says Abdulaziz Abu Hamad Aluwaisheg, director of economic integration for the GCC.

“The important thing is having greater exchange rate flexibility as that is what the GCC states really need,” says Al-Saidi.

Market intervention

In addition to the currency basket, Al-Saidi proposes that the central bank has the ability to intervene to adjust interest rates by as much as 10 per cent.

This would allow the region much greater monetary policy independence, which could be crucial in addressing any future challenges posed by globalisation, such as the current international financial turmoil.

Clearly, monetary union will bring benefits to GCC member countries, principally a reduction in foreign exchange transaction costs, removing exchange rate risks, promoting pricing transparency and increasing competition.

However, economic analysts agree there needs to be a greater exchange of labour, capital and investment within the region for a single currency to be effective.

While intra-GCC trade has grown rapidly, at 32.4 per cent over the period from 2003 to 2007, at 5.1 per cent of the region’s total global trade, it still represents a minority share.

Boosting regional trade will require further diversification of the GCC economies, which are still heavily dependant on oil.

In some GCC states, oil still accounts for up to 90 per cent of export revenues. But Al-Saidi remains optimistic. “The political will as expressed by heads of state has been very clear,” he says. “So the pressure is now on the respective committees to get moving.”