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Gulf Arabs delay single currency beyond 2010 deadline

Posted on: March 26, 2009


Reuters – Wednesday, March 25

* Gulf Arabs delay single currency deadline beyond 2010

* Gulf Arabs seek to coordinate policy in face of crisis

By Daliah Merzaban

MANAMA, March 24 – The 2010 deadline for a Gulf Arab single currency will be extended and a new timetable set, senior Gulf officials said on Tuesday, in the first official recognition that monetary union plans would be delayed.

Five Gulf Arab states — Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain and Qatar — have been working for years towards launching a single currency in 2010, a deadline that analysts and even policymakers had long said was untenable.

“The physical currency, it will not be in 2010,” Naser al-Kaud, deputy assistant secretary-general of the GCC told reporters. “The monetary council will be established and one of its tasks will be to set the new timetable for the introduction of the physical currency.”

While the 2010 deadline would be extended to a date to be determined by the monetary council, Gulf states would likely decide on the name of the currency and the rate at which each Gulf currency would be converted by 2010, Kaud said.

Gulf states have until December to ratify a monetary union agreement and the charter governing the monetary council — both of which were approved by Gulf leaders at a summit in December.

The monetary council is meant to be a precursor to a future regional central bank but its creation has been stuck over thorny political questions — where the joint body will be based and how much independence it will have.

Oman dropped out of monetary union plans in 2006 and Kuwait dropped its dollar peg in 2007, throwing convergence efforts into disarray in an oil-exporting region where currencies have long been pegged to the U.S. dollar.

Analysts said it was now important for Gulf Arab states to set a new date for the common currency launch to avoid creating more uncertainty.

“It’s about time. Having said they are not going to meet the deadline they should also come out and say when they will meet it — otherwise it will just create more uncertainty,” said John Sfakianakis, chief economist at HSBC’s Saudi affiliate SABB.

“It’s more of a political than a technical decision at this stage. They could do it in two years. With the financial crisis they are seeing the importance of monetary union; now they see clearly that they are not isolated from what is happening.”

FACING THE CRISIS

With a fully-fledged common currency off the agenda at least until next year, Gulf central banks are focused on helping their financial institutions weather the global crisis that ended a six-year boom fuelled by record crude oil prices.

Crude prices have collapsed from almost $150 a barrel in July to just over $53 a barrel on Tuesday.

Asked if the crisis had played any role in the delay, Bahraini Central Bank Governor Rasheed al-Maraj said: “Before 2007, we knew it would be a very challenging timeframe to meet the deadline. The most important thing is the monetary union agreement. That is the cornerstone for the monetary union. What happens next is technicalities…”

In December, GCC leaders signed the long-awaited monetary union deal but put off their decision on the location of a regional central bank, raising the possibility of future delays.

Maraj declined to say when the physical currency was now likely to come into circulation.

“It is not about just printing the money,” he told reporters. “It is streamlining our regulations, our supervision and payment systems. All these things take a lot of time.”

Gulf officials have repeatedly said that the global financial downturn has given added impetus to their existing efforts to improve monetary policy coordination and thrown the need for a common currency into focus.

They have taken a slew of measures to defrost credit markets, cutting interest rates, guaranteeing bank deposits and offering extra liquidity to banks in an effort to keep economies moving as oil revenues fall and world trade flows decline.

“Central bank governors have been instructed to increase their consultations and take the necessary measures to bolster… the economies of the GCC against this crisis,” Kaud said in a speech at the banking conference.

 (Writing by Lin Noueihed; editing by Stephen Nisbet and Andy Bruce)

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