Global Arab Network | IMF assisting GCC to set up monetary union in 2010

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IMF assisting GCC to set up monetary union in 2010

Global Arab Network - - George Haddad

Saturday, 05 September 2009 01:45

Saudi Arabia and three other Gulf oil producers have sought assistance from the International Monetary Fund on a possible revaluation of their currencies as part of a landmark plan to create the world’s second monetary union in 2010.

In a working paper released, the IMF suggested slight appreciation of the currencies of Saudi Arabia, Kuwait, Qatar and Bahrain against the US dollar, but it warned any leakage of news ahead of the revaluation could spur damaging speculation.

“This paper developed from an informal request to one of the authors by a member of the Gulf Co-operation Council (GCC) Secretariat for guidance on how to set the conversion values for the new GCC currency. He subsequently requested such advice from the IMF. This working paper describes one method that could be used for the conversion.” The report said such a methodology could also be useful for the UAE and Oman in case they decide to join the GCC monetary union at a later stage.

“If hypothetically the GCC decides to establish the new currency in its original planned year, 2010, Saudi Arabia would need to revalue its currency by 2.94 per cent vis-à-vis the US dollar, Kuwait by 5.15 per cent, Qatar by 4.54 per cent and Bahrain by 1.09 per cent. The methodology provides an estimate of the required adjustment for each currency, if the conversion is to take place in 2011, 2012 or 2013,” said the working paper.

The paper said that because of these low estimates of the degree of misalignment, the GCC authorities might choose to not modify their current parity vis-à-vis the US dollar.

“In addition, if information of possible adjustments filters to the market, the agents might undertake speculative attacks that might undermine the exchange rate adjustment and could harm the creation of the new currency,” it said.

The paper said only a small exchange rate adjustment (less than five per cent) is needed for the GCC currencies to establish the conversion at the closest level to equilibrium.

“Moreover, the adjustment tends to decline from 2010 to 2013… we recommend that the GCC authorities rigorously apply our proposed method [alongside other methodologies and with full use of information available within the region] to test these results to help set the conversion rates for the future union,” it said.

“In a broader perspective, we recommend a regular update of the forecast misalignment using the bi-annual World Economic Outlook publications to monitor the conversion rate and make sure it is still the closest to the equilibrium value. It could also be useful to calculate the real exchange rate (RER) equilibrium and misalignment using forecasts from other databases or using the national agencies’ forecasts.”

The paper concluded that GCC nations could also construct several terms of trade variables that would reflect different oil prices and use these variables to calculate the RER misalignment to see how the different currencies would deviate from the equilibrium, and calculate the required exchange rate adjustment if any of the scenarios is to occur.

Oman pulled out of the planned GCC currency union in late 2006 on the grounds it is not ready for the project.

The UAE followed suit in early 2009 apparently to protest the GCC decision to locate the Gulf Central Bank in Riyadh not in Abu Dhabi.

GCC officials discussed the monetary union plan in Kuwait yesterday but there was no word whether the scheme would be launched on time next year.

The four members have not made clear what form of currency would be in circulation but some officials have indicated national currencies would remain in circulation in the first stages of the union. A new peg, possibly a basket of currencies, could be adopted then.

The currencies of Saudi Arabia, Qatar and Bahrain are pegged to the US dollar while Kuwait ended that peg and reverted to a basket in early 2008 because of soaring inflation, for which it blamed the dollar and other factors.

Hot money poured into the oil-rich region in late 2007 and 2008 on mounting speculation the GCC countries are about to revalue their currencies against the dollar to tackle inflation, which soared to double digits in most members.

Global Arab Network

By Nadim Kawach, business24-7,

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