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Gulf Cooperation Council: Free-trade and regional grouping

Global Arab Network - The Middle East Association

Wednesday, 24 March 2010 11:20

Page 1 of 2

Kuwait’s May 2007 decision to abandon the dollar peg, to which all six Gulf Co-operation Council (GCC) members were committed, has proved a serious stumbling block to aspirations for greater union. Some analysts warned that the GCC’s standing as a major regional block was seriously damaged, but GCC officials remain hopeful that other important projects, such as a GCC common market, will get off the ground.

Following Oman’s December 2006 announcement that it could not meet the single currency’s proposed 2010 launch date, Kuwait argued that a regional boom has undermined integration. In turn, Kuwait would follow a monetary policy suited to its specific ational interests.

Analysts said that with Kuwait – usually a core GCC player – breaking ranks, confirmation had been made of the difficulties facing certain aspects of economic integration, particularly a feeling that some of the Gulf states lacked the political will to take the common steps required to move towards a viable single currency.

Standard & Poor’s sovereign risk analyst, Farouk Soussa, comments: “Kuwait’s decision highlights the reluctance of Gulf governments to accept the need to pool a measure of sovereignty, to accept that they are bound by a common agreed policy, if they are to establish a credible monetary union and single currency.”

Kuwait’s pursuit of policies that are potentially detrimental to the GCC raises questions regarding the commitment of individual states to monetary union, says Soussa, adding: “Financial markets already doubted the chances of meeting the 2010 target date for launching a single currency; their scepticism will now have been reinforced.”

Soussa adds: “If Gulf governments were ready to make a strong political commitment to monetary union, and surrender some national sovereignty… differences in the technical monetary policy needs of individual countries could be reconciled.”

Hamad al-Sayari, Saudi Arabian Monetary Agency governor, said in mid-September 2007 that new, exceptional developments in the region meant the GCC states were unlikely to launch a single currency by 2010, adding that “despite growing difficulties, the GCC member countries agreed on the necessity of pressing ahead for the single currency”.

The Central Bank of the UAE’s governor, Sultan bin Nasser al-Suwaidi – who is seen as something of a single currency ‘bull’ and leading Gulf thinker on monetary issues – said recently that the first and second stages of monetary union would still be completed by 2010, but accepted that the third step, the single currency, would be delayed “until we have a common market working to our satisfaction” – a usefully flexible benchmark.

Following Kuwait’s abandonment of the dollar peg in favour of a currency basket, other GCC members have been under increasing market pressure to follow suit. Maintaining the dollar tie at a time when the greenback is so weak risks importing inflation, as it pushes up the cost of imports from Europe and other non-dollar suppliers. Inflation in Qatar, for example, hit 13.7 per cent in 2007, and is forecast to rise to 15 per cent in 2008. Qatar National Bank reported rental inflation of 26 per cent in 2006.

Common market
With hopes fading for a single currency, GCC governments are

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Last Updated on Wednesday, 24 March 2010 11:31

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