GCC single currency faces a bumpy road: economist Moin Siddiqi examines the prospects for a single Gulf currency and questions whether it will make its 2010 implementation deadline.

Author:Siddiqi, Moin
Position:BUSINESS & FINANCE - Gulf Cooperation Council

THE CREATION OF a unified currency bloc is a long-term aim of the Gulf Cooperation Council (GCC) countries--comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This ambitious goal was formally declared soon after the foundation of the GCC in Article 22 of the Council's Unified Economic Agreement of June 1982, which states that: "The six-member states shall seek to coordinate their financial, monetary and banking policies and enhance cooperation between monetary agencies and central banks, including an endeavour to establish a common currency in order to further their desired economic integration." A genuine monetary union signifies an area where one currency (the sole legal tender) prevails, or several currencies which are freely convertible at irrevocable fixed exchange rate circulate within the zone. It would be based around a 'supranational' central bank such as the US Federal Reserve Board or the Frankfurt-based European Central Bank (ECB), which assumes responsibility for key aspects of monetary policy such as setting interest rates, credit aggregate and inflation targeting, as well as nominal exchange rate adjustments.

Monetary integration also exists in the form of currency unions and financial integration models. In the former, the fixing of exchange rates and the existence of a mechanism are employed to ease money and trade adjustments. The latter involves free capital mobility and the unification of financial institutions and capital markets to facilitate freedom among member states. In both models, barriers on nationals of one member state from establishing themselves in another state, or providing services directly in another state, disappear.

Max Corden, in Essays in International Finance, published in 1972, defined monetary integration in terms of "exchange rate union, that is, an area within which exchange rates bear a permanently fixed relationship to each other ... and total convertibility", or as he put it "the permanent absence of all exchange controls, whether for current or capital transactions, within the area". An ECB research paper noted: "A single monetary and exchange rate policy that is geared to the economic, monetary and financial conditions in the single monetary area as a whole can only be ensured if it is conducted by a supranational monetary institution."

The GCC economic convergence project is based on the Maastricht criteria for the successful launch of the euro in 1999. It includes specific targets for:

* Inflation less than or equal to 200 basis points (bps) above the weighted average rate of the GCC bloc (it remains undecided whether 'headline' or 'core' inflation will be used in final calculations)

* Short-term interest rates not exceeding 150bps above the GCC average

* Budget deficit for respective member-countries of not higher than 3% of GDP

* Total government debt (ie national debt) must not surpass 60% of GDP; and

*Gross foreign exchange reserves of at least four months of import cover.

The six-member bloc is...

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