Progress on the formation of the Gulf Cooperation Council (GCC), a project that aims to create a Gulf Arab monetary union, had been going swimmingly of late.
Most importantly, earlier this month, the GCC got over what was assumed to be one of its most thorny issues – the choosing of a headquarters. On May 5th, the group named Riyadh in Saudi Arabia as the location for the union’s potential central bank, a factor most analysts understood as opening the door to real progress on the next key challenges.
Alas, not so. On Wednesday, a major boulder appears to have toppled onto the currency union plans, and almost out of nowhere.
The United Arab Emirates, the second-largest Arab economy, has walked away from the project – and without citing official reason.
Most, however, will see it as the UAE not being able to stomach the idea of a Riyadh base for the union. As Reuters reports (our emphasis):
The UAE and four of its neighbours, including Saudi Arabia, had planned to converge their economies with a view to eventually launching a common currency. But the UAE, one of the major candidates to host a joint central bank, expressed reservations over a May 5 decision to base it in the Saudi capital Riyadh.
In the statement on the UAE withdrawal, WAM said it was the first country to ask to host the joint central bank in 2004 and did not host any other GCC body. “I think this is more a statement of protest over the decision that was taken on choosing Saudi Arabia,” said Mohammed Yasin, chief executive at the UAE’s Shuaa Securities. “It is more over the way it was chosen, not where it was chosen… I don’t think it will have any affect on the economy or the stock markets.”
Bahrain is the only country to have ratified the deal, the GCC Secretary-General Abdul-Rahman al-Attiyah said this month. Neither Attiyah nor Naser al-Kaud, deputy assistant secretary-general of the GCC General-Secretariat, could immediately be reached for comment. The UAE, Saudi and Qatari central banks could not be reached for comment.
The central bank governor, meanwhile, added that the UAE would be keeping its currency pegged to the US dollar, with monetary policy remaining the same as it is now.
The news in the interim is unlikely to move markets, say Standard Chartered, as most had not been convinced common currency introduction would happen any time soon. As the analysts explain:
Convergence trades never kicked off. We, therefore, believe that market impact will be limited. It is also important to note that the central bank governor mentioned that the currency will remain pegged to the USD. Not joining the common currency will give the UAE greater flexibility to manage its currency in the future. However, given the current economic downturn, we do not believe that currency reform is high on the agenda at the moment.
Related links:
Emirates won’t join Gulf monetary bloc – AP
A commodity anchor, or oil as money – FT Alphaville