Four Gulf states ink monetary union pact
Four GCC states signed a pact on 7 June creating a monetary union. The ceremony was attended by foreign and finance ministers and central bank governors of the six-nation Gulf Cooperation Council (GCC) in the Saudi capital Riyadh. Bahrain, Kuwait, Qatar and Saudi Arabia will have a common currency in the next several years.
It comes as a confidence-building measure after the shock decision by the UAE, the second-largest Arab economy, to leave the plan in protest after a decision to base the central bank in the Saudi capital Riyadh.
7 June 2009
Analysis and forecast (↓ decreasing risk)
The signing of the monetary union pact between four of the six members of the GCC is an important public confirmation of Saudi Arabia, Kuwait, Bahrain and Qatar’s intention to launch a common currency. Doubts have been raised on whether the monetary union will proceed, after the UAE decided to withdraw from the pact in May, in protest about not choosing Abu Dhabi as the venue for the central bank. The main stumbling block was the location of the central bank, and with four of the GCC members deciding to proceed after agreeing on the central bank’s location leaving the UAE out, there are no more major hurdles, save those of practicalities. There is unofficial and widespread consensus amongst analysts that the original launch date of 2010 will not be achievable from a practical point of view. However, even with a probable launch date of 2013, the signing of the pact was a necessary step. Although the UAE’s withdrawal will dilute the effectiveness of the common currency, it will still be an important addition to the global currency markets, if as expected it de-pegs from the US dollar. The common currency will help in faciltating intra-GCC trade as well as trade between the GCC and other countries, which is seen as vital in the region’s efforts to diversify their economies away from oil.