UAE likely to rejoin Gulf monetary union

[Rajiv Sekhri]

UAE likely to rejoin Gulf monetary union
Sep 03, 2009


The UAE is likely to rejoin the Gulf monetary union as it stands to benefit most from a single currency and it makes no sense to have a euro-style union without the bloc’s second-largest economy, experts say.

Home to the Gulf Cooperation Council (GCC) nations' largest banking sector and accounting for about a quarter of the region's 2007 gross domestic product of $810 billion, the UAE is likely to let financial sense prevail over an ego hurt by a decision to base the headquarters of the union's central bank in Saudi Arabia.

"The benefits that the UAE will derive from the monetary union outweigh the advantages for all the other countries," said Said al-Shaikh, chief economist at NCB. "The UAE will reconsider the decision it had made in May, and maybe forego the issue of location and think about the economic benefits."

Saudi Arabia, the GCC’s largest economy, on Monday approved the proposed GCC monetary union agreement and said it hoped the UAE and Oman would rejoin. Economists say the adoption of a single currency could take up to 2015. The plan was to have a currency in place by 2010.

Saudi Arabia, Kuwait, Qatar and Bahrain are part of the union. The UAE pulled out on May 20, two weeks after Gulf leaders chose Saudi Arabia to host the central bank. But the UAE said a day later it would keep the door open to joining.

"The issue is not necessarily that the UAE cannot afford not to join the union," said Philippe Dauba-Pantanacce, a senior economist at Standard Chartered. “I would more argue that the monetary union barely makes any sense without the UAE."

He added: "In the current scheme, without Oman and the UAE, Saudi represents more than two-thirds of the ensemble. This is not in effect a monetary union anymore but rather 3 GCC countries adopting (Saudi’s) currency."

A single currency would benefit the UAE the most as its transactions are the largest in the area and its financial system the most open and transparent in the Arab world.

The UAE "cannot afford to lose out on the benefits of seamless movement of trade, capital and labor and importantly attracting foreign direct investment," said Samir Pradhan, an economist at Gulf Research Centre in Dubai.

However, a unified monetary policy for the GCC will be difficult given that countries are faring differently.

"Convergence criteria would take time to be fully implemented by member countries, and this should be backed by astute political will on the basis of comparative assessment of gains and losses by member countries," Pradhan said.

Standard Chartered's Dauba-Pantanacce said he does not think "substantial progress will be achieved in the short term. But again, more than a date (when this union will be ready), the question is really, what is the sense of a four-country monetary union? This has to be solved before they go further."