Committee to hold meeting on common GCC currency
DOHA, Sept 5, (KUNA): The technical committee of the Gulf Monetary Union is due to hold its 25th meeting in Doha next Sunday to discuss the issue of GCC single currency, it was officially reported. The committee, during its two-day meeting, is scheduled to discuss drafting regulations for the authority that would be assigned to issue the common current for the member states of the Gulf Cooperation Council. The special authority will be also tasked with working out various mechanisms of the process, such as the ways of ciruculating the single currency, setting the rate for the currency in addition to various other supervisary tasks. The authority that has been picked for the task is the GCC committee for supervision on the banking systems. The GCC secretariat general anticipates that various procedures for the issuance of the single currency will be finalized this year. A GCC central bank is due to established at least six months before the issuance of the common currency.
Sunday, September 7, 2008
Tuesday, September 2, 2008
GCC monetary union unlikely by 2010: UAE
DUBAI - With only about two years to go, Gulf Arab oil producers may not be able to meet the target for a monetary union by 2010, and are unlikely to sever their dollar pegs because the US currency is appreciating against other major currencies.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi stated this on Thursday, and stressed that the country’s economy would grow at 6.6 per cent this year and remain strong until 2009. Last year’s economic growth was 7.4 per cent.
In a keynote speech before a business conference, Al Suwaidi said the monetary union would be implemented in three stages with the last one involving the implementation of similar laws among the Gulf countries.
“If we achieve the first two stages to monetary union by 2010, then that will be enough,” said Al Suwaidi, who gave a keynote speech at the last of the two-day The 33rd Japan Cooperation Forum for the Middle East (JCCME).
He added that the first and second stages would reduce or even eliminate the cost of the exchange cross-rates as well as realise the free capital flows between the Gulf countries.
Al Suwaidi said, meanwhile, the rapid economic growth in the region could encourage the Sovereign Wealth Funds (SWFs) of GCC Arab governments to invest more of their assets in the domestic market.
He added this could start off a new regional development cycle. Among the Gulf Cooperation Council member-countries, only Kuwait has abandoned the dollar-peg while Oman said in 2006 that it would not join the monetary union.
The other GCC members are Saudi Arabia, Bahrain, the UAE and Qatar. “The current level of interest rates in the GCC actually creates an environment of ultra loose monetary policy with highly negative interest rates, which can only be conducive to massive credit growth,” said Philippe Dauba-Pantanacce, a Dubaibased senior economist for the Middle East & North Africa, Global Markets, at Standard Chartered Bank, in an earlier interview.
The UAE Central Bank has a two-per cent repurchase rate, or lending rates to commercial banks, since May 1. It has slashed this repo rate by 275 basis points since setting it at 4.75 per cent on November 29 following a revamped of its monetary policy tools.
The country has replaced a daily sale of fixed-rate certificates of deposit with the auction, the results of which have not been released.
jose@khaleejtimes.com
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi stated this on Thursday, and stressed that the country’s economy would grow at 6.6 per cent this year and remain strong until 2009. Last year’s economic growth was 7.4 per cent.
In a keynote speech before a business conference, Al Suwaidi said the monetary union would be implemented in three stages with the last one involving the implementation of similar laws among the Gulf countries.
“If we achieve the first two stages to monetary union by 2010, then that will be enough,” said Al Suwaidi, who gave a keynote speech at the last of the two-day The 33rd Japan Cooperation Forum for the Middle East (JCCME).
He added that the first and second stages would reduce or even eliminate the cost of the exchange cross-rates as well as realise the free capital flows between the Gulf countries.
Al Suwaidi said, meanwhile, the rapid economic growth in the region could encourage the Sovereign Wealth Funds (SWFs) of GCC Arab governments to invest more of their assets in the domestic market.
He added this could start off a new regional development cycle. Among the Gulf Cooperation Council member-countries, only Kuwait has abandoned the dollar-peg while Oman said in 2006 that it would not join the monetary union.
The other GCC members are Saudi Arabia, Bahrain, the UAE and Qatar. “The current level of interest rates in the GCC actually creates an environment of ultra loose monetary policy with highly negative interest rates, which can only be conducive to massive credit growth,” said Philippe Dauba-Pantanacce, a Dubaibased senior economist for the Middle East & North Africa, Global Markets, at Standard Chartered Bank, in an earlier interview.
The UAE Central Bank has a two-per cent repurchase rate, or lending rates to commercial banks, since May 1. It has slashed this repo rate by 275 basis points since setting it at 4.75 per cent on November 29 following a revamped of its monetary policy tools.
The country has replaced a daily sale of fixed-rate certificates of deposit with the auction, the results of which have not been released.
jose@khaleejtimes.com
Sunday, July 6, 2008
The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
UAE Central Bank
does not have a magic solution to soaring inflation in the country and any sudden currency changes could trigger monetary turmoil in the short term, a government report said yesterday.
Revaluing or de-pegging the dirham from the ailing US dollar remains a very difficult decision and such a move will not alone tackle inflation, which surged above 11 per cent last year from 9.5 per cent in 2006 and less than five per cent in previous years, the Department of Planning and Economy (DPE) said in its weekly report on the dirham peg and inflation in the UAE.
While stemming inflation requires a set of measures, changes in the UAE monetary policies appear to be more complex than any other country in the six-nation Gulf Cooperation Council (GCC), the report said.
It said the Central Bank had already made clear that there are no plans at present to unpeg the dirham from the dollar on the grounds that about 70 per cent of the country's foreign trade is in the US currency, a large part of the UAE's foreign assets are in dollar, more than 95 per cent of its official reserves are in dollar and the peg has long been a factor of stability.
Magic solution
"Therefore, it should be said in conclusion that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
does not possess the magical stick to stop inflation. Rather, it is a problem that should be tackled by more than one institution at the federal and local levels. Even the private sector and individual consumers have a role to play," it said.
According to the report, pegging the dirham to the dollar has been justified by many internal and external factors and that any decision to end the link requires alternative monetary policies that would curb inflation. But it warned:"Any major change in the exchange rate will cause financial and monetary unrest in the short term... available options do not seem attractive for the time being and changes of the monetary policies in the country look more complex than any other country of the GCC."
The report said the role of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
, like any central bank in the world, is to preserve the value of the national currency and keep inflation in check. However, the roles of central national banks are being curtailed by the assertive influences of globalisation sweeping across the world, it added.
Currency pressure
It noted that the UAE dirham has come under increased pressure as a result of the flow of oil revenues, adding that inflation has been partly fuelled by the high cost of imports from non-dollar markets.
While this imported inflation can best be reduced either by scaling down imports or by diversifying sources, such a decision requires well-thought out and long-term strategies, DPE said.
Moreover, the report believes any inflation ensuing from devaluation of local currency can only be redressed through adoption of a basket of alternative world currencies, but at carefully studied and fixed rates.
"More importantly, it should be said that despite the enormous pressures put on the UAE economy by the dollar woes, any abrupt change in monetary policies will not suffice in itself to bring down inflation," it said. "On the contrary, such a haphazard move would affect the competitive edge of the UAE's non-oil exports. At the same time, such a decision will affect the overall productivity and would touch on salaries and remittances."
Devaluation
According to DPE, oil revenues will remain unaffected as they are valued in dollars but under this scenario, a decision to devalue the dirham by little less than its current value would seem a good option as this would boost the competitiveness of the country's exports and re-exports.
"De-valuation of the dirham would not entirely be woesome because many sectors of the local economy will stand to benefit from such a decision.
"Having said that, it remains to be mentioned that any decision to change the monetary policies or even devalue the dirham, no matter how little that devaluation might be, would require a comprehensive and technical studies that encompass the pros and cons... an attempt to decide the future of the UAE's national currency will remain a complex task. "
The report, citing official comments, said a close look at the UAE's monetary and financial experience during the past three years would reveal that the dollar pegging policy has had some positive impacts.
Not easy
"Thus, to drop the dollar would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate... this dilemma, however, does not mean that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
would sit by idly while inflation continues to rip local markets apart. While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of local economy."
It recalled that when the UAE decided to peg the dirham to the dollar more than two decades ago, there were a host of economic, and financial and monetary justifications.
The pegging proved to be a safe haven for a long time, ensuring credibility, stability and boosting investments and investor confidence, it said.
"Furthermore, a review of these justifications will show that the argument to retain the pegging at fixed rate was fuelled by some objectives conditions. Prime among these conditions was the pricing of oil and other essential commodities in dollar. Indeed, 60 per cent of dollar reserves are outside the US.
Additionally, UAE cash surplus and financial accounts are all in dollars.
"What is important in the complex issue of whether or not to de-peg is the position of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates, which maintains that de-pegging will have adverse consequences that the national economy would not afford.
"The Central Bank maintains that monetary stability, which has long been the UAE's strength, will be tampered with, at least for the time being, if de-pegging is adopted."
Basket of currencies
Despite the positive aspects of the link to the dollar, the pegging of any national currency against a foreign basket is a double-edged sword, DPE said, citing recent Central Bank remarks. It noted that the decline in the US dollar benefited UAE non-oil exports but made the country's imports from other markets costlier.
"Thus, the most dangerous impact of the dollar decline is imported inflation that comes with it as a result of huge fall in the dollar exchange rate against other currencies. Imported inflation terribly affects economic activities and the gross domestic product. This is not to mention the spiralling prices of consumer goods that are purchased with other major currencies," DPE said.
"In short, it is difficult to claim that any one particular monetary policy would be ideal for the UAE. However, if the US dollar continues to decline, the UAE's economy will continue to pay the price as a result of continued dirham pegging with the weakening dollar." It stressed that such a scenario might require certain practical measures to mitigate the negative impact.
"One way of tacking such a situation would be to tie the dirham to a basket of major currencies, including the dollar. This step would boost the international market value of the dirham. Such a decision would, of course, have some short-term effects. Nevertheless, it would achieve a better economic stability. However, it should be acknowledged that such a decision would be one of the most difficult and complex economic decisions to take. "As mentioned earlier, the decision to de-peg the dollar is not an easy one. It requires a set of alterative monetary policies to check inflation and exchange rate. Similarly, it is hard to assert categorically that a single currency anchor is the best system for the UAE."
Dollar has served GCC well
In its comment on the GCC as a whole, the report considered that the dollar pegging had served member states well for decades.
But it also noted that the pegging was adopted when oil prices were low and the greenback still at the height of its strength.
"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies. GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia.
"With oil windfall entering its fifth year in a row, and with the dollar continuing to decline, it is clear that GCC's monetary polices will face a problem of policy alignment. This problem will definitely affect the single currency union." It warned that a single GCC currency could not be without a decision by the six members to align their monetary, financial, and banking policies.
"This is the single most important objective that needs to be attained now. This alignment may require certain standards in the long-term. These standards include, among others, keeping inflation rate below two per cent at the average, maintaining budget deficit at not more than three per cent of the GDP and keeping the general GCC credit at 60 per cent," it said.
"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies. ...as the dollar continues to fall, the GCC states need to face the repercussion by adopting a unified stand. It should be noted that these states pegged their currencies to the dollar for objectives reasons."
The Dirham peg: Reasons and motives
Objectives and special reasons
Dirham peg has been the bedrock of a stable monetary stability. The economy enjoyed long credibility as a result.
Investor confidence in the local currency maintained
UAE's financial assets in dollars
70 per cent of foreign trade is in dollars
More than 95 of reserves is in dollar
International oil trade is priced in dollars
General motives
The dollar remains the single most important hard currency in the world
It is the currency of international trade
It is the currency of the US, which accounts for about 27 per cent of the world trade
66 per cent of world reserves are in dollars
60 per cent of the greenback is outside the US
Side effects of dollar peg
In view of US economic woes, dirham exchange rate is loosing some of its credibility, a trend that might have negative impact on monetary stability (As in 1977-1976)
That the dirham exchange rate has remained fixed against the dollar will require the Central Bank to be continually ready to intervene in the exchange market. This will require huge foreign assets reserves. With the dollar continuing to decline, future exchanges rate trends will continue to be uncertain. This will cause problems to economic planning
Euro has begun to compete with the dollar at the global level. It is a force to reckon with when considering the exchange rate
De-pegging or no de-pegging?
Reasons for taking the decision
Enhancing the efficiency of monetary policy to regulate economic activities
Curbing inflation and mitigating its effects at the domestic level
Mitigating the effects of dollar depreciation on domestic conditions.
Reasons for deferring the decision
Pegging is justified by many internal and external factors
De-pegging requires alternative monetary policies, which would curb inflation and check exchange rates
Changes in UAE's foreign trade, which helped to contain inflation
Taking risk by adjusting exchange rate is one of the tools for monetary policy
Any major change in the exchange rate will cause financial and monetary unrest in the short term
Available options do not seem attractive (currencies basket/floating, etc)
Difficulty in managing exchange rates in the context of other option
De-pegging requires regional and international consensus (GCC single currency)
De-pegging requires delicate balances
Changes of monetary policies in the UAE look more complex than any other country in the GCC
Future of dollar: further depreciation predicted
The dollar lost 40 per cent of its value since 2000
US monetary policy welcomes more reduction
Dollar weakness reduces cost of US exports
Dollar weakness helps US trade balance
Weakening dollar reduces cost of US assets
There is a global tendency to get rid of the dollar in favour of other currencies
By Nadim Kawach
© Emirates Business 24/7 2008
UAE Central Bank
does not have a magic solution to soaring inflation in the country and any sudden currency changes could trigger monetary turmoil in the short term, a government report said yesterday.
Revaluing or de-pegging the dirham from the ailing US dollar remains a very difficult decision and such a move will not alone tackle inflation, which surged above 11 per cent last year from 9.5 per cent in 2006 and less than five per cent in previous years, the Department of Planning and Economy (DPE) said in its weekly report on the dirham peg and inflation in the UAE.
While stemming inflation requires a set of measures, changes in the UAE monetary policies appear to be more complex than any other country in the six-nation Gulf Cooperation Council (GCC), the report said.
It said the Central Bank had already made clear that there are no plans at present to unpeg the dirham from the dollar on the grounds that about 70 per cent of the country's foreign trade is in the US currency, a large part of the UAE's foreign assets are in dollar, more than 95 per cent of its official reserves are in dollar and the peg has long been a factor of stability.
Magic solution
"Therefore, it should be said in conclusion that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
does not possess the magical stick to stop inflation. Rather, it is a problem that should be tackled by more than one institution at the federal and local levels. Even the private sector and individual consumers have a role to play," it said.
According to the report, pegging the dirham to the dollar has been justified by many internal and external factors and that any decision to end the link requires alternative monetary policies that would curb inflation. But it warned:"Any major change in the exchange rate will cause financial and monetary unrest in the short term... available options do not seem attractive for the time being and changes of the monetary policies in the country look more complex than any other country of the GCC."
The report said the role of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
, like any central bank in the world, is to preserve the value of the national currency and keep inflation in check. However, the roles of central national banks are being curtailed by the assertive influences of globalisation sweeping across the world, it added.
Currency pressure
It noted that the UAE dirham has come under increased pressure as a result of the flow of oil revenues, adding that inflation has been partly fuelled by the high cost of imports from non-dollar markets.
While this imported inflation can best be reduced either by scaling down imports or by diversifying sources, such a decision requires well-thought out and long-term strategies, DPE said.
Moreover, the report believes any inflation ensuing from devaluation of local currency can only be redressed through adoption of a basket of alternative world currencies, but at carefully studied and fixed rates.
"More importantly, it should be said that despite the enormous pressures put on the UAE economy by the dollar woes, any abrupt change in monetary policies will not suffice in itself to bring down inflation," it said. "On the contrary, such a haphazard move would affect the competitive edge of the UAE's non-oil exports. At the same time, such a decision will affect the overall productivity and would touch on salaries and remittances."
Devaluation
According to DPE, oil revenues will remain unaffected as they are valued in dollars but under this scenario, a decision to devalue the dirham by little less than its current value would seem a good option as this would boost the competitiveness of the country's exports and re-exports.
"De-valuation of the dirham would not entirely be woesome because many sectors of the local economy will stand to benefit from such a decision.
"Having said that, it remains to be mentioned that any decision to change the monetary policies or even devalue the dirham, no matter how little that devaluation might be, would require a comprehensive and technical studies that encompass the pros and cons... an attempt to decide the future of the UAE's national currency will remain a complex task. "
The report, citing official comments, said a close look at the UAE's monetary and financial experience during the past three years would reveal that the dollar pegging policy has had some positive impacts.
Not easy
"Thus, to drop the dollar would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate... this dilemma, however, does not mean that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
would sit by idly while inflation continues to rip local markets apart. While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of local economy."
It recalled that when the UAE decided to peg the dirham to the dollar more than two decades ago, there were a host of economic, and financial and monetary justifications.
The pegging proved to be a safe haven for a long time, ensuring credibility, stability and boosting investments and investor confidence, it said.
"Furthermore, a review of these justifications will show that the argument to retain the pegging at fixed rate was fuelled by some objectives conditions. Prime among these conditions was the pricing of oil and other essential commodities in dollar. Indeed, 60 per cent of dollar reserves are outside the US.
Additionally, UAE cash surplus and financial accounts are all in dollars.
"What is important in the complex issue of whether or not to de-peg is the position of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates, which maintains that de-pegging will have adverse consequences that the national economy would not afford.
"The Central Bank maintains that monetary stability, which has long been the UAE's strength, will be tampered with, at least for the time being, if de-pegging is adopted."
Basket of currencies
Despite the positive aspects of the link to the dollar, the pegging of any national currency against a foreign basket is a double-edged sword, DPE said, citing recent Central Bank remarks. It noted that the decline in the US dollar benefited UAE non-oil exports but made the country's imports from other markets costlier.
"Thus, the most dangerous impact of the dollar decline is imported inflation that comes with it as a result of huge fall in the dollar exchange rate against other currencies. Imported inflation terribly affects economic activities and the gross domestic product. This is not to mention the spiralling prices of consumer goods that are purchased with other major currencies," DPE said.
"In short, it is difficult to claim that any one particular monetary policy would be ideal for the UAE. However, if the US dollar continues to decline, the UAE's economy will continue to pay the price as a result of continued dirham pegging with the weakening dollar." It stressed that such a scenario might require certain practical measures to mitigate the negative impact.
"One way of tacking such a situation would be to tie the dirham to a basket of major currencies, including the dollar. This step would boost the international market value of the dirham. Such a decision would, of course, have some short-term effects. Nevertheless, it would achieve a better economic stability. However, it should be acknowledged that such a decision would be one of the most difficult and complex economic decisions to take. "As mentioned earlier, the decision to de-peg the dollar is not an easy one. It requires a set of alterative monetary policies to check inflation and exchange rate. Similarly, it is hard to assert categorically that a single currency anchor is the best system for the UAE."
Dollar has served GCC well
In its comment on the GCC as a whole, the report considered that the dollar pegging had served member states well for decades.
But it also noted that the pegging was adopted when oil prices were low and the greenback still at the height of its strength.
"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies. GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia.
"With oil windfall entering its fifth year in a row, and with the dollar continuing to decline, it is clear that GCC's monetary polices will face a problem of policy alignment. This problem will definitely affect the single currency union." It warned that a single GCC currency could not be without a decision by the six members to align their monetary, financial, and banking policies.
"This is the single most important objective that needs to be attained now. This alignment may require certain standards in the long-term. These standards include, among others, keeping inflation rate below two per cent at the average, maintaining budget deficit at not more than three per cent of the GDP and keeping the general GCC credit at 60 per cent," it said.
"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies. ...as the dollar continues to fall, the GCC states need to face the repercussion by adopting a unified stand. It should be noted that these states pegged their currencies to the dollar for objectives reasons."
The Dirham peg: Reasons and motives
Objectives and special reasons
Dirham peg has been the bedrock of a stable monetary stability. The economy enjoyed long credibility as a result.
Investor confidence in the local currency maintained
UAE's financial assets in dollars
70 per cent of foreign trade is in dollars
More than 95 of reserves is in dollar
International oil trade is priced in dollars
General motives
The dollar remains the single most important hard currency in the world
It is the currency of international trade
It is the currency of the US, which accounts for about 27 per cent of the world trade
66 per cent of world reserves are in dollars
60 per cent of the greenback is outside the US
Side effects of dollar peg
In view of US economic woes, dirham exchange rate is loosing some of its credibility, a trend that might have negative impact on monetary stability (As in 1977-1976)
That the dirham exchange rate has remained fixed against the dollar will require the Central Bank to be continually ready to intervene in the exchange market. This will require huge foreign assets reserves. With the dollar continuing to decline, future exchanges rate trends will continue to be uncertain. This will cause problems to economic planning
Euro has begun to compete with the dollar at the global level. It is a force to reckon with when considering the exchange rate
De-pegging or no de-pegging?
Reasons for taking the decision
Enhancing the efficiency of monetary policy to regulate economic activities
Curbing inflation and mitigating its effects at the domestic level
Mitigating the effects of dollar depreciation on domestic conditions.
Reasons for deferring the decision
Pegging is justified by many internal and external factors
De-pegging requires alternative monetary policies, which would curb inflation and check exchange rates
Changes in UAE's foreign trade, which helped to contain inflation
Taking risk by adjusting exchange rate is one of the tools for monetary policy
Any major change in the exchange rate will cause financial and monetary unrest in the short term
Available options do not seem attractive (currencies basket/floating, etc)
Difficulty in managing exchange rates in the context of other option
De-pegging requires regional and international consensus (GCC single currency)
De-pegging requires delicate balances
Changes of monetary policies in the UAE look more complex than any other country in the GCC
Future of dollar: further depreciation predicted
The dollar lost 40 per cent of its value since 2000
US monetary policy welcomes more reduction
Dollar weakness reduces cost of US exports
Dollar weakness helps US trade balance
Weakening dollar reduces cost of US assets
There is a global tendency to get rid of the dollar in favour of other currencies
By Nadim Kawach
© Emirates Business 24/7 2008
Tuesday, June 10, 2008
Rising inflation main hurdle to currency union
Rising inflation main hurdle to currency union
By Issac John (Deputy Business Editor)
11 June 2008
DUBAI — Soaring rates of inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union, economists said.
In the wake of GCC Central Bankers breakthrough agreement on Monday setting up a regional central bank, analysts said the prevailing double-digit inflation rates in the UAE and Qatar will continue to be one of the main hurdles in meeting the convergence criterion on inflation, which is a critical aspect of successful currency union.
Marios Maratheftis, Regional Head of Research, Standard Chartered Bank, told Khaleej Times that the most important obstacle for the common currency was the absence of GCC-wide institution. “By 2010 we understand the central bank for the GCC will be in operation, may be the common currency will follow later but for us what is important is the establishment of an institution. I think the development is a breakthrough and very important development indeed.”
According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. "On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points," said Samba, a leading Saudi bank.
To meet the target for inflation, although Qatar has proposed stripping out rents from the inflation measure, it has met a cool response from other GCC members.
Analysts said the currency union presents the GCC with an imperative to define a more appropriate level for their exchange rates to ensure that they establish a realistic starting point.
"A satisfactory initial alignment of exchange rates is an essential, if not sufficient, condition for the viability of a GCC common currency. However, a currency union need not involve a fixed peg to the dollar (nor any other currency) and the project therefore also presents an opportunity to introduce a more flexible regime. This would allow the proposed GCC central bank some control over interest rates, and enable it to manage domestic demand more effectively. The end result would likely be more stable and predictable price growth, laying the foundations for sustainable, investment-led economic growth over the long term," the banks economist said.
Since the other convergence criteria, including limiting budget deficits to no greater than three per cent of GDP and public debt burdens of less than 60 per cent of GDP, now lack relevance given the GCC’s booming economies and robust financial indicators, inflation criterion is the main stumbling block to GCC currency union, analysts point out.
Observing that the most pressing challenge facing GCC economies is inflation, economists said a key factor bearing on skyrocketing price stems from the fixed peg to the US dollar. Another factor stoking inflation is increased government spending which has resulted in rapid liquidity growth across the GCC.
"A third factor contributing to demand pressures is the rapid growth of bank credit to the private sector, reflecting the greatly expanding role of the private sector in the regional economic and investment boom. A combination of promising investment opportunities together with highly liquid financial institutions have propelled annualised rates of credit growth to 35 percent or more across the region," they said
By Issac John (Deputy Business Editor)
11 June 2008
DUBAI — Soaring rates of inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union, economists said.
In the wake of GCC Central Bankers breakthrough agreement on Monday setting up a regional central bank, analysts said the prevailing double-digit inflation rates in the UAE and Qatar will continue to be one of the main hurdles in meeting the convergence criterion on inflation, which is a critical aspect of successful currency union.
Marios Maratheftis, Regional Head of Research, Standard Chartered Bank, told Khaleej Times that the most important obstacle for the common currency was the absence of GCC-wide institution. “By 2010 we understand the central bank for the GCC will be in operation, may be the common currency will follow later but for us what is important is the establishment of an institution. I think the development is a breakthrough and very important development indeed.”
According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. "On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points," said Samba, a leading Saudi bank.
To meet the target for inflation, although Qatar has proposed stripping out rents from the inflation measure, it has met a cool response from other GCC members.
Analysts said the currency union presents the GCC with an imperative to define a more appropriate level for their exchange rates to ensure that they establish a realistic starting point.
"A satisfactory initial alignment of exchange rates is an essential, if not sufficient, condition for the viability of a GCC common currency. However, a currency union need not involve a fixed peg to the dollar (nor any other currency) and the project therefore also presents an opportunity to introduce a more flexible regime. This would allow the proposed GCC central bank some control over interest rates, and enable it to manage domestic demand more effectively. The end result would likely be more stable and predictable price growth, laying the foundations for sustainable, investment-led economic growth over the long term," the banks economist said.
Since the other convergence criteria, including limiting budget deficits to no greater than three per cent of GDP and public debt burdens of less than 60 per cent of GDP, now lack relevance given the GCC’s booming economies and robust financial indicators, inflation criterion is the main stumbling block to GCC currency union, analysts point out.
Observing that the most pressing challenge facing GCC economies is inflation, economists said a key factor bearing on skyrocketing price stems from the fixed peg to the US dollar. Another factor stoking inflation is increased government spending which has resulted in rapid liquidity growth across the GCC.
"A third factor contributing to demand pressures is the rapid growth of bank credit to the private sector, reflecting the greatly expanding role of the private sector in the regional economic and investment boom. A combination of promising investment opportunities together with highly liquid financial institutions have propelled annualised rates of credit growth to 35 percent or more across the region," they said
Saturday, June 7, 2008
GCC central bankers to discuss MU
GCC central bankers to discuss MU
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
7 June 2008
DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.
The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.
"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.
Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.
The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.
At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.
Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.
The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.
"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."
Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.
Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.
An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.
"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.
"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."
Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.
Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.
"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters
Tuesday, June 3, 2008
Qatar must depeg, gov't advisor says
Qatar must depeg, gov't advisor says
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.
"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.
"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."
Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.
"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."
Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.
“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.
Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.
The report said the two Gulf states would move to a currency basket within the next six months.
All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.
Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.
The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.
Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.
Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.
US dodges issue of Gulf depegging
US dodges issue of Gulf depegging
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
advertisement
Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.
Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.
This also reduces their purchasing power for goods denominated in other currencies.
Story continues below ↓
advertisement
Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."
Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.
The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.
Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.
But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.
"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."
Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.
"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.
Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.
"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."
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