The planned single currency of the four Gulf countries would be delayed by at least four years, said Dr. John Sfakianakis, chief economist of Banque Saudi Fransi in a note on Monday. “In our view, momentum behind the project is still weak and we believe it could take four to five years before a single currency comes into circulation,” noting that the “divergence of views among GCC states” is a key factor holding back currency union. “Institutional capacity building is also a prerequisite which needs to be addressed,” he said. Saudi Arabia was the first GCC state to ratify the monetary union deal while the other three states - Kuwait, Qatar and Bahrain - are likely to do so in the coming months, the banks said in the note. Once the ratification process is complete, the four countries will establish a monetary council that would act much like the European Monetary Institute (EMI) that preceded the European Central Bank (ECB). A lot of work remains before a Gulf monetary union can reach fruition, especially following its shaky history. In 2001, the six member states of the GCC, agreed to set up a monetary union like that of the European Union. According to the plan, the Gulf currency would be issued on January 1, 2010. But the project was fraught with delays and eventually Oman dropped out of the plan in 2006. In March, the GCC abandoned an initial 2010 deadline for issuing common notes and coins. It said a monetary council would determine a new timetable for the issuance. The UAE, the region's second-largest economy, then dealt the biggest blow to the project to date when it withdrew from the plan in May in protest of the decision to base the regional central bank in Riyadh rather than Abu Dhabi, the bank report said. Moreover, the bank report said a single currency is expected to encourage further trade and financial integration, facilitate foreign direct investment, and foster the development of the GCC into an optimum currency area. GCC countries have achieved virtually unrestricted intraregional mobility of goods, national labor and capital, Sfakianakis said. Prudential regulations and supervision of the banking sector are being gradually harmonized. Intra-GCC imports have more than tripled in size over the past 15 years, although their share in the overall imports remained steady and low at less than 9 percent. He further said in deciding a long-term currency policy for the Gulf currency, the Gulf central bank would need to consider the importance of the oil sector, exports and government revenues. Any currency policy should also take into account the non-oil private sector since “a stronger currency would make exports less competitive but lower the cost of imports. Striking the right balance will be crucial for the region's competitiveness.” When the new currency is created, it's “likely to remain pegged to the dollar in the beginning,” Sfakianakis said.
