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GCC central bankers to discuss MU

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