There is a widespread feeling in Gulf banking circles that the single currency project will not meet its 2010 launch, despite a solemn declaration from finance ministers last December establishing an executive monetary union council tasked with creating a central bank.
It is true that the project has run into headwinds: Notably the global financial crisis of a scale not seen for perhaps a century and the oil price collapse that has brought the oil boom to an abrupt end.
This is damaging the prospects of meeting the convergence criteria for the new money, whose name has not been announced although the khaleeji is the front runner for the new global currency. Khaleeji means ‘from the Gulf’ in Arabic.
Deficit problem
For monetary union, the GCC [Gulf Cooperation Council] demands deficits no larger than five per cent of GDP. It seems inevitable that in a global financial crisis the oil states will want to revert to their traditional contra-cyclical deficits.
Other criteria stipulate interest rates must not diverge by more than two per cent, FX reserves should be greater than four months of exports, and public debt-to-GDP should not exceed 60 per cent.
However, any project for monetary union is as much a political as an economic action, for the true purpose is to promote greater integration and cooperation in a region. The hope is this political agenda will have long term beneficial social and economic consequences.
That is why there is probably still room for optimism that the GCC single currency project will make further progress. The global financial crisis has underlined the need for GCC countries to work harmoniously together to develop their own national welfare in the face of a world recession.
Unity goal
Bad times can push people together into alliances for the common good, and perhaps the single currency will become a unifying totem for the GCC.
Certainly standing firm and holding onto the U.S. dollar pegs might prove to be a big mistake as the swelling budget deficits of the United States are likely to exceed anything required in the Gulf, and result in wholly inappropriate monetary conditions.
There is also a growing realization that the future of the GCC lies with its energy customers in the East and not the West. But the most simple rationale for a GCC single currency is to avoid the fate that awaits the US dollar and to establish a strong commodity backed money for the region.
Gold
Given the traditional weight placed on gold as a store of value it would seem only to be expected that gold should play a part in this money. And perhaps this is inevitable anyway as Saudi Arabia holds some of the world’s largest gold reserves.
These are challenging times for Gulf central banks and a combination of self-interest, self-reliance and a desire for a new regional identity ought to keep the single currency project on track.
