Gulf Monetary Union: on track in spite of delay

The precedent of the European Monetary Union highlights the critical role of a proper institutional driver as now embodied in the GCC Monetary Council. Moreover, the political will now exists to keep the delay to a minimum while ensuring that the monetary council keeps the project on track.

Commenting on the GCC's statement on GMU this week, Dr Jarmo T. Kotilaine, NCB Capital's Chief Economist, said,

"Having stuck with the fixed exchange rate through the period of heightened inflationary pressures, the authorities are likely to want to introduce the new currency before other factors come to challenge the economic convergence process. The greatest threats in this regard come from the differential fiscal ability of the GCC countries to deal with the downturn."

In view of this, he believes that the Gulf governments have every incentive to push through with the introduction of the Union as soon as possible, using it as a basis for introducing greater exchange rate flexibility and thereby maintaining competitiveness. Taken in combination with other government initiatives, such as the ambitious ongoing diversification efforts, the single currency has the potential to "kick-start" economic integration in the Gulf.

Dr Kotilaine continued, "The introduction of a single currency is in many ways the beginning, not the end, of the integration process. Establishing a basic monetary union is theoretically easy in the Gulf, given the years of dollar pegs and the link to the US monetary stance this has entailed. At a most basic level, a union would merely formalize an already extant arrangement and make it irreversible."

By going further and creating a genuine single market, the GCC countries will create enormous opportunities at home while also further boosting the global standing of this rapidly growing economic block. Not only would such a process encourage M&A activity, cross-listings and greater trade, it would also have the potential (judging by the European precedent) to create powerful pan-regional corporations and finance houses with the ability to adopt an increasingly global footprint or at least enhanced global competitiveness.

He concluded, "In that sense, the GMU holds the potential to significantly contribute to the emergence of the Gulf as an economic powerhouse of truly global importance."