Complex Made Simple

GCC monetary union a red herring, inflation is the main issue

GCC policy makers would be well advised to concentrate their attention of tackling the immediate problem of inflation, while monetary union is something of a red herring unlikely to occur because of political differences, argued Standard Chartered chief economist Gerald Lyons at a briefing of journalists in Dubai.

‘I campaigned for the ‘Britain in Sterling’ campaign to keep the UK out of the euro,’ he said. ‘It was clear then that a monetary union is as much about politics as economics.

‘You can discuss the convergence criteria to link economies in a union as much as you like but the real question is whether you have political and social systems that are aligned to the extent that a monetary union is possible. I leave people to make up their own minds on whether, or not that is the case in the GCC.

‘If it is not then it does not matter what date you discuss for a monetary union, 2010 or 2015. We see a far more pressing need for GCC countries to tackle inflation.’


The Standard Chartered economics team – now bolstered locally by the arrival of the bank’s former Senior FX Strategist Marios Maratheftis and Arabist Mary Nicola – thinks countries like the UAE and Qatar should be looking at revaluation and also replacing the dollar-peg with a basket of currencies like Kuwait.

‘Inflation is now the number one problem for GCC economies and currency revaluation is a curb to imported inflation,’ said Maratheftis whose arrival in the region might suggest that the bank thinks his expertise in foreign exchange may soon be needed by the central banks.

‘If the Fed continues to cut US interest rates, which are inappropriate for the high levels of monetary growth in the GCC and therefore inflationary, then we see an increased chance of individual countries revaluing their currencies, and in time moving to a basket of currencies.’

Currency basket

Upward revaluation of say the US dollar to dirham rate from Dhs3.67 to Dhs4.5, for example, is not the same as moving the dirham to a basket of currencies like that operated by Kuwait. But it would probably be a first step in decoupling the dirham from the dollar.

‘We see non-Western countries increasingly diversifying away from the US dollar,’ added Dr. Lyons. ‘Sovereign Wealth Funds will buy less dollar denominated assets, and currency reserves will be diversified.’

But for Gulf policy makers the need for an anti-inflation strategy is even more urgent, he argued, preferably with currency reform also a part of this agenda. The ‘resource curse’ is when inflation rises to such a level that it starts to destroy the non-resource sectors of an economy, and that is the immediate outlook in the UAE.

‘The authorities need to drain liquidity out of the economy by sovereign bond issuance, increasing bank deposit ratios and asking banks to stop lending so much,’ said Dr. Lyons. ‘We are not saying that it is impossible to tackle inflation but it is the number one problem facing the GCC economies.’

See also:
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