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Rising inflation threatens to derail common currency plan.

It seems that central bank chiefs in the Gulf Cooperation Council (GCC) are determined to make some progress, no matter how small, towards the ambitious project of monetary union by 2010. This was clear during the extraordinary meeting of the committee of governors of monetary agencies and central bank governors held last week in Doha.

The central bankers intend to create what is described as a nucleus for a joint central bank. The proposal calls for setting up a monetary council or authority, which in turn should serve as a forerunner to a common central bank. Still, the GCC's fin-ance ministers must approve the draft during their scheduled meeting on September 17 in the Saudi port city of Jeddah.

The bank chiefs avoided committing themselves to having a single common currency by 2010. Still, member countries must ratify the proposal in order that the monetary council commences its activities.

Clearly, the central bankers plan to change the argument from that of having a full-fledged monetary union by 2010 to that of having some institutions relating to the ambitious functioning by the target date. Referring to 2010, the governor of the central bank of Qatar, Shaikh Abdullah Bin Saud Al Thani, made it clear by saying: "We are not talking about the currency."

Implementation of the ambitious monetary union project requires member countries adhering to five conditions dealing with fiscal and monetary standards. These are: Limiting public debt to 60 per cent of gross domestic product (GDP); restricting budget deficit to three per cent of the GDP; limiting inflation to the average rate in member states plus two per cent; limiting interest rates to the lowest rates in member countries plus two per cent; and ensuring that the reserves cover import bills of four months.

Ostensibly, GCC central bankers are using the ever growing inflationary pressures as an excuse for possible delay of a monetary union by 2010.

Soaring inflation could delay the common currency project and is leading to disagreements about the launch. UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi pointed out that inflation is causing differences of opinion. He went on to suggest that the inflation factor could defer issuance of a single currency by 2010.

Nevertheless, high inflation was not a concern only a few months ago. The Qatari central banker argued in April during the 45th meeting of the committee of governors of monetary agencies and central bank governors that the monetary union project would be implemented regardless of inflationary pressures. At the time it was suggested that Shaikh Abdullah's comments were designed to dampen market fears. Yet these fears turned out to be true, one way or the other.

Serious concern

To be sure, the inflation factor is a serious concern when it comes to meeting one such condition attached to the monetary union project, namely limiting that to the average rate in member states plus two per cent. According to the International Monetary Fund, inflation rates amounted to 14 per cent, 11 per cent and 4.1 per cent in 2007 in Qatar, the UAE and Saudi Arabia, respectively.

Accordingly, the inflation phenomenon is threatening to derail the much discussed and anticipated project aimed at integrating GCC economies. Worse, there seems to be no end in sight to inflationary pressures.

Not long ago, the IMF raised its estimate for average inflation in the GCC in 2008 from 6.1 to 7.1 per cent. If any thing, the GCC countries have no choice but to adjust to ever rising inflation.

- The writer is a Member of Parliament in Bahrain.

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Publication:Gulf News (United Arab Emirates)
Date:Jun 15, 2008
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