UAE quits Gulf monetary union

The United Arab Emirates on Wednesday abandoned long-held plans to join a Gulf monetary union after objecting to a decision to locate the central bank in Saudi Arabia.

The UAE’s announcement, which followed a formal reservation against the decision earlier this month to base a proposed unified central bank in Riyadh, also highlighted a political rift between the two largest Arab economies.

The six members of the Gulf Cooperative Council – Saudi Arabia, Oman, Kuwait, the UAE, Qatar and Bahrain – have for years planned a monetary union by 2010 but progress has been halting. Oman has already said it will not join the monetary union, and Kuwait broke Gulf ranks and depegged its currency from the dollar in 2007.

“With the UAE now pulling out, the likelihood of a GCC currency coming into existence is increasingly low,” Caroline Grady, Deutsche Bank economist, said in a research note, released on Wednesday.

Saudi Arabia is the most populous Gulf nation, and by some distance the largest Arab economy, but the UAE has the largest financial sector by assets and is considered the most international and open economy in the region. It was the first country to request formally, in 2004, to host the joint central bank.

“This is a matter of principle,” a senior UAE official told the Financial Times. “This move will definitely weaken the proposed currency union, as you’re taking out a third of the GCC economy.”

A UAE source close to the authorities said that the country had also been unhappy by Saudi Arabia’s “conservative and guarded” approach at the recent G20 meeting in London, revealing political differences between the two states, both US allies in the Gulf.

Economists have for a long time said the 2010 target for full monetary union was unrealistic, but many had hoped that the long-delayed decision on the home of the central bank signalled a renewed push towards harmonising fiscal and monetary policy.

“The selection of Riyadh as the home of the GCC monetary authority makes sense given Saudi Arabia’s dominant economic position,” said Matthew Vogel, head of emerging markets research at Barclays Capital.

Kuwait’s finance minister said on Wednesday that his country was still committed to the idea of a common GCC currency. But economists said that the turmoil – and long-standing problems of common statistical measures and regulatory harmony – would likely severely delay the implementation – at best.

“If the Euro is the paragon, then you need mobility of capital, trade and people before you have full monetary union, and further progress has yet to be made on these fronts in the GCC anyway,” said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.

“In the Gulf context, the UAE and Saudi Arabia are like France and Germany, and one of them pulling out is clearly a major spanner in the works,” Mr Gokkent said.

The UAE reiterated that it would maintain its peg to the US dollar, and currency markets had already discounted the chances of monetary union for the foreseeable future, said Mr Vogel.