article dated 2008
Gulf unified currency will be one of top five
The planned GCC unified currency will be one of the world's five major currencies, says an economic expert.
And it will be used as a reserve currency by global central banks, according to Nasser Al Saidi, Chief Economist at the Dubai International Financial Centre.
He said international investors and central banks around the world would want to hold assets denominated in the Gulf currency as both a safe haven and a hedge against oil price shocks and inflation.
Al Saidi was speaking at a presentation of a DIFC report proposing the establishment of a Gulf Central Bank and a unified GCC currency.
"This currency would be strong and trusted," he said. "The GCC has strong fundamentals, especially the similarity between economies in member countries. The reserves of oil and gas in the region today are equal in value to the capitalisation of global capital markets. The unified currency will be attractive to the world economy."
He said there were several ways to achieve Gulf monetary union but creating a unified central bank was the most attractive idea. Both the markets and the public would regard as credible the creation of an organisation that was an effective counterpart of other major international central banks.
"Credibility requires a Gulf Central Bank to be viewed as a strong, independent and well managed institution with clear political backing and full commitment. A strong bank will become the voice of the GCC on global economic issues and look after the interest of its member countries in global markets and institutions.
"The GCC has huge liquidity due to increasing oil revenues. This liquidity is being invested outside the region in other currencies and by creating a Gulf Central Bank and a unified currency this liquidity will return and be invested in the region. Also, international capital will flow to the region to be invested in the new currency."
Al Saidi explained the creation of a new strong currency, whose stability was guaranteed by oil wealth and, increasingly, by financial wealth, would attract sizeable capital inflows from across the world and inturn provide a safe haven for investors when commodity prices spiked or security tensions arose.
The release of the report came ahead of a meeting of GCC economy and finance ministers in Saudi Arabia to discuss proposals for the implementation of Gulf monetary union. But Al Saidi ruled out any attempt to influence the meeting.
"The DIFC has great interest in the issue because the centre is a regional entity and creating a unified Gulf currency is very important for our expansion as the single currency will be effective in attracting global investments to issue bonds, sukuk and other securities in this currency.
"The report does not reflect the opinions of the DIFC Authority or any government or governmental authority, but it outlines a number of possible central bank structures and monetary policy voting formulas, as well as other elements vital to setting up a well-governed central bank.
"It recommends creating a new Gulf Central Bank with its own staff and administration. This would be the most effective method, as well as the most welcomed and credible in regional and global markets," he said.
The report says a GCB could be set up and in operation by 2009 to prepare the way for the currency's introduction and to test and fine-tune the bank's decision-making mechanisms.
While financial markets do not expect a single currency to be implemented by the 2010 deadline, the report says the target is still feasible and largely a matter of political will.
Al Saidi said the launch of a Gulf currency could be postponed for three years.
The report says a GCB should be managed by an executive board, with the governors of national central banks and monetary authorities joining board to form a monetary policy committee, which would be the main decision-making and policy-making body.
The report say a fixed peg with the US dollar should be maintained as part of the criteria for monetary union despite increasing demands for depegging or currency revaluation. "A peg with the dollar is not the great issue," said Al Saidi. "Increasing inflation in the GCC is the real one and should be controlled through monetary policy.
He stressed inflation in the GCC should decline to an average of two per cent annually, within a margin of 1.5 per cent up and down.
"While a fixed peg to the US dollar provided for monetary and price stability in the past, structural changes, growing economic and trade diversification combined with and weakness of the US dollar on international markets provide the rationale for a change in policy towards inflation targeting, with monetary policy geared to maintaining inflation within an announced target range."
He said the new currency could be pegged to the dollar when it was launched, but the Gulf Central Bank could then have a right to de-peg with the greenback and shift to a basket of currencies.
"The GCC should act as a monetary bloc to counter the winds of globalisation, international financial turmoil and widespread volatility of commodity and financial markets. Monetary union would help move the GCC from a situation in which they do not enjoy any monetary autonomy to an arrangement in which monetary policy can be more readily tuned to countering inflation, addressing economic fluctuations, adapting to business cycle developments and reacting to changing global economic conditions," Al Saidi said.
A Gulf Central Bank with a monetary policy geared to targeting inflation would generate investor confidence in GCC financial markets.
The report considers the much-discussed issue of where a Gulf Central Bank should be headquartered and introduces ideas of decentralisation.
It says some central bank departments could be located away from the base, mitigating the impact of the headquarters' location.
However, the DIFC says it makes sense for the central bank to be located in a city with a sizeable financial market, a good banking network, international transport, communications and telecommunications infrastructure.
September 2008
The planned GCC unified currency will be one of the world's five major currencies, says an economic expert.
And it will be used as a reserve currency by global central banks, according to Nasser Al Saidi, Chief Economist at the Dubai International Financial Centre.
He said international investors and central banks around the world would want to hold assets denominated in the Gulf currency as both a safe haven and a hedge against oil price shocks and inflation.
Al Saidi was speaking at a presentation of a DIFC report proposing the establishment of a Gulf Central Bank and a unified GCC currency.
"This currency would be strong and trusted," he said. "The GCC has strong fundamentals, especially the similarity between economies in member countries. The reserves of oil and gas in the region today are equal in value to the capitalisation of global capital markets. The unified currency will be attractive to the world economy."
He said there were several ways to achieve Gulf monetary union but creating a unified central bank was the most attractive idea. Both the markets and the public would regard as credible the creation of an organisation that was an effective counterpart of other major international central banks.
"Credibility requires a Gulf Central Bank to be viewed as a strong, independent and well managed institution with clear political backing and full commitment. A strong bank will become the voice of the GCC on global economic issues and look after the interest of its member countries in global markets and institutions.
"The GCC has huge liquidity due to increasing oil revenues. This liquidity is being invested outside the region in other currencies and by creating a Gulf Central Bank and a unified currency this liquidity will return and be invested in the region. Also, international capital will flow to the region to be invested in the new currency."
Al Saidi explained the creation of a new strong currency, whose stability was guaranteed by oil wealth and, increasingly, by financial wealth, would attract sizeable capital inflows from across the world and inturn provide a safe haven for investors when commodity prices spiked or security tensions arose.
The release of the report came ahead of a meeting of GCC economy and finance ministers in Saudi Arabia to discuss proposals for the implementation of Gulf monetary union. But Al Saidi ruled out any attempt to influence the meeting.
"The DIFC has great interest in the issue because the centre is a regional entity and creating a unified Gulf currency is very important for our expansion as the single currency will be effective in attracting global investments to issue bonds, sukuk and other securities in this currency.
"The report does not reflect the opinions of the DIFC Authority or any government or governmental authority, but it outlines a number of possible central bank structures and monetary policy voting formulas, as well as other elements vital to setting up a well-governed central bank.
"It recommends creating a new Gulf Central Bank with its own staff and administration. This would be the most effective method, as well as the most welcomed and credible in regional and global markets," he said.
The report says a GCB could be set up and in operation by 2009 to prepare the way for the currency's introduction and to test and fine-tune the bank's decision-making mechanisms.
While financial markets do not expect a single currency to be implemented by the 2010 deadline, the report says the target is still feasible and largely a matter of political will.
Al Saidi said the launch of a Gulf currency could be postponed for three years.
The report says a GCB should be managed by an executive board, with the governors of national central banks and monetary authorities joining board to form a monetary policy committee, which would be the main decision-making and policy-making body.
The report say a fixed peg with the US dollar should be maintained as part of the criteria for monetary union despite increasing demands for depegging or currency revaluation. "A peg with the dollar is not the great issue," said Al Saidi. "Increasing inflation in the GCC is the real one and should be controlled through monetary policy.
He stressed inflation in the GCC should decline to an average of two per cent annually, within a margin of 1.5 per cent up and down.
"While a fixed peg to the US dollar provided for monetary and price stability in the past, structural changes, growing economic and trade diversification combined with and weakness of the US dollar on international markets provide the rationale for a change in policy towards inflation targeting, with monetary policy geared to maintaining inflation within an announced target range."
He said the new currency could be pegged to the dollar when it was launched, but the Gulf Central Bank could then have a right to de-peg with the greenback and shift to a basket of currencies.
"The GCC should act as a monetary bloc to counter the winds of globalisation, international financial turmoil and widespread volatility of commodity and financial markets. Monetary union would help move the GCC from a situation in which they do not enjoy any monetary autonomy to an arrangement in which monetary policy can be more readily tuned to countering inflation, addressing economic fluctuations, adapting to business cycle developments and reacting to changing global economic conditions," Al Saidi said.
A Gulf Central Bank with a monetary policy geared to targeting inflation would generate investor confidence in GCC financial markets.
The report considers the much-discussed issue of where a Gulf Central Bank should be headquartered and introduces ideas of decentralisation.
It says some central bank departments could be located away from the base, mitigating the impact of the headquarters' location.
However, the DIFC says it makes sense for the central bank to be located in a city with a sizeable financial market, a good banking network, international transport, communications and telecommunications infrastructure.
September 2008
