Oman opts out of the Gulf's single currency monetary plan

The much-talked about Gulf Cooperation Council's (GCC) plans to start the single currency in January 2010, initiated at the GCC 2001 summit in Muscat, may have hit a roadblock with Oman's decision to unilaterally opt out of the Gulf monetary union.

The GCC, established in 1981 to enhance economic, defense, and political cooperation among its six state members, has become one of the world's most prominent sub-regional organisations, with Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates who together possess nearly half the earth's proven petroleum reserves, as its members.

Yousuf Bin Alawi, Oman's minister in charge of foreign affairs said Oman has no intention of joining the Gulf monetary union.

Arabic daily Al Bayan, quoting Bin Alawi reported that Oman will not join the monetary unity project in 2010 and "not even in 2100". However, he clarified that Oman would not obstruct the monetary unity project, which was started at the GCC 2001 Summit, despite the GCC statute stipulating that unanimity was a prerequisite for such a project.

He said that the five other GCC states were going ahead with the monetary unity project and issuing the single currency.

Interestingly, not all GCC states share a common currency peg while Kuwait pegs its currency to a basket of currencies dominated by the dollar, all the others peg their currencies directly to the dollar.

Oman feels the proposed GCC currency has no benefits as it would not replace the other strong global currencies, and that the country would loose out on the advantages of those currencies.

"This project was not thoroughly studied," Bi Alawi told the paper, saying no studies were done that implied the single currency would have economic and strategic advantages, "but our brothers believe the single GCC currency would have such advantages."

Comparing Oman's stand to that of the UK, which opposed  the euro, is now said to be reevaluating its earlier stand. He said when the EU set up the single currency, EU countries had strategic goals, unlike the GCC bloc.

Oman is the poorest member of the GCC and for the first time since 1980, recorded its highest growth with gross domestic product of  4.9 billion rials or $12.73 billion in the first quarter of 2008, up 42.9 per cent over the same period of 2007.

Oman's oil sector registered 2.5 billion rials of revenue in the first three months of this year, representing a record growth of 60.8 per cent over the same period of 2007.

However, Oman's economy constitutes an insignificant per cent of the GCC's total GDP. The possible reasons for Oman opting out may be conflict of interest on the future choice of exchange rate regime for the unified currency and its financial partnership with its economically more affluent neighbours to improve its financial status.

Gulf Central Bank
In its 15 September 2008 report, The Dubai International Financial Centre (DIFC) outlined the proposed structure of Gulf Central Bank, ''The GCB could be formed 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,'' under The Institutional Framework of the Gulf Central Bank.

While financial markets don't expect the common currency to be implemented by the deadline, the report says 2010 is still feasible and ''largely a matter of political will.''

It recommends creating a new Gulf Central Bank (GCB) with its own staff and administration, which would be the most effective, as well as the most welcomed and ''credible'' in the eyes of regional and global markets.

Significantly, the report notes that international investors and central banks around the world would want to hold assets denominated in the new Gulf currency, as both a safe haven and a hedge against oil price shocks and inflation. It says the new currency would ''clearly be among the five major currencies in the world''.

On 17 December 2008 DIFC published an economic note stating that the GCC Common Currency created by the GCC Monetary Union would be pegged to a basket of global currencies comprising the US dollar, the Euro, the Japanese yen and the British pound.

It further suggested that ''while the peg of GCC currencies to the US dollar should be maintained for the time being, the new unified currency should be pegged to a basket of currencies at the launch of the Gulf Monetary Union on 1 January 2010.''

Dr Nasser Al Saidi, chief economist, Dubai International Financial Centre Authority, said in the note, "The historic GCC Monetary Union will need to be accompanied by a re-assessment of the exchange rate policy that links the currencies of GCC member states to the US dollar.

Managing exchange rates against a basket of currencies rather than a single currency will allow adequate flexibility to tailor monetary policy that can address domestic conditions and withstand external shocks.

"The GCC Common Currency can be an important building block of the emerging post-Bretton Woods global financial architecture. The Gulf Central Bank, (GCB) and currency union in the GCC will be crucial in helping member countries face up to the challenges posed by globalization and the current international financial turmoil."

The International Monetary Fund (IMF) has encouraged the GCC's single currency move  and the adjustment exchange rates, which would help bring down inflation.

Institute of International Finance has projected the GCC countries GDP to slow down to 4.2 per cent in 2009 from 5.7 per cent in 2008.

The wake of the global financial crisis, decline in oil prices, production cut due to slow demand, tighter credit conditions may have motivated the GCC to push the common currency platform to start by January 1, 2010. But with the existing hitches one has to see how DIFC will be able to meet the proposed deadline.