The UAE’s decision to opt out of the planned GCC monetary union is a fundamental setback to the planned Gulf single currency, and illustrates a deep concern at the heart of all monetary unions – that of ceding sovereignty over economic and monetary policy.
by Emilie Rutledge | May 20, 2009
The UAE’s decision to opt out of the planned GCC monetary union is a fundamental setback to the planned Gulf single currency, and illustrates a deep concern at the heart of all monetary unions – that of ceding sovereignty over economic and monetary policy.
The announcement from Riyadh that the Kingdom – already home to the GCC Secretariat – will host the GCC central bank, clearly illustrates its desire to exert control over the monetary union’s decision making bodies.
This, of course, is of particular concern to its smaller neighbours, as exemplified by Abu Dhabi’s response. It indicates that in a future monetary union, the Kingdom might attempt to steer future joint economic and monetary policy to suit its own domestic economy.
Objectively speaking, the UAE had the strongest case to host the bloc’s central bank. With its high standards of regulatory quality, excellent banking infrastructure and a critical mass of banking institutions and expertise, the UAE has justifiably earned its international reputation as the Gulf’s financial centre. Indeed, other central banks in the region, such as Kuwait, also appeared to favour the UAE as a ‘safe’ location.
Whether or not the loss of national control over economic and monetary policy is perceived as too burdensome by the smaller GCC states remains to be seen.
With Oman already out of the picture, Kuwait’s peg to a basket and Qatar’s on-off relationship with the Kingdom, could a Bahraini-KSA monetary union take place in 2010? Even this may be unlikely, recalling that Bahrain, not so long ago, forged ahead unilaterally with a US Free Trade Agreement.
For the UAE, the utility of its dollar peg is likely once again to resurface, for it is no longer a requirement of the GCC integration process. A move to a trade-weighted basket peg, à la Kuwait, would perhaps better serve the UAE’s economy.