LONDON • Gulf Arab oil producers are unlikely to decide on a new deadline to launch a single currency until next year as the 2010 target for monetary union becomes “difficult”, Bahrain’s central bank governor said yesterday.
Bahrain, Saudi Arabia and three other states in the world’s biggest oil-exporting region have been working towards monetary union for years, but the project has faced numerous hurdles as economies boom and inflation soars across the region.
“It’s not about putting up arbitrary dates,” Rasheed al-Maraj told Reuters in an interview. “Now we have come to a stage where we have almost completed our draft monetary agreement. This is a major milestone toward reaching our objectives.”
Asked when Gulf states could revise the 2010 target, Maraj said: “I don’t think this is going to be decided this year. Next year we will have a better or clearer picture.”
Saudi Arabia’s Central Bank Governor, Hamad Saud al-Sayyari, told Reuters last week Gulf states would decide on a “feasible” schedule for rolling out the single currency after reviewing the 2010 target at meetings this autumn.
At a meeting in June, Gulf central bankers finalised a draft monetary union deal as well as an agreement to set up the nucleus of a regional central bank.
But rapid economic growth spurred by a seven-fold surge in oil prices since 2002 and inflation that is soaring to record- and near-record peaks were placing hurdles before a 2010 deadline set in 2001, Sayyari said.
Monetary union first hit trouble when Oman chose not to join in 2006 and Kuwait broke ranks, severing its dollar peg in 2007.
Bahrain, the smallest Gulf Arab economy, would likely expand expand 6.5 percent this year and between 6 and 7 percent next year, Maraj said, adding the rapid regional economic growth was a driver of inflation.
OIL SPIKE IMPACT
He said record oil prices were having only a very limited impact on growth, with the economy diversified into financial services, manufacturing and aluminium smelting.
“The main impact of higher oil prices is that it gives the government more to spend and where the oil price is high it also improves confidence in the economy,” he said. “if I was to raise rates by one or two percent it would have no impact on growth.”
Overall, he said rocketing volatile oil prices were unhealthy for economies around the world including the Gulf, although the government was able to use the oil revenues to subsidise food and fuel to limit inflation.
“It’s not in our long-term interest to have oil going upwards and upwards,” he said, adding that oil prices had not been moving on fundamentals. “There is enough oil in the market at present – this is because of worries over the long-term availability as well as geopolitics.”
Dollar pegs in all Gulf states but Kuwait have exacerbated inflation as the US currency tumbled, driving up import costs. But Maraj said there were no plans to move the peg.
Gulf central banks have also been forced to track seven US interest rate cuts since September to defend their pegs, driving real interest rates – the difference between official rates quoted by banks and inflation – into negative territory.
In Bahrain, inflation was 6.2 percent in April, compared with the central bank’s one-week deposit rate of 2 percent and lending rates of 5.25 percent. Maraj said he was happy with the current rate.
“The dollar is only a minor factor in inflation,” he said, blaming high global prices and regional growth. “You are seeing this in all countries... the high oil price is hurting us all.”
Follow us on our social media channels: