Arab states in the Gulf should aim to narrow the gap in their inflation rates before a 2010 target for monetary union, a report said on Tuesday, proposing a depegging from the US dollar. “Inflation should be the priority item on the policy agenda,” said the Dubai International Financial Center (DIFC) in its progress report dubbed “An Assessment of the Progress towards GCC Monetary Union” in the Gulf Cooperation Council (GCC). While stating that the GCC countries remain on schedule to meet the imposed requirements by 2010, the report identifies four key policy issues which need to be addressed for the successful launch of the GMU, namely: q “Firstly, there needs to be an institutional and governance framework to ensure smooth, transparent and effective decisions on the conduct of monetary policy and other central bank policies, including the mode of operation of the GCC Central Bank. q Inflation should be the priority item on the policy agenda: there is need for a change in monetary policy towards inflation targeting, with monetary policy geared to maintaining inflation within an announced target range. q The GCC countries will need to invest in building their statistical capacity, in order to provide harmonized, comparable economic and financial data, to support the GMU and the Gulf Common Market. q The GMU, if it is to be achieved and serve its purpose, needs to be supported by investments in financial infrastructure (including legal and regulatory), payment systems and the development and linkage of money markets and capital markets to ensure a uniform interest rate and the swift transfer of funds throughout the GCC.” However, once these issues are addressed, the report states that the GMU will add significant value to the region's economies: “The GMU will strengthen the commitment of GCC countries to regional economic integration. The GMU should be the central policy anchor, extending the benefits of currency stability to financial markets, industries and citizens, by fostering more intense trade relationships, linking the capital markets and attracting international capital.” The top priority should be “not to alter the commitment to 2010,” said Nasser Saidi, chief economist at DIFC Authority, presenting the report. The document looks at six convergence criteria formulated by a GCC technical committee, “largely inspired by the Maastricht criteria” which regulated the adoption of a common currency by European Union members. These include convergence on inflation rates, interest rates, foreign exchange reserves, fiscal deficits, public debt, as well as maintaining a fixed peg to the US dollar. A windfall of record-high oil revenues has provided GCC countries with large fiscal surpluses, reduced their public debt to modest percentages of economic production, and boosted their coffers of foreign exchange. But inflation - higher than usual in all six member states - has been running exceptionally high in Qatar and the United Arab Emirates, at 13.76 and 11.1 percent in 2007, respectively. In Bahrain, Kuwait, Oman and Saudi Arabia, consumer prices did not exceed single digits last year, although they have hit double digits in Kuwait and Saudi Arabia in monthly data for 2008. “Inflation rates should not exceed the GCC weighted average inflation rates plus two percent in each member country,” the report said, putting the GCC weighted average inflation at 6.91 percent in 2007. GCC interest rates, meanwhile, converge as a result of the currencies' peg to the dollar. Only Kuwait dropped out of the dollar link last year, choosing a basket of currencies. But the peg to the greenback has deprived GCC central banks of the use of interest rates to control inflation, being forced to follow the US Federal Reserve in reducing rates even while their economies are booming. “Pegging to the US dollar is not necessarily the best option to control inflation,” Saidi said. While the dollar peg “provided for monetary and price stability in the past ... (several changes) and the weakness of US dollar ... provide rationale for a change in policy towards inflation targeting,” the report pointed out. GCC leaders decided at a summit in Qatar last December to stick to the 2010 deadline. In January 2008, they set up the Gulf common market, after establishing a customs union in 2003. About 35.1 million people live in the Gulf Cooperation Council countries, although citizens of the member states represent around only 60 percent of the total population while expatriate workers and their families make up the rest. __
