Gulf Arab central bankers have agreed a set of monetary and financial targets which they hope will pave the way to unifying their six currencies by 2010, a senior official said on Sunday. Mohammad Mazrooei said the central bankers from Saudi Arabia, Oman, Bahrain, Qatar, Kuwait and the United Arab Emirates agreed to keep government debt below 60 percent of GDP.
They also set limits for inflation, interest rates, foreign reserves and budget deficits, Mazrooei said, but failed to reach a final decision on the powers of a new regional central bank.
"This is significant progress," said Mazrooei, Assistant Secretary-General for Economic Affairs at the Gulf Co-operation Council (GCC), after Saturday's talks. He said GCC finance ministers would discuss the agreement in May.
The mainly oil-rich GCC countries have largely similar economies and have already established a customs union. They plan to set up a common market by 2007 and to unify their dollar-pegged currencies three years later.
But hopes of monetary union by 2010 have been bedevilled by concerns of some central banks about ceding authority to a regional authority, and by oil price fluctuations which cause major volatility in the petroleum-fuelled economies.
US oil prices topped $57 a barrel this month, four times higher than levels in the late 1990s. The six countries which together control half the world's crude oil reserves have lurched in less than a decade from belt-tightening deficits into their biggest boom since the 1970s.
MONETARY TARGETS: Economists say Saudi Arabia, the biggest GCC economy, has cut back government debt as a proportion of gross domestic product from around 119 percent five years ago to around 66 percent - close to the level agreed on Saturday.
Mazrooei said Saudi Arabia and its five neighbours also agreed that inflation should be capped at the weighted average of the six countries, plus 2 percent.
Interest rates should be no more than the average of the lowest three countries, plus 2 percent. And foreign reserves should cover at least 4-6 months of imports, though the agreement on reserves was "not final", he said.
For budget deficits - one of the most difficult challenges because of the annual swings in oil income - the central bankers fixed a limit of 3 percent of GDP, the same as that used in the European Union.
But Mazrooei said they agreed a formula which allowed some flexibility to cushion the impact of any oil price fluctuation.
The six central bank governors also discussed the shape of the new authority which would oversee the unified currency, without reaching a binding decision.
Officials said last year they recommended a model where monetary policy is set by the central bank, with national banks retaining some supervisory and other functions. But they said sensitive sovereignty issues stalled the talks.
"They discussed the authority, which could be like the European Central Bank," Mazrooei said. "They almost came to agreement but they want to know about its responsibilities, jobs, functions."
The United Arab Emirates, which has offered to host a future Gulf central bank, said last year that the Gulf Arab states would probably float their new currency soon after its launch, dropping the peg to the dollar.
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