The United Arab Emirates pulled out Wednesday of a proposed monetary union being negotiated by the six Gulf nations in a major blow to plans to forge a single currency in the region. "The UAE has decided not to be party to the accord on Gulf monetary union" between the Gulf Co-operation Council nations, the official WAM news agency quotes a foreign ministry spokesman as saying.
"The general secretariat of the GCC was officially informed today," the unnamed official said. The energy-rich GCC groups the UAE with Bahrain, Kuwait, Oman, Qatar and Saudi Arabia. The UAE had expressed reservations over the monetary union after an informal GCC meeting in Saudi Arabia on May 5 decided that Riyadh, which is home to the GCC headquarters, would host the future banking authority.
Oman announced in 2007 that it would not join the scheme. "We believe that with the second-largest economy pulling out, the monetary union project is effectively dead," EFG-Hermes investment bank said in a statement. "It is detrimental... The fact that they will not be involved is a big loss," EFG-Hermes' Dubai-based economist Monica Malik told AFP.
"With Saudi Arabia being the largest economy in the planned union, Riyadh will be the party determining the monetary policy under the current convergence criteria," she added. Saudi economist Ali al-Daqaq also echoed fears that the proposed union will be set back by the UAE decision. "This decision will slowdown, if not abolish, the whole monetary union process, and will slowdown the Gulf economic integration," he said. Kuwaiti economist Hajaj Bukhdour said the UAE withdrawal "will strip the monetary union of its anticipated importance," and delay it by "many years". Malik said that the UAE's response to choosing Riyadh to host the future central bank was not expected to be so strong.
"I was not expecting such a decision. I had expected that the UAE's reservations could possibly delay the process of the union," she said. But the impact of the UAE's decision on its foreign exchange policy, which pegs the dirham to the dollar, is expected to be minimal. "The UAE monetary policy... will not change and will keep the dirham pegged to the dollar," UAE central bank governor Sultan al-Suweidi said in a statement carried by WAM. Malik said Suweidi's statement appears to assure investors that the currency regime will not be affected. "It is a sign that they are not looking to have a currency policy change."
GCC Secretary General Abdurrahman al-Attiyah had said after the Riyadh meeting that the first step towards creating a Gulf central bank would be the establishment of a Riyadh-based monetary council, which would exist during a "transitional phase" in the move towards monetary union.
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