Six oil-exporting Arab Gulf states can achieve their goal of a single currency by 2010, but the move is unlikely to jump-start regional trade and merger activity, bankers and economists said on June 23. Political will is the main requirement for the six Gulf countries to meet their 2010 deadline, but legal blocks and limited diversification away from the energy sector may mute its economic impact, speakers at an Arab banking conference said.
Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates - who together make up the Gulf Co-operation Council (GCC) - agreed at the start of the decade to unify their currencies, which are currently pegged to the dollar.
"I personally believe it can be achieved," said Abdulhadi Shayif, General Manager of Saudi Arabia's National Commercial Bank, the kingdom's largest bank in terms of capital.
"The GCC countries have one language, one religion, homogeneous economies that all depend on oil ... there is more to unite them than to separate them. In my opinion it's much, much easier than Europe," he told Reuters.
If the union goes ahead, it will create a currency area encompassing 32 million people, an annual economic output in excess of $300 billion and much of the world's oil exports.
"The regional monetary integration initiative is, in my view, a quite astonishing development," Deutsche Bundesbank board member Hans Georg Fabritius told the Frankfurt conference, saying it was the most important project of currency union going on in the world after the introduction of the euro in 1999.
But while Fabritius said the euro had boosted trade within the euro zone by at least 10 percent, bankers were less confident there would be a big growth in trade for the Gulf.
Even in the wider Middle East and North Africa region, intra-regional trade only makes up 8 percent of total trade.
"It's a gradual process," Joseph Torbey, Chairman of the Union of Arab Banks, told Reuters. "Limited trade is not a currency issue. A unified currency is not a major issue in developing intra-Arab trade. The issue is a similarity of production."
Torbey said that although Gulf countries were investing in industry and services to provide income when the oil runs out, they still depended on oil exports and had few goods and services to trade with each other.
R. Seetharaman, Acting General Manager of Qatar's Doha Bank, was a bit more optimistic, hoping that better economic policy in the run-up to monetary union would pay dividends.
"It's a big opportunity for GCC states to unify the monetary policy and fiscal discipline so that along the line economic reforms can benefit the common man," he told Reuters, adding that it was important the move had popular political support.
He also hoped that it would speed up consolidation among the Gulf region's many small banks. "You have to consolidate to survive. You have 200 banks in the region. Do you need that for a market of this scale? No," he said.
Torbey said that up to now, differing legal regimes had prevented cross-border banking mergers.
A common currency might also give the Gulf countries an opportunity to reconsider their peg to the dollar.
Dresdner Bank economist Rainer Schaefer, an expert in emerging markets, said the new currency would benefit from being pegged to a basket of major trading partners' currencies.
"A currency basket would be a real advantage. When you look to the trade structure these countries have, most of the exports are invoiced in US dollars, but when you look at imports roughly 45 percent are coming from Euroland," he said.
Currently Gulf economies get a windfall when the dollar appreciates, but when the euro is strong against the dollar they lose out, he said. But any change was at least five years away, Schaefer forecast.
Torbey was more sceptical, saying the peg would last as long as oil was priced in dollars.
"If you are lost in the desert and need to be rescued ... if you have dollars everyone will accept that. If you offer another currency ... people are not so sure."