DUBAI, 8 June 2007 — Creating a single currency for six Gulf Arab oil producers could take longer than the initially agreed 2010 deadline, United Arab Emirates Central Bank Governor Sultan Nasser Al-Suweidi said yesterday.
Monetary union would be achieved in three phases with a single currency being the final step, Suweidi said at a conference in Dubai.
“If we achieve the first two stages of monetary union by 2010, that will be enough and sufficient,” he said, taking questions from the audience.
Freeing capital flows among the six states, including Saudi Arabia and Kuwait, and reducing the cost of certain foreign exchange transactions, would precede the single currency, he said.
Moreover, he ruled out UAE’s currency policy shift for the foreseeable future, sending his strongest message yet to investors expecting the dollar-pegged dirham to appreciate.
Markets have been betting delays to a regional monetary union project and the dollar’s decline would tempt some Gulf states to change dollar-pegged exchange rates, especially after Kuwait broke ranks and adopted a currency basket last month.
He dismissed suggestions this could trigger a change in policy on the dirham. “We rule out any change for the foreseeable future,” Suweidi told reporters in Dubai.
“The peg is a very important stability anchor and is part of why the UAE economy has been successful,” he said, of the dirham exchange rate which has been fixed at 3.67275 to the dollar since 1987.
It was the central bank’s strongest signal to investors betting on an appreciation of the dirham since Suweidi stirred up a storm in Gulf currency markets in January by questioning the value of the dollar-pegged exchange rate regime.
Although he has since moved to deter speculation about a change in currency policy, his language has been more nuanced.
Suweidi previously said the UAE would not change currency policy “at this point” or that he would not revalue the dirham “unilaterally”, a promise analysts, including those at Standard Chartered, said he was not bound keep after Kuwait’s move.
Analysts in a Reuters poll in March tipped the UAE as the country most likely to revalue its currency after Kuwait to cope with the fallout from dollar’s slide to a record low against the euro in April.
Deutsche Bank said on Wednesday the UAE was likely to allow the dirham to appreciate by up to 3 percent in the next three months to check inflation and increase purchasing power.
Monica Malik, senior economist at Cairo-based EFG-Hermes investment bank, said a revaluation was now less likely. “There is a reduced possibility for this year after these comments...” Malik said. “But maybe in the medium-term, over two to three years, there’s more likelihood,” she said, adding that an extended decline in the dollar and delays to monetary union were among the factors that could increase chances of a revaluation.
The UAE, Kuwait, Saudi Arabia, Oman, Qatar and Bahrain had agreed to keep their currencies pegged to the US dollar in the run up to monetary union in 2010.
Monetary union would be achieved in three phases with a single currency being the final step, Suweidi said at a conference in Dubai.
“If we achieve the first two stages of monetary union by 2010, that will be enough and sufficient,” he said, taking questions from the audience.
Freeing capital flows among the six states, and reducing the cost of intra-regional foreign exchange transactions, would precede the single currency, Suweidi said. He described the second phase of monetary union as “the reduction or elimination of the cost of exchange cross-rates between our currencies.”
The timetable has been in doubt since Oman announced last year it would not meet the deadline.
Then Kuwait dropped its dollar peg last month, throwing the project into disarray. “This is something they are entitled to do,” Suweidi said. We have no problem with it. We will live with it.”