JEDDAH, 26 October 2007 — The Gulf Cooperation Council (GCC) ministers of finance and economy and central bank governors will hold their 74th meeting here tomorrow and are scheduled to review a number of topics pertaining to joint economic cooperation, SPA news agency website said yesterday.
The meeting comes amid surging inflation in the region, which analysts say are due to weak dollar, among others.
Observers said that the meeting will also touch on the timetable for a single currency plan which has been dragging on for some time.
Kuwait has already reneged on a pledge made with the other five members to keep its currency pegged to the tumbling dollar to prepare for monetary union. Divisions among the other five over inflation targets at the last meeting of policymakers fired intense market speculation that they would follow, observers said.
With the dollar at record lows, regional inflation at decade highs and central banks facing the prospect of tracking more US interest rate cuts, the central bank governors and finance ministers will be hard pressed to maintain a united front at the meeting tomorrow and Sunday, analysts said.
“Divergence is already occurring in fighting inflation and interest rate policies,” said Koceilas Maames, African and Middle East Economist at Calyon Bank in London.
“I believe this divergence will continue with forex policy and we will be watching for signals of change in the exchange rate regime,” he said.
The monetary union deadline began slipping when Oman opted last year not to join by 2010.
Kuwait broke ranks with its neighbors and adopt a basket of currencies in May.
A single currency is unlikely even by 2015, United Arab Emirates central bank governor said in remarks published this month.
“A statement announcing delay...would be read as evidence that the Gulf states are preparing to adopt more independent responses to the increasingly acute challenges they are facing,” HSBC Middle East economist Simon Williams said in Dubai.
“Rising inflation, dollar weakness, low US rates are having a direct impact on the real economy and the market will be watching the meeting for signs of their response,” he said.
Apart from Kuwait, the Gulf states agree that allowing their currencies to appreciate against US is not an option for now. At the last meeting of central bank governors in Saudi Arabia last month, they could agree about little else.
The six said they would fashion separate responses to any US interest rate cut.
When the Federal Reserve cut rates on Sept. 18, Saudi Arabia, Oman and Bahrain declined to follow, choosing to ride out pressure on their currencies rather than stoke inflation at home. The Saudi riyal hit a 21-year high on the news. Qatar and UAE, the two countries with the region’s highest inflation rates, cut some key rates along with Kuwait, to help deter bets on currency appreciation.
With the US economy faltering after the mortgage-market meltdown, the 50-basis point cut on Sept.18 is unlikely to be a one-off test of the Gulf’s commitment to dollar-pegged exchange rates.
Central bankers of UAE and Qatar have repeatedly ruled out a unilateral revaluation as have the Saudis, Bahrainis and Omanis.
“I think there are discussions on doing this multilaterally,” Marios Maratheftis, regional head of research at Standard Chartered Bank, said.
“Long term, it does make more sense to have a peg to a basket of currencies rather than the dollar.”
The Federal Reserve is expected to cut US interest rates again by another 25 basis points next week in an effort to bolster the economy. That perspective can provide some support for the currency on the calculation that a stronger economy will ensure the dollar remains an attractive investment proposition.
