JEDDAH: Central bank governors cemented moves toward monetary union yesterday but said more efforts were needed to curb soaring inflation, which threatens to undermine the project. Bankers of the six-member Gulf Cooperation Council (GCC) meeting here reached an agreement on the charter governing the monetary council that will form the nucleus of a future common central bank.
Qatari Central Bank Gov. Sheikh Abdullah Saud Al-Thani, who chaired the meeting, said the council had “completed 85 percent” of what it needed to achieve a single currency. But inflation across the Gulf has been rising, mainly because of surging demand for real estate as the economy has expanded, spurred by a near five-fold increase in oil prices since 2002.
“Rising inflation will require extra efforts in order to stabilize our economies and provide the appropriate environment in order for monetary union to be launched and to succeed,” Al-Thani said.
New data yesterday showed inflation in one key Gulf country, Qatar, hit a record 16.6 percent in June, while money supply growth in another, the United Arab Emirates, accelerated to 36 percent, signaling more inflation ahead.
“We need to tighten monetary policy to fight inflation but instead, we are forced to loosen because we have to follow the monetary policy of the Fed. We are in completely different ... phases,” said Mahdi Mattar, chief economist at Shuaa Capital.
“If today the Fed decides to cut by 25 or 50 basis points, the countries in the GCC have to follow or they will fall under speculative attack and that will just deepen their predicament.”
The Gulf’s status as a growth region has shielded it so far from any direct impact from the US financial crisis, even if Arab stocks have plummeted in recent days due to fear of fallout stemming from the collapse of Lehman Brothers.
GCC central bank governors said yesterday they saw little systematic risk from the US crisis as their exposure to Lehman and US subprime assets was limited. “At the moment ... I don’t see any risk but this crisis has just started yesterday,” said Saudi Arabian Monetary Agency Gov. Hamad Al-Sayari.
Qatar’s Al-Thani said Gulf central banks had succeeded in resisting calls for them to revalue their currencies or drop their pegs as the dollar weakened.
Yet paradoxically, one way they could further shield themselves from US economic problems is by achieving a monetary union that would finally allow them to peg to a basket of major currencies rather than tie their fate to the greenback.
