BY ISSAC JOHN (Chief Business Reporter)
14 January 2007
DUBAI — The UAE Central Bank said a simpler form of GCC monetary union would take place as planned by 2010, but ruled out the possibility of setting up a single central bank for the Gulf region.
Instead of a single central bank, GCC Central Bank governors will soon be discussing two alternatives, which could include proposals to model the monetary union on the US Federal Reserve System, according to the Middle East Economic Digest (Meed).
"You don't need (a single central bank) if monetary policy issues can be decided by the governors," UAE Central Bank Governor Sultan bin Nasser Al Suwaidi was quoted by Meed in its latest issue. There are many models for Monetary Union and member nations are working on a model which does not require a common GCC Central Bank.
Suwaidi, according to Meed, was critical of a European Central Bank feasibility study that included a key proposal to eliminate member state's central banks and the formation of a single institution for the monetary union. "The study suggested a more comprehensive monetary union that went miles beyond the GCC common market and even further that European monetary union. The Omanis clearly rejected it," Al Suwaidi was quoted as saying. He was referring to Oman's recent announcement that it was not prepared to meet the 2010 deadline.
"There is no use putting down a track 100 miles long if you are not going to run that distance," the UAE Central Bank chief was quoted by Meed.
The Governor said many countries are in different stages of economic development and have different levels of preparedness. Recently, Al Suwaidi said the UAE had started "in a limited way” to sell part of its dollar reserves as part of a plan to expand the country's holding of euros to 10 per cent of the total from 2 per cent.
The UAE state is among oil producers including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is currently priced in dollars, in the 12-nation currency. The total value of the UAE's current reserves is $24.9 billion, 98 per cent in dollars and two per cent in euros, Al Suwaidi said. Mixed opinions are being expressed by the Middle Eastern central banks on the issue. While the UAE and Qatar, followed by the Kingdom of Saudi Arabia are seriously considering shifting reserves from US Dollar to Euro, Bahrain and Oman are still keeping faith on US Dollar, but are open to shift.
Currently, all the Gulf countries hold over 70 per cent of their reserves in US dollars. The six Gulf central banks together hold more than $250 billion in reserves.
At a recent gathering of central bankers in the UAE, the Saudi central bank governor said stability was a priority in his policy on asset holdings. Other central bankers said they were looking at diversifying reserves estimated at around $50 billion. It is reported that already, over the past couple of years, most members of Opec have slashed the proportion of deposits held in US Dollars from 75 per cent to 61.5 per cent.
Hamood Sangour Al Zadjali, Executive President of Oman’s central bank, which keeps 70 per cent of its reserves in US Dollars and the rest in other currencies, however said the return on the US Dollar is higher than on other currencies. "It makes sense to be invested in the US Dollar as long as the (currency) peg is there.” Rasheed Al Maraj, Governor of the Bahrain Monetary Agency, also expressed similar sentiments. “We are heavily invested in US Dollar-based assets, and that is our position. We are maintaining (that) same policy.” Qatar’s central bank Governor said that the bank could hold up to 40 per cent of its foreign exchange reserves in Euros.
