18/11/2009
KUWAIT/DUBAI, Nov 17,2009
Gulf Arab countries will discuss pegging their planned single currency to a basket instead of the U.S. dollar, a Kuwaiti government official said on Tuesday, putting the greenback's regional status in question.
Kuwait -- the only Gulf Arab state to peg to a currency basket, which includes the dollar -- will host the annual meeting of Gulf rulers in December.
The Gulf Cooperation Council (GCC) has long said the single currency is expected to be linked to the dollar, although Qatar has questioned its riyal peg recently as the dollar fell to 15-month lows against major currencies.
"It is not necessary for the GCC currency to be linked to a certain currency. It could be one currency or a basket of currencies," Kuwait Foreign Minister Sheikh Mohammad al-Salem al-Sabah told parliament.
"And this will be discussed among the Gulf countries."
Kuwait, the world's fourth largest oil exporter, broke ranks with fellow Gulf states in 2007 and dropped the peg in favour of a currency basket to help fight then-soaring inflation.
The other five members of the GCC -- a loose economic bloc comprising Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and Oman -- all peg to the greenback but Oman and the UAE have opted out of monetary union.
The peg issue is gaining momentum again as the dollar retreats and oil prices recover, helping economies in the world's top oil exporting region emerge from a downturn.
Analysts said Kuwait's pitch may find support among Gulf Arab states if the dollar stays weak for a longer period and the common currency is delayed beyond its 2010 target. "Given the fact that the majority of GCC countries are pegged to the U.S. dollar, it seems as more likely a starting point although a lot will depend on when the common currency will be introduced and the U.S. dollar development," said Monica Malik, a senior economist at EFG-Hermes in Dubai.
"Going forward, if you have a structurally weak USD, policymakers will have to look at different options," she said. The dollar peg is a sensitive issue in the region, where top two economies -- Saudi Arabia and United Arab Emirates -- have strong political and economic ties to the United States.
The Gulf Arab countries have adopted fixed exchange rate regimes in the past to stabilise their currencies and import low inflation from the overseas.
The peg came under fire again last week when an adviser to Qatar's ruler said oil producers should be more willing to discuss the viability of linking their currencies to the dollar.
MONETARY UNION
The Gulf monetary union got a boost on Tuesday when Bahrain's lower house of parliament ratified the law with the process seen wrapped up by next week.
"Bahrain is trying to end the process before the Kuwait summit," Bahraini MP Jasim Ali told Reuters.
The project is seen clearing the upper house by Monday, Ali said. Bahrain's king is expected to approve the deal ahead of his meeting with fellow Gulf rulers on Dec. 14-16.
But in Kuwait, parliamentarians on Tuesday delayed voting on monetary union to Dec. 8, saying they needed more time to assess its economic implications.
Only Saudi Arabia, the world's top Arab economy, has ratified monetary union so far.
"The GCC currency is not tomorrow or the day after. This needs time and sufficient time," Kuwait Finance Minister Mustapha al-Shamali told the parliamentary session.
Last month, finance ministers and central bank governors from the Arab Gulf called on Kuwait, Qatar and Bahrain to ratify the project by the end of the year. [ID:nLH615644]
"The postponement has more to do with the dynamics of Kuwaiti politics rather than qualms about the monetary project by the government," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh, reports Reuters.
