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Dubai: The meeting of the GCC central bank governors in Saudi Arabia that came to an abrupt end late on Tuesday, without arriving at any clear decision on the 2010 deadline to achieve monetary union, has deepened the doubts about GCC states' ability to meet the various fiscal convergence criteria within the deadline.
"Although the governors' meeting called on the member states to expedite measures to meet the target deadline, it stopped short of reaffirming the feasibility of the 2010 deadline, especially in the context of Oman clarifying its inability to stick to the original schedule and Qatar disagreeing with the criteria for common inflation targets," said a Dubai based currency market analyst.
Six central bank governors made little progress on monetary union criteria, as some members including Qatar are yet to agree on how to measure the inflation target. Kuwait and the UAE have also voiced concern about inflation, as the dollar fell around 10 per cent against the euro last year, driving up the cost of some Gulf imports.
Analysts said yesterday that the governors' meeting has achieved little except creating doubts about the feasibility of the original schedule of the currency union and the future of the dollar peg of GCC currencies. Despite the assurances from Saudi central bank chief Hamad Saud Al Sayyari that all member states will stick to the dollar peg until the currency union is achieved in 2010, Dubai base currency market players said they expect the GCC to miss the target and revalue their currencies within the dollar peg.
Over the past few years, the nominal exchange rates of Gulf currencies have depreciated in line with the US dollar while the rate of consumer price inflation has climbed. This has fuelled debate about the correctness of the current exchange rate regimes. According to analysts, the most likely option for GCC is an eventual upward revaluation within the dollar peg. This would mean not only of an appreciation of Gulf currencies but also the potential move to a more flexible exchange rate regime.
According to a recent Deutsche Bank report, the lack of fiscal convergence is one of the trickiest aspects of achieving monetary union in the GCC by 2010. In the economic aspects of convergence, the GCC also face several institutional requirements to adopting a common currency. The GCC countries have (preliminarily) agreed on five convergence criteria that are largely based on Europe's Maastricht criteria covering the budget deficit, government debt, inflation and interest rates.
An inflation target of no more than two per cent above the average for the six states is the most contentious among the European Union-style convergence criteria. Most countries prefer to measure headline inflation but Qatar is insisting on the use of core inflation, stripping out the impact of rents, which soared last year.
Interest rates: Cut on certificates of deposit is routine - UAE
A UAE Central Bank official said yesterday that interest rate cuts on certificates of deposit was a routine practice that is undertaken by the bank on a daily basis.
And Saif Hadif Al Shamsi, executive director of the Exchequer Department at the bank, said that certificates of deposit had increased from Dh34 billion to Dh55 billion since the beginning of the year. He added that interest rate adjustments were dependent on two key factors, namely supply and demand equation and volume of liquidity in the market.
- WAM
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