Gulf Central Bankers May Adopt Monetary Union Draft: Week Ahead

By Matthew Brown

Sept. 14 (Bloomberg) -- Central bank governors of five Gulf states will probably approve a new draft accord for monetary union at a meeting in Jeddah, Saudi Arabia, this week, the latest step toward a single currency for the region.

Gulf finance ministers will discuss the draft at the same meeting, scheduled for Sept. 15 and 16. Heads of state may give final approval at a meeting in Muscat, Oman, before the end of the year, said Salim Al Gudhea, head of the monetary union unit at the Gulf Cooperation Council Secretariat General, in an interview.

Progress toward a single currency eases pressure on Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain to revalue their currencies or drop pegs to the dollar after inflation accelerated. The five agreed in 2001 to form a European Union-style monetary union by 2010 to boost regional trade.

Central bankers ``are expected to pass the draft and that is a positive step,'' said Monica Malik, Dubai-based chief economist at EFG-Hermes Holding SAE, Egypt's largest investment bank. This week is ``the easy part. The stages after that will be tricky.''

Contracts to buy dirhams in a year have fallen 3.1 percent since a March 18 high. Saudi riyal forwards dropped 2.2 percent in the same period.

The five states are pushing ahead with monetary union after Oman, the sixth Gulf Arab state, pulled out last year. The agreement allows for the creation of a monetary council, a precursor to the Gulf central bank, the location of which will be decided at the meeting this week.

`Difficult Bit'

The council will be responsible for deciding the level at which the Gulf currency is pegged to the dollar, aligning interest rates, monetary tools and goals.

``Technical issues won't be tackled until the monetary council is set up, and that may be a long way into 2009, depending on how quickly it is ratified by national parliaments,'' said Malik. ``That's going to be the difficult bit and is likely to result in much-greater delays.''

The central bank governors will also vote on whether to create the monetary council after three or five countries have ratified the agreement, Naser Al-Kaud, deputy assistant general for economic affairs at the GCC Secretariat, said by phone yesterday.

``We are suggesting it; I am not sure if they will agree,'' said Al-Kaud. ``It may help start the council sooner.''

Last week, the seven Persian Gulf benchmarks tracked by Bloomberg declined last week. The Dubai Financial Market General Index slumped 9.2 percent. Oman's Muscat Securities Market 30 Index declined 7 percent and Saudi Arabia's Tadawul All-Share Index fell 4.4 percent.

Tamweel PJSC, the U.A.E.'s second-biggest mortgage lender by market value, tumbled 14 percent following the arrest of the company's deputy chief executive officer.

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net