GCC Currency: A year before the 2010 deadline, where do we stand?

Nadine Hawa for CNBC, January 2009

Since 2001, when the first steps towards a single GCC currency were taken in what would prove to be a long and winding road, where do Gulf

policy makers stand today?

It hasn’t been a smooth ride, and even though Gulf countries seem ever closer to their deadline, they are still far from reaching their goal.

Complications first arose when Oman, one of the smaller countries making up the 6 member GCC, decided to pull out of the monetary union in 2005, citing its inability to live up to certain conditions. One example it gave was the country’s belief that it could not ensure public debt did not exceed 60 % of GDP. Even though Oman presently does not suffer from a debt problem, in the future, it may need to pile up debt as part of its efforts to generate maximum GDP growth level.

The monetary union faced another bump in the road when Kuwait, in May of 2005, decided to drop its peg to the US Dollar, and adopted a basket of currencies. The reason? It claimed its dollar peg was fuelling imported inflation, which had risen to double digits.

The currency, which it is said will become the world’s most important currency union after the Euro, will offer a wide array of advantages to the adhering members, from boosting intraregional trade, to the removal of internal currency risk.

But every coin has two sides, and the members’ loss of monetary policy independence and exchange rate flexibility are just a few examples of the downsides a single GCC currency would bring about.

One cannot ignore the fact that the financial climate witnessed globally in 2008 was very different to that of the first 7 years of the decade. Might the current downturn in world economies be a pushing force towards economic unity in the Gulf or might it play against it?

At the recent GCC Annual Summit held in Muscat, Gulf Arab states were clear, stating that now more than ever, meeting their deadline was a top priority. They added that the global economic meltdown had been a wake up call, propelling them towards finalizing the plan.

They also highlighted the importance of presenting a strong unified front, especially economically, at a time when the effects of the financial crisis rippled through the region.

But finalizing the plan may take more than just 12 months, as regulations and policies are yet to be established, and certain key criteria’s, such as the question of the peg to the US Dollar or the location of the GCC central bank which will manage the currency, still waiting to be agreed on.

Even the name of the new common currency, for which GCC Riyal, Gulf Dinar, or Khaleeji (which translates into from the Gulf) have all been considered, has yet to be decided.

So should we hold our breath? Probably not. According to most analysts, 2015 seems like a much more realistic target.