Kuwait and other Gulf countries are still committed to the Gulf Arab monetary union plan, Kuwait’s finance minister told Reuters after the United Arab Emirates said it was withdrawing from the project.

“Kuwait and other Gulf Cooperation Council (GCC) countries are still committed with this agreement and we are all going ahead with what we’ve agreed on,” Mustapha al-Shamali said on Wednesday. “There is no change in the stance of Kuwait.” Shamali said he was not officially informed of the UAE’s decision to withdraw.

Saudi Arabia, Kuwait, Qatar and Bahrain are still committed to the Gulf Arab monetary union plan, a source told Reuters after the United Arab Emirates said it was withdrawing from the single currency plan. “Saudi Arabia, Kuwait, Qatar and Bahrain are committed,” said the Gulf source, who spoke on condition of anonymity.

“Monetary union will be weakened but it is also a loss for the UAE because it is losing a competitive advantage of being part of a bloc,” the source said.

“And of course the bloc will have more options in terms of monetary policy and fiscal policy that would be more appealing to foreign investors.” The United Arab Emirates said Wednesday it won’t join a plan to unite the Gulf’s currencies, dealing a serious blow to what was seen as a step toward greater economic integration in the oil-rich region.

The official Emirates news agency quoted an unidentified foreign ministry official saying his country has informed the six-nation Gulf Cooperation Council of its decision Wednesday. The government often announces official policy changes through the news agency, WAM.

No explanation was provided for the move, which comes two weeks after GCC heads of state selected Saudi Arabia to host the bloc’s first central bank. The Emirates, which noted in the WAM report that it does not host any GCC institutions despite its growing financial weight, had been vying to be the bank’s headquarters and expressed reservations about the choice. Other Gulf countries, however, continued to back the single-currency proposal.

“We haven’t been notified officially (of the UAE’s decision), but we are committed to what has been agreed to,” he said, adding that three other GCC members were still onboard.

Oman has repeatedly said it would initially not participate in the currency plan. Bahrain’s central bank said it “continues to believe that the GCC monetary union remains in the long term interests of the GCC economies,” according to an e-mailed statement attributed to an unnamed bank official.

Heavyweight
OPEC heavyweight Saudi Arabia — the world’s largest oil exporter and home to the Arab world’s largest economy — is already home to the GCC Secretariat. The UAE, the second-biggest Arab oil exporter, meanwhile prides itself on its relatively open economy and business-friendly policies. Its biggest city, Dubai, has forged itself into the Middle East’s commercial hub. The UAE’s selection as the bank’s headquarters would have given it more bragging rights. Eckart Woertz, program manager for economics at the Gulf Research Center in Dubai, said the central bank choice likely led to the Emirates’ decision. “It’s like France withdrawing from the euro because the European Central Bank is set up in Frankfurt, (Germany),” he said. WAM quoted UAE Central Bank Governor Sultan Nasser al-Suwaidi as saying the UAE will keep its currency pegged to the US dollar and will leave its monetary policy unchanged.

In addition to Saudi Arabia and the UAE, GCC members include Kuwait, Bahrain, Qatar and Oman. The GCC had hoped to have a common currency in place by 2010, although its ability to meet that target had been in doubt. The bloc has set a deadline at the end of this year to ratify the charter of a monetary council to lay out a timeline for establishing a common currency. The UAE statement Wednesday signaled the country would not seek to prevent the other four GCC countries from forming a monetary bloc. “The UAE extends its best wishes for success to those GCC member states who will join the monetary union agreement,” WAM quoted the foreign ministry source as saying. However, Woertz said the UAE’s decision effectively kills any hope for a Gulf-wide currency union. “Unless there is a last ditch effort, I would doubt that an agreement is possible,” he said.

Urgent
Gulf policymakers had repeatedly said in recent months that the global financial turmoil and a collapse in oil prices had made achieving monetary union more urgent. But the decision over a venue for the monetary council had been caught up in political wrangling for the past year. Oman had already shaken the project when it opted out at the end of 2006, but the exit of UAE, the world’s third-largest oil-exporter, comes as a much stronger blow. “It’s a major blow for the single currency project. Oman has withdrawn, Kuwait has a currency basket and now the Gulf’s second largest economy has said it won’t participate,” said Simon Williams, regional economist at HSBC in Dubai.

“I don’t think it signals a change in currency regime, or disagreement over the maintenance of the dollar peg.” The choice of Saudi Arabia was seen as a fresh sign that the kingdom, which is the Gulf region’s largest economy, was regaining the prominence it had lost to the UAE, which had raised its profile in recent years with rise of Dubai as the region’s trade and tourism hub. Some analysts said at the time that the headquarters of both the GCC Secretariat and the central bank should not be in the same country. “The UAE decision to withdraw has been coloured more by emotion than rational thinking and it’s unfortunate that they have opted to walk out rather than find reason,” said John Sfakianakis, chief economist at HSBC’s Saudi affiliate SABB. “Egos should be supplanted by common sense. The union is not coming to a complete end but it complicates matters further.” “We believe that with the second-largest economy pulling out, the monetary union project is effectively dead,” EFG-Hermes investment bank said in a statement.


Ambitions
“It is detrimental... The fact that they will not be involved is a big loss,” EFG-Hermes’ Dubai-based economist Monica Malik told AFP. “With Saudi Arabia being the largest economy in the planned union, Riyadh will be the party determining the monetary policy under the current convergence criteria,” she added. Saudi economist Ali al-Daqaq also echoed fears that the proposed union will be set back by the UAE decision. “This decision will slowdown, if not abolish, the whole monetary union process, and will slowdown the Gulf economic integration,” he said. Kuwaiti economist Hajaj Bukhdour said the UAE withdrawal “will strip the monetary union of its anticipated importance,” and delay it by “many years”. Malik said that the UAE’s response to choosing Riyadh to host the future central bank was not expected to be so strong. GCC Secretary General Abdurrahman al-Attiyah had said after the Riyadh meeting that the first step towards creating a Gulf central bank would be the establishment of a Riyadh-based monetary council, which would exist during a “transitional phase” in the move towards monetary union. The UAE, in particular Dubai, is a major financial and commercial hub and had harboured ambitions of playing host to the region’s banking authority. WAM said the UAE was the first GCC country to have officially applied — in 2004 — to be the seat of any future Gulf central bank.

Bahrain had also been considered in the running to host the new banking authority for the region, which controls a large share of global energy supplies and has a population of more than 36 million. But in the end it fell to Saudi Arabia, which while not a banking centre like Bahrain, Kuwait or the UAE, is by far the world’s biggest oil supplier and the Gulf’s largest economy. A timetable for the next step of forming the monetary council has still to be decided. Originally the goal was set for 2010, but analysts consider that unrealistic, given the global economic slowdown. Oman announced in 2007 that it would not join the scheme for the planned single currency, while Kuwait, which remains committed to the planned union, has depegged its dinar from the dollar in May 2007 to combat inflation.