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Go your own way to tackle crisis

posted on 07/04/2009: 823 views

Countries in the Gulf should take their own measures to deal with the financial crisis, the Central Bank Governor said yesterday.

"The issues that each country will have to deal with are different. Every country has taken its own crisis mitigation measures,” Sultan al Suwaidi said at the biannual meeting of GCC central bank governors in Muscat.

This time, the region's governors met to discuss the effects of the financial crisis on the region and the success of measures taken by the individual states to mitigate them.

So far, the GCC states have each addressed their regional financial difficulties differently, despite expressed desires to form a more unified economic bloc. Although some states have cut interest rates, while others have held firm, analysts have generally agreed that the regional economies are different enough at the moment to warrant divergent economic strategies.

"At the moment, co-ordination is not there and the countries are moving independently, but this isn't a sign that they can't co-ordinate in the future,” said Monica Malik, the chief economist at EFG-Hermes.

The severity of the financial crisis is different in each GCC state, analysts say. "They don't have the same real estate and liquidity issues in Saudi Arabia that we have in the UAE. In the UAE, we have real structural problems that require more severe actions,” said Mahdi Mattar, the chief economist and head of research at Shuaa Capital.

Since the onset of the financial crisis, the Government has pledged Dh120 billion (US$32.67bn) to local banks and lent US$10bn to Dubai to help its cash-starved companies. This contrasts with Kuwait, which recently passed the most comprehensive bank rescue plan in the region, and Qatar, which recently opted to purchase portions of its banks' investment portfolios.

The fact that most Gulf countries peg their currencies to the dollar will ensure that their monetary policies do not vary too widely, according to Hamood al Zadjali, the central bank governor of Oman.

Over the past months, the UAE has cut its key interest rate several times to 1 per cent, while Qatar has held its rate constant.

"There is no unified monetary policy yet with the GCC countries, but all our interest rates are already supposed to go down with the dollar rate, with some sort of differential between them,” he said.

"I think from what we see, things have almost settled down, and maybe we have almost gotten through the difficult times. But 2009 will still be a challenging year for everybody, including the GCC.”

A shrinking population, caused by people leaving the country after losing their jobs, is one of the potential problems for the economy. During the past decade, a rapidly expanding population has been a primary driver of growth in the UAE. If the population shrinks dramatically this year, it could drag down domestic demand and property prices, further hurting the economy.

Mr al Suwaidi said: "In every country we will see a shrinkage of the workforce… so in our case, that means shrinkage that will go out. But that is going to be very small.”

The GCC representatives also announced yesterday that there would not be a new timetable for the introduction of a common currency for at least several months.

Two weeks ago, the GCC secretariat said certain parts of the original timetable to implement the GCC common currency, including the launch of the physical currency, would have to be delayed from the original deadline of Jan 1 2010. Analysts expected GCC central bank governors to issue a new timetable on the matter after yesterday's meeting.

However, a new deadline is unlikely to be drafted until the GCC takes several other time-consuming steps, including the creation of a monetary council, according to Mr al Zadjali. The revised timetable "will be decided by the currency board… when it is created,” Mr al Zadjali said at a press briefing following the meeting.

Oman, which has decided to opt out of the planned monetary union, had no plans to join it at a later stage, Mr al Zadjali said.

The next substantive decision relating to the GCC monetary union will be made early next month when GCC heads of states are expected to reach a decision on the location of the monetary council. The council, which is expected to be created by the end of this year, will eventually grow to become a GCC central bank.

GCC officials did, however, reach some agreements on the need for a more advanced and integrated payment system between the GCC states.

"We have agreed that there will be a strategy on the payment system between the GCC countries, for improving trade, improving payments. We have agreed also on having a common ATM switch,” Mr al Zadjali said. – The National


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