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Gulf Arab Countries Approve Monetary Union Agreement

posted on 31/12/2008: 822 views

Gulf Arab leaders approved an agreement to create a central bank and single currency for the region to boost trade and strengthen monetary policy.

The accord must now be endorsed by the national governments of the Gulf Cooperation Council, the group said in a statement after its leaders met today in Muscat, Oman's capital. Within the six-nation GCC, Oman has pulled out of the process.

A single currency would allow the Gulf States to stop pegging their currencies to the dollar and implement independent monetary policy. All of the GCC states except Kuwait peg their currencies to the dollar and tend to follow the U.S. Federal Reserve when setting interest rates. The states are looking to issue a unified currency by 2010.

The accord will lead to the creation of a Monetary Council, the precursor to a Gulf central bank. It should go into effect by Dec. 12 next year, Kuwait's Finance Minister Mustafa al- Shimali was cited as saying by the official KUNA news agency.

No decision has yet been taken on where the central bank will be located, GCC Secretary General Abdulrahman al-Attiyah told a press conference today. That decision should be taken by mid-2009, he said.

The six Gulf Cooperation Council states of Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman agreed in 2001 to form a European Union-style monetary union by 2010 to boost regional trade. Oman pulled out last year.

A draft of today's accord was agreed by Gulf central bank governors and finance ministers in September.

Pressure mounted this year on the Gulf States to drop their currency pegs as inflation accelerated above 10 percent in five of the six countries while the Fed slashed rates to help revive the slumping U.S. economy.

Kuwait dropped the dinar's peg to the dollar in May 2007, linking it instead to a basket of currencies including the euro, the yen and the British pound, citing inflationary pressures.

The Monetary Council is the equivalent of the European Monetary Institute, which was the forerunner to the European Central Bank. It will prepare the legal and technical aspects of the monetary union and arrange for the establishment of the GCC central bank and the issuing of the new currency. – Bloomberg


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