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Single Gulf currency to boost financial markets

posted on 21/09/2003: 1521 views

The move towards a single currency by the countries in the AGCC region is likely to boost growth in the region by contributing to the unification and development of the region's bond and equity markets and by improving the efficiency of financial services, according to a report from the National Bank of Dubai (NBD). The report comes at a time when the six AGCC countries have decided recently to move forward in economic integration by establishing a monetary union with single currency pegged to the US dollar by January 1, 2010.

This monetary union can promote policy coordination, reduce transaction costs and increase price transparency. The report said that achieving this union would lead to a more stable environment for business and facilitates investment decision. Although direct gains from the union, like an increase in intra-regional trade are relatively small, indirect gains are expected to be more significant. In particular, the introduction of a common currency is likely to enhance growth prospects by contributing to the unification and development of the region's bond and equity markets and by improving the efficiency of financial services, it said.

The report also said that the costs of the monetary union to member countries that comes from giving up independence in setting monetary policy and adjusting the nominal exchange rate should not be high because they have not relied on these tools for quite some time by adopting pegged exchange rate regimes. However, the union will need to be supported by a range of structural reforms to realise its full effectiveness, the report added.

It also was of the view that several economic reforms would be necessary before the introduction of a common currency. The pace of these reforms will determine how fast the AGCC countries consolidate the monetary union and enhance the net benefits of a single currency. The reforms include fiscal convergence, a common exchange rate policy that includes pooling of foreign reserves, developing the monetary institutions, establishing adequate and transparent data environment, and implementing other needed economic structural reforms.

On the fiscal convergence, it said that adherence to fiscal discipline is crucial for a successful monetary union. It argued that without fiscal discipline, differences in the fiscal status among member countries will lead to tension, which might ignite political disagreements and impede other macroeconomic convergence requirements.

"Fiscal discipline means abiding by a common code of fiscal conduct, such as reference values for fiscal variables, a common framework for computing public finance accounts and adequate budgetary procedures. Given the volatility of oil prices, targets for non-oil fiscal deficits might be also set to determine underlying fiscal trends. Fiscal convergence is a top priority before introducing the common currency," it said. (The Khaleej Times)


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