Another Blow To The GCC Monetary Union: the UAE Pulls Out

Less than 24 hours after Dubai’s finance chief was demoted, the UAE announced its decision to withdraw from the GCC Monetary Union, putting the broader union at risk. This decision comes two weeks after a major milestone; selection of the location of the GCC Central Bank. UAE officials did not conceal their reservations about the choice of Saudi Arabia to host the institution. UAE newspapers heavily criticized the Saudis in what may have developed into a political rift.

For starters, the GCC Secretariat is already located in Saudi Arabia and other institutions in other GCC countries, and with plans to diversify the government institutions, they believed that the GCC Central Bank should be located in the UAE, given its development as one of the region’s financial hub, possibly with a presiding Saudi National.

Despite the political headlines,the GCC monetary union was already facing many hurdles and the 2010 deadline had already been abandoned, particularly as economic policies have diverged in the wake of the global and local economic crisis. Changes in the GCC policy agenda- now focusing on policy responses that would shield the GCC countries and boost growth and liquidity – took precedence over convergence and made delay more likely. Furthermore other aspects of the customs union may face delays. This decision should not come as a big surprise. Oman announced its decision not to participate several years ago. Kuwait de-pegged from the dollar in 2007 (and pegged to a dollar-dominated basket) although it vowed to join the union. The UAE’s decision to pull out, despite the fact that it was the first country to apply to host the union in 2004, versus Saudi Arabia who applied in 2008, might be a fatal blow. With only four out of six members willing to join, any potential union seems ripe for significant delays.

Even deciding upon the location of the GCC central bank was not a piece of cake, coming only after long deliberations and postponements.

Implications

The most important question is whether the monetary union will proceed or not. With the second largest GCC member pulling out, the union is left with only four members. If this adds to the hurdles the union is already witnessing, then a further delay (beyond the current open-ended timeline) is the best option that these countries would hope for instead of a formal cancellation of the union. Moreover, with the UAE pulling out any new union would be even more Saudi-dominated.

So far, markets have not responded to the UAE’s decision to withdrawal, partly because of prior sluggish progress of the union. For them, given that the union was by no means imminent, this delay is but one other form of such sluggish progress, so any market impact should be negligible. Moreover, despite the fact that the UAE has pulled out, one should not rule out a rejoining at a later date, if conditions seem to meet UAE interests more than at present.

2009 has not been a good year for currency unions. The holdup of the GCC single currency occurs at a time when the European Monetary Union is under pressure in a severe test to its cohesion.  At a time of economic crisis, the EU appears to be short of the proper tools to boost economic flexibility. Within this context, GCC governments may be reluctant to give up their what sovereign flexibility they have in conducting their monetary policy. As dollar-peggers, their monetary autonomy is of course limited but, the union could limit the use of some monetary and fiscal measures over time. However, such restraints would come very far into the future, so seem unlikely to be an explanation of current moves

Meeting the convergence criteria -which include lining up budget deficits –is also doubtful as a result of the different policy responses implemented by each government, with several countries slipping into budget deficits especially in 2009. 2009 will also witness more deviation in terms of GDP figures in the GCC, doing nothing to help a smooth transition towards convergence. In 2010, the shape of recovery might differ across countries making it even more difficult to attain the convergence criteria.

However, the monetary council, the heart of the GCC Central bank should be established by the end of 2009 as if proceeding with the monetary union is still on the table. In fact there remain several significant preconditions for the union including coordination of payment systems, improvement in data gathering, sharing and monitoring among others.

An important final question; could the political differences escalate to a crisis between those two countries? That will be something to monitor in the coming months up to the GCC Summit in 2009. What is also left to monitor is the response of the other four GCC countries. Although it is highly doubtful that any of them will follow suit and pull out of the union, other political and economic dynamics may be unveiled as a result of the void that will be created by the UAE’s pullout.  As noted above, the UAE’s withdrawal implies an even more Saudi-dominated union, with Bahrain already under the Saudi wing.

3 Responses to "Another Blow To The GCC Monetary Union: the UAE Pulls Out"

  1. Ivo Cerckel   May 20, 2009 at 6:19 pm

    Banks used to have the right to issue receipts for the gold [hiding in oil] they held in reserve.This right was taken away from them by the institution of central banks. (1)I propose to repeal central banking and return the right to issue receipts for the gold, hiding in oil, they are holding in reserve to the banks.I propose to have gold, hiding in oil, as a freely floating financial-wealth-reserve.Let’s have central banking repealed and banks to be allowed again to issue certificates for some of the gold, hiding in oil, they hold in reserve and let‘s have the value of these certificates to increase to the extent that the ounces, kilograms, or tonnes of gold held in reserve by the issuing bank increase. (2) (3)Ivo(1)Roland Leuschel and Claus Vogt, “Das Greenspan Dossier, Wie die US-Notenbank das Weltwährungssystem gefährdet. Oder: Inflation um jeden Preis”, http://www.finanzbuchverlag.de, 2006, 3rd ed., p. 299(2)Gold as default reservePosted by Ivo Cerckel on May 9th, 2009http://bphouse.com/honest_money/2009/05/09/gold-as-default-reserve/(3)The main rationale behind this proposal is of course the other way around. No gold or silver backed system can change human nature which dictates that no issuing bank can withstand the temptation to print more receipts that it has gold in reserve.(Roland Leuschel and Claus Vogt, op. cit., pp. 299- 300)This means that to the extent more receipts are issued than gold is held in reserve, the value of the currency decreases.

  2. Ivo Cerckel   May 21, 2009 at 4:15 am

    first step towards repealing central bankingno issuing bank can withstand temptation to print more receipts than it has gold in reserveby staying within the deficit-displaying dollar-regime,Kuwait, Saudi Arabia, Qatar and Bahrain to continue inflatingand to continue perpetuating riba, usuryChina to be labelled the bad guyThe United Arab Emirates (UAE)’s surprise decision to pull out of a EU-style Gulf Monetary Union (GMU) planned by regional oil producers isNOT, as some (1) argue, an expression of the country’s unhappiness at not being chosen to host the Central Bank of the six-nation Gulf Co-operation Council (GCC) which also includes Oman.BUT it is a first step towards repealing central banking and returning to the banks the right to issue receipts for part of the gold, hiding in oil, they are holding in reserve.Gold, hiding in oil, will thereby become a freely floating financial-wealth-reserve.The value of those receipts or certificates for part of the gold held in reserve will then increase to the extent that the ounces, kilograms, or tonnes of gold held in reserve by the issuing bank increase.The main rationale behind the UAE thinking is of course the other way around. No gold, hiding in oil, backed system can change human nature which dictates that no issuing bank can withstand the temptation to print more receipts than it has gold in reserve.After the UAEs decision to withdraw from GMU, Kuwait, Saudi Arabia, Qatar and Bahrain are still committed to the GMU plan, Kuwait’s finance minister told Reuters. (2)By staying within the deficit-displaying dollar regime, those four GCC members will have to continue inflating and devaluing vis-à-vis gold and oil.Despite all the monetary union and fight against riba (3) rhetoric, this is the simplest way for the divided GCC.In the meantime, China will be able to establish its yuan as dollar alternative.This will then allow public opinion to label China as the bad guy, to label China as the anti-dollar guy.Ivo CerckelNOTES(1)see for exampleUAE pull-out seen as ‘unhappiness over bank HQ’Emirates Business 24/721 May 2009http://www.zawya.com/story.cfm/sidZAWYA20090521031643(2)Four GCC states committed to monetary union21/May/2009Trade Arabiahttp://www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=97398SNIPKuwait and three other Gulf countries are still committed to the Gulf monetary union plan, Kuwaits finance minister told Reuters after the UAE said it was withdrawing from the project.(3)Arabian FreeGoldPosted by Ivo Cerckel on May 17th, 2009http://bphouse.com/honest_money/2009/05/17/arabian-freegold/SNIPIs riba, usury, the result of paper money?Or is riba the result of money linked to gold (hiding in oil)?Do gold and oil bear interest?In order to achieve a riba-free system, we need FreeGold, freely floating gold prices.It is therefore the GCC oil producers who would gain most from the repeal of paper gold and institution of FreeGold.But they remain silent…

  3. gpswatch   June 1, 2011 at 1:27 pm

    thanks for the knowledge.