Nothing unusual emerged from the 45th meeting of the committee of governors of monetary agencies and central bank governors of the Gulf Cooperation Council (GCC) in Doha last week. Qatar chairs all scheduled GCC meetings this year by virtue of hosting the 28th summit of heads of state late last year. Oman is due to host the next summit later this year.
Contrary to expectations, the meeting solely dealt with matters related to the implementation of the planned monetary union in 2010. The governors discussed ways to overcome obstacles pertaining to fiscal and monetary standards underpinning speedy and comprehensive implementation of the ambitious project. The guardians used the meeting as an opportunity to renew their commitments to the monetary union project.
Unfortunately, they decided not to discuss two critical issues, namely inflationary pressures and prospects of ending the pegging of GCC currencies to the dollar. All GCC countries except Kuwait link their currencies to the greenback. The dollar is under pressure as evidenced by the fact of losing nearly eight per cent of its value against the euro since the start of 2008.
Implementation of the ambitious monetary union project requires the member countries to adhere to several conditions dealing with fiscal and monetary standards. These are: limiting public debt to 60 per cent of gross domestic product (GDP); restricting budget deficit to three per cent of the GDP; limiting inflation to the average rate plus two per cent; limiting interest rate to lowest rates in member- countries plus two per cent; and ensuring that the reserves cover import bills of four months.
To be sure, firm oil prices sustained over the last few years have only strengthened prospects for meeting requirements related to implementation of three variables concerning debt, budget and reserves.
In the case of Saudi Arabia, for instance, strong revenues generated from the hydrocarbons sector allowed the kingdom to post budget surpluses of $47.6 billion in 2007 and a record $71 billion in 2006.
Of the surplus achieved in 2007, Saudi authorities decided to allocate more than $14 billion to reduce public debt.
In turn, this allowed outstanding debt to decline from $97.6 billion in 2006 to $71.2 billion in 2007. Hence, the move reduced the significance of outstanding public debt from 28 per cent in 2006 to 19 per cent of the GDP in 2007. Yet, the largest chunk of the surplus or $26.7 billion will be transferred to strengthen the country's reserve.
However, strengthened petroleum revenues, in turn leading to greater spending opportunities, are partly blamed for inflationary pressures encircling the regional economies. According to IMF, inflation rates amounted to about 14 per cent, 11 per cent and 4 per cent in 2007 in Qatar, the UAE and Saudi Arabia, respectively.
Governor of the central bank of Qatar, Shaikh Abdullah Bin Saud Al Thani, argued that the monetary union project would be implemented regardless of inflation. It seems that Shaikh Abdullah's comments were designed to dampen market fears. Nevertheless, one positive development relates to agreeing to have an extraordinary meeting of governors in mid-June.
The Doha meeting was the first in 2008 for GCC governors of monetary agencies and central bank governors. Economic commentators have censured the governors for not holding emergency meetings despite turmoil in global markets affecting the GCC economies. A case in point is the repeated decisions by the US Federal Reserve to lower interest rates over the last few months. Maybe the governors will have answers to outstanding questions during the meeting in June.
Strengthened petroleum revenues are partly blamed for inflationary pressures encircling the regional economies.
- The writer is a Member of Parliament in Bahrain.