The race to host a central bank for the western Gulf region sees Bahrain and the UAE emerging as the top two candidate nations and, barring any more fanciers, one or the other is likely to be the location of a central financial institution for the Gulf Cooperation Council (GCC). If the organization achieves its 2010 target of monetary union, the choice will probably be either Abu Dhabi or Manama. The two cities are bidding hard.
Late entries, however, cannot be ruled out, with Saudi Arabia also tipped to enter the lists. News of this came at a routine meeting of the region’s central bankers in Abu Dhabi at the end of October 2006. During a break at this event, GCC Secretary General Abdulrahman bin Hamad al-Attiyah said that Saudi Arabia had not yet submitted a bid to host the institution, but elsewhere Hamad al-Sayari, the governor of the Saudi Arabian Monetary Agency (SAMA), said that this should not be taken as confirmation that his country would not throw its hat into the ring.
Saudis an expected entrant
Many had been expecting the Saudis to make the contest a three-horse race, with some analysts wondering if their current reluctance is tactical, as they awaited more details to emerge on the other two offers.
Others have pointed out that there is still plenty of time for the Saudis. Not only is 2010 some way off, but there are many in Gulf capitals who wonder at the likelihood of that target being reached. Skeptics argue that the GCC has not had a good track-record in working together on economic issues, as spats over Free Trade Agreements have illustrated.
Nonetheless, the “race” does give observers a chance to study the form. Abu Dhabi is certainly a strong contender, known as the economic and political powerhouse of the UAE and a key global player in energy and investment markets. This gives it a substantial financial and banking community and the resources to match.
UAE Central Bank governor Sultan bin Nasser Al-Suwaidi confirmed in late 2006 that the UAE bid was submitted well in advance of Bahrain’s recent counter-offer, an indicator of Abu Dhabi’s confidence that it will be the eventual winner.
Al-Suweidi also took the opportunity to propose that any single currency in the GCC should, in the longer term, lose its dollar-pegging. He argued that it would not make sense to have a single currency linked to a hard currency and that the currency should be free floating. He also dismissed an idea that it could be linked to a basket of currencies, arguing that within such a basket there would always be one dominant currency.
According to Steve Brice, senior economist at Standard Chartered Bank, in an ideal world, the Gulf Central Bank would be in a better position to set interest rates than the US Federal Reserve. He further said that there seems to be some acknowledgement of this within the region as long as central bank’s intentions were flagged in advance, so businesses can protect themselves against the different currency and interest rate exposures they might face.
Problems ahead for the union
One particular concern regarding the proposed union is the differing inflation levels in the various participating countries. The UAE has a much higher rate of inflation, for example, than Saudi Arabia. Of all the convergence criteria including public debt, currency reserves and interest rates, inflation will be the most difficult to meet before the single currency. Without it, the union will not work.
However, Muhammad al-Mazrouei, assistant secretary general for economic affairs at the GCC, is not worried. At a meeting of GCC central bank governors in Abu Dhabi in October 2006, he said that inflation is transitory and limited to certain sectors such as real estate. He further dismissed concerns over frailing to meet all the criteria, recalling that even the Europeans violated the criteria, and still launched a single currency.
But what about Bahrain? The island emirate also scores highly. While the kingdom lacks Abu Dhabi’s hydrocarbon clout, it has long been known as the Gulf’s financial and banking capital, with its lack of oil and gas obliging it to specialize in such sectors such as this. It has also emerged as the hub for Islamic finance in the region, while also possessing good economic transparency and a lack of excessive bureaucratic regulation. At the same time, the central bank of Bahrain’s stringent laws governing the local financial sector have also won praise internationally.
According to a new study conducted in the region by Dubai-based Fusion Marketing and Management in conjunction with a US company, SurveyMonkey, the organizers of the Leaders in Dubai Business Forum 2006, Bahrain ranks second only to Dubai for ease of doing business.
