Identifier
Created
Classification
Origin
07ABUDHABI387
2007-03-08 10:42:00
CONFIDENTIAL
Embassy Abu Dhabi
Cable title:  

UAE OFFICIALS DISCUSS GCC MONETARY UNION WITH

Tags:  EFIN EINV ETRD ECON AE 
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VZCZCXRO9569
RR RUEHDE
DE RUEHAD #0387/01 0671042
ZNY CCCCC ZZH
R 081042Z MAR 07
FM AMEMBASSY ABU DHABI
TO RUEHC/SECSTATE WASHDC 8477
INFO RUEHDE/AMCONSUL DUBAI 6903
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 000387 

SIPDIS

SIPDIS

STATE FOR NEA/ARP, EB/IFD/OMA
STATE PASS FEDERAL RESERVE FOR GOVERNOR KROSZNER
TREASURY FOR DAS SAEED, ROSE

E.O. 12958: DECL: 03/07/2017
TAGS: EFIN EINV ETRD ECON AE
SUBJECT: UAE OFFICIALS DISCUSS GCC MONETARY UNION WITH
TREASURY AND FEDERAL RESERVE

REF: 06 ABU DHABI 4555

Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d).

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 000387

SIPDIS

SIPDIS

STATE FOR NEA/ARP, EB/IFD/OMA
STATE PASS FEDERAL RESERVE FOR GOVERNOR KROSZNER
TREASURY FOR DAS SAEED, ROSE

E.O. 12958: DECL: 03/07/2017
TAGS: EFIN EINV ETRD ECON AE
SUBJECT: UAE OFFICIALS DISCUSS GCC MONETARY UNION WITH
TREASURY AND FEDERAL RESERVE

REF: 06 ABU DHABI 4555

Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d).


1. (C) Summary. On January 21 and 22, UAEG officials and
local economists discussed perspective on challenges to the
planned 2010 GCC currency union and the peg to the dollar.
UAEG officials, while acknowledging the difficulties facing
the currency union argued that its benefits outweighed the
costs, and expressed their hope that some version of it would
go forward, even with a delayed start. Private sector
economists were less sanguine about the 2010 start date.
Central Bank Governor Sultan Nasser Al-Suwaidi defended the
dollar peg, but acknowledged that he was facing political
pressure to revalue. The issue of the currency union, the
peg, and revaluation will be discussed at the spring meetings
of the GCC Central Bank Governors and Finance Ministers. End
summary.


2. (C) A major topic of the January 21-22 visit of Treasury
Under Secretary for International Affairs Timothy Adams,
Federal Reserve Governor Randall Kroszner, and Treasury DAS
Ahmed Saeed to the UAE was the prospect for the 2010 GCC
currency union and for the GCC currencies' peg to the dollar.
Both Minstate Finance Dr. Mohammed Khalfan bin Khirbash and
Central Bank Governor Sultan Nasser Al-Suwaidi, while
acknowledging the problems facing the currency union,
stressed the positive. Dr. Khirbash stated that Oman viewed
the currency union as non-viable, based at least partially on
the challenges facing the current customs union and planned
(2007) common market. Dr. Kharbash acknowledged the
challenges to closer economic integration, but argued that it
was occurring, and that the opportunities from further
integration were immense. He concluded that "if the GCC
wants to play a global role" the currency union would be
important. Dr. Kharbash and Al-Suwaidi both agreed that the
GCC would need to decide how to move forward in its spring

meeting, but stressed that "Oman is keeping its options
open."


3. (C) Al-Suwaidi suggested that since meeting the 2010
deadline with a "comprehensive" currency union was unlikely,
a simpler option could be put on the table. He stated that
the current plan was unacceptable to Oman, but that there was
no "rule that the GCC needs to implement a comprehensive
monetary union." He argued that the Euro model did not fit
the GCC and that the study conducted by the European Central
Bank (ECB) for the GCC was unworkable. GCC countries did not
want to give up their individual central banks and did not
need a large central bank that "did nothing like the ECB." It
would be "a waste of money." The GCC might be able to start
with some sort of monetary policy coordinating committee. He
argued that the GCC would move ahead with some form of
monetary union, since "the people" demanded it. The form
could be changed and the time could slip, but it would not be
canceled.


4. (C) HSBC Economist Simon Williams and Standard Chartered
Regional Head of Research Steve Brice were less optimistic
about the prospects of a GCC monetary union by 2010.
Williams noted that his view on the likelihood had shifted
from "agnostic to doubtful." He said that Oman and Qatar
both had concerns about the union, although both the UAE and
Saudi Arabia were still keen advocates. Oman -- as a smaller
economy, with fewer reserves -- was much more vulnerable
economically than the UAE. Brice commented that the GCC
didn't seem to be having enough substantive discussions to
bring the union into being.


5. (C) U/S Adams also asked his interlocutors about the peg
to the dollar and about the possibility of GCC states
revaluing. Al-Suwaidi said that he thought that there was no
alternative but to maintain the dollar peg. He said that
China, Korea, Thailand, and Indonesia are all pegged to the
dollar and -- after North America -- they were leading
trading partners for the UAE. He suggested that the other
GCC governors would also come to the conclusion that changing
the peg was not viable. He noted that the UAE Central Bank
had tried to place some of its reserves in Euros, but was
unable to do so.


6. (C) Al-Suwaidi acknowledged, however, that he was facing
political pressure to revalue, noting that there were those
in Dubai who argued that the exchange rate was a problem. He
explained that members of the UAE Council of Ministers had
hired "experts" who estimated the cost of the dirham's
depreciation at 26 billion dirham ($7 billion). He argued

ABU DHABI 00000387 002 OF 002


that the "experts" were responding to the merchants importing
from Europe, rather than those importing from elsewhere. He
noted that a revaluation would presumably harm the UAE's
tourism business by making it more expensive for European
tourists to visit. He then asked U/S Adams and Governor
Kroszner for their views on whether revaluation would be
beneficial. Kroszner noted that the UAE needed to weigh the
long-term costs and benefits of a peg to the dollar, such as
the financial discipline it provided to a country.
Short-term fluctuations were always going to be an issue. In
his meeting, Williams noted that there were increasing
expectations in markets that GCC currencies would revalue.
HSBC had calculated that a revaluation would not be cost
free. For example, there would be fiscal costs and the
benefits (lower inflation) were not that clear. That said,
he noted that there was a worry about the value of the dollar
and that a slip in the 2010 monetary union could convince the
governments to revalue.


7. (SBU) U/S Adams asked Al-Suwaidi, whether the USG could be
helpful on the issue of the currency union. Al-Suwaidi
replied that after the GCC Central Bank Governors and finance
ministers met in March, they might "get back" to Adams.
Clearly, noted Al-Suwaidi, the Euro model did not work for
the GCC. Governor Kroszner explained that the U.S. regional
Federal Reserve System had been developed when the U.S. had a
far less integrated economy, so there were precedents for a
less centralized currency union. U/S Adams also explained to
both Dr. Khirbash and Governor Al-Suwaidi that the Treasury
Department was conducting table-top exercises with European
countries to improve cooperation in managing shocks to the
international financial system. He suggested that the U.S.
and the GCC might consider something similar. Both officials
endorsed the idea. Al-Suwaidi promised to discuss it with
the GCC Secretariat and the Saudi Arabian Monetary Authority,
the current chair of the GCC central banks. He suggested
that most of the GCC central Bank Governors would be in
Washington for the IMF/World Bank Spring meetings, and that
this might be a good time to have further discussions.


8. (U) This cable has been cleared by the party.
SISON