GCC HAS CLEAR VISION FOR COMMON CURRENCY, BUT

C O N F I D E N T I A L SECTION 01 OF 02 DOHA 000060 SIPDIS EEB/IFD/OMA FOR JJACOBY E.O. 12958: DECL: 01/26/2019 TAGS: ECIN EFIN QA SUBJECT: GCC HAS CLEAR VISION FOR COMMON CURRENCY, BUT IMPLEMENTATION A MIRAGE REF: 2008 DOHA 743 Classified By: Amb. Joseph LeBaron for Reasons 1.4 (b) and (d). -------------- (C) KEY POINTS -------------- -- Gulf heads of state maintain their vision of creating a Gulf Central Bank by the end of 2009 and a common currency in 2010, but multiple hurdles remain before GCC monetary systems can be harmonized, according to Qatar's Central Bank Governor and the MFA's Director of GCC Affairs. -- Location of the GCC Central Bank is the most pressing dispute, and GCC Foreign Ministers will next discuss the issue in March. -- The heads of state discussed in Muscat creation of a free-floating currency, though both contacts indicated the GCC currency is likely to remain pegged to the dollar, for now. -------------- (C) COMMENT -------------- -- Political will aside, these two insiders clearly believe major challenges remain if the GCC is to unify its currency soon. -- The GCC's harmonization efforts are occurring in parallel with Qatar's individual efforts to reform and unify its financial regulation. It remains unclear how the two paths will cross, and what will be the fate of Qatar's regulatory bodies if and when the Gulf Central Bank is established. End Key Points and Comment. -------------- Currency Unification by 2010 Difficult -------------- ¶1. (C) Qatar Central Bank Governor Shaykh Abdullah Bin Saoud Al Thani told Ambassador January 12 that the GCC states continue to plan for the launch of a common currency next year but they must still "do more homework" on harmonizing their monetary policies. (Note: GCC Heads of State and Finance Ministers -- minus Oman -- continue to call for a common currency, and announced their intent at the late December 2008 Muscat summit to form a unified central bank by the end of 2009, and a common currency by 2010.) Regulatory and legal incompatibilities, in addition to different approaches to Islamic financing, are the main challenges to harmonization, according to Al Thani. (Note: The Governor left unsaid the obvious political machinations at work, and the intense competition between GCC states over where the GCC Central Bank will be located.) ¶2. (C) The GCC states are working with the Bank for International Settlements to harmonize their commercial banking systems, and are receiving IMF assistance for a number of joint committees studying unification, but there is "no clear picture" of how the GCC states could achieve unification on the proposed timeline, according to Al Thani. ¶3. (C) MFA Director of GCC Affairs Yousuf Al-Jaber told P/E Chief Rice and Econoff Fabrycky January 22 that the GCC will have trouble meeting the political deadline of 2010 for currency unification. He advised that the most pressing point is a dispute over where to locate the Gulf Central Bank. Of the four candidates vying to play host, Qatar and the UAE have the strongest position, according to Al-Jaber, because they currently have no GCC-related institutions, unlike the other two candidates (Saudi Arabia and Bahrain), who already play host to GCC-related organizations. Al-Jaber noted that all the countries see both a business and prestige boon to hosting the bank, and GCC Foreign Ministers are slated to discuss the issue again in March. The bank will probably have a council of governors from each participating state, with a rotating chair/lead governor. -------------- Continued Dollar Link Likely, For Now -------------- ¶4. (C) Al Thani said there is no GCC consensus on whether and how to link a common currency to the dollar or a broader DOHA 00000060 002 OF 002 basket of currencies. He indicated that Qatar's position was generally supportive of a continued dollar link, since most of the commodities driving the Gulf business cycle are priced in dollars. Differing from Prime Minister/Foreign Minister Shaykh Hamad Bin Jassim Al Thani who supports a free-floating Gulf currency (reftel),the Governor noted that this was "not advisable" at present, as there would be no demand for the currency outside the Gulf. ¶5. (C) Al-Jaber reported that GCC heads of state discussed in Muscat creation of a free-floating currency, with the region's sizable oil and gas resources serving as a tangible asset to back it. He noted, however, that GCC leaders seem to be moving in the direction of a continued dollar peg, for now. LeBaron