SAG FLEXES MUSCLES TO ENSURE GCC CENTRAL BANK IN

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000653

SIPDIS

DEPT FOR NEA/ARP, INR/NESA, INR/EC, EEB/IFD/OMA

E.O. 12958: DECL: 05/10/2019
TAGS: ECON EINV PREL ETRD GCC SA
SUBJECT: SAG FLEXES MUSCLES TO ENSURE GCC CENTRAL BANK IN
RIYADH

Classified By: Acting DCM Sandra Muench for reasons 1.4 (b) and (d)


1. (U) Key points:

-- (U) The GCC announced on May 5 that the GCC monetary
council, a precursor to a GCC central bank, would be located
in Riyadh and would start operating by the end of 2009.

-- (SBU) Embassy contacts disagree as to the reason for
locating the council in Riyadh as opposed to the UAE, with
some citing Saudi egos and others identifying Saudi Arabia's
recent economic performance relative to its neighbors.

-- (C) A senior GCC Secretariat official responsible for
external economic relations believes a currency could be in
circulation by the end of 2012.


2. (SBU) Comment: Although the establishment of the monetary
council is a clear indication the GCC members are still
politically committed to a common currency, there are still
significant obstacles to overcome. Among these are decisions
on whether the GCC central bank or the members' central banks
will have control of foreign reserves, what the common
currency's relationship with the U.S. dollar will be (four of
five initial members of the future monetary union currently
have their currencies pegged to the dollar),and what will
the timetable be for adoption of the common currency. Given
the decisions that remain to be worked out, it is unlikely a
currency will be in place before the end of 2012. End
comment.


3. (U) Leaders of the Gulf Cooperation Council (GCC) met in
Riyadh on May 5 and selected Riyadh as the location of the
GCC monetary council, a precursor to the group's central
bank. Various Emirati media publications reported that the
UAE had "voiced reservations" over the decision to locate the
Council in Riyadh, asserting that the lack of GCC
institutions in the UAE and the UAE's early offer to host the
bank gave them the "right" to have the bank in their country.


4. (C) In a May 6 conversation with EconCouns, Saudi British
Bank's chief economist, Dr. John Sfakianakis, said the
decision to locate the monetary council in Saudi Arabia had
been reached six weeks ago and that the meeting held the day
before was just the public unveiling of this decision. He
also relayed that many had argued in favor of having the
institution located in the UAE but placing a prominent Saudi
in charge (such as recently retired central bank governor
Hamid Al-Sayari),but that "egos interfered" (presumably
Saudi egos). Sfakianakis said he sees monetary integration
proceeding slowly, with the countries in the region taking
the intermediate step of transitioning from a dollar peg to a
currency basket before adopting a common currency.


5. (C) EconOff met with Dr. Abdulaziz Al-Uwaisheg, Director
General of External Economic Relations at the GCC
Secretariat, on May 10 to discuss the future GCC central
bank. Uwaisheg clarified that the role of the monetary
council will be to lay the groundwork for the future central
bank, and will coordinate monetary policy between the GCC
members, but will not have the authority to set policy
itself. He expects the council to finish its work within 2 -
3 years and then evolve into the bank. When asked why the
GCC leaders decided to locate the council in Riyadh, Uwaisheg
said it was a combination of the size of Saudi Arabia's
economy relative to the other GCC members (in 2007 Saudi
Arabia accounted for 47 percent of the GCC's combined GDP)
and Riyadh's reputation as "conservative and boring" when it
comes to money management. He said that Riyadh's lobbying
efforts were augmented by the perception that Saudi Arabia is
doing a better job weathering the current economic crisis
than some of its neighbors.


6. (C) Uwaisheg also discussed the GCC's movement towards a
common currency, saying that though the current agreement
requires the currency to be in place by the end of 2010, the
monetary council is likely to ask the GCC leadership for an
extension. He said he believes an accounting unit with
irrevocably fixed exchange rates to the various GCC members'
currencies could be in place by early 2011 with the currency
entering into circulation by mid to late 2012 (originally the
GCC intended to skip the accounting unit phase and jump
straight to a circulating currency but has recently realized
that is not feasible). According to Uwaisheg, the GCC has
already met with a number of firms in Europe involved in the
production of paper currency to discuss timetables.

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