The United Arab Emirates, the second-largest Arab economy, has withdrawn from Gulf Arab plans for monetary union, possibly paralysing project a project that has faced hurdles for almost a decade.
The UAE is the second country in the six-member Gulf Cooperation Council (GCC) to withdraw from the single currency plan after Oman, a smaller economy. But a senior Gulf source said four states remained committed to the union.
"Saudi Arabia, Kuwait, Qatar and Bahrain are committed," said the source, who spoke on condition of anonymity. "Monetary union will be weakened but it is also a loss for the UAE because it is losing a competitive advantage of being part of a bloc."
Kuwait, which complicated monetary union plans by dropping its peg to the dollar in 2007, said it remained on board.
UAE Central Bank Governor Sultan Nasser al-Suweidi said the UAE would keep its dirham currency pegged to the U.S. dollar and monetary policy would otherwise remain unchanged, according to the state news agency WAM.
The UAE and four of its neighbours, including Saudi Arabia, had planned to converge their economies with a view to eventually launching a common currency.
But the UAE, one of the major candidates to host a joint central bank, expressed reservations over a May 5 decision to base it in the Saudi capital Riyadh.
In the statement on the UAE withdrawal, WAM said it was the first country to ask to host the joint central bank in 2004 and did not host any other GCC body.
"I think this is more a statement of protest over the decision that was taken on choosing Saudi Arabia," said Mohammed Yasin, chief executive at the UAE's Shuaa Securities.
"It is more over the way it was chosen, not where it was chosen… I don't think it will have any affect on the economy or the stock markets."
Bahrain is the only country to have ratified the deal, the GCC Secretary-General Abdul-Rahman al-Attiyah said this month.
Neither Attiyah nor Naser al-Kaud, deputy assistant secretary-general of the GCC General-Secretariat, could immediately be reached for comment. The UAE, Saudi and Qatari central banks could not be reached for comment.
A BLOW TO UNION PLANS
Gulf policymakers had repeatedly said in recent months that the global financial turmoil and a collapse in oil prices had made achieving monetary union more urgent.
But the decision over a venue for the monetary council had been caught up in political wrangling for the past year.
Oman had already shaken the project when it opted out at the end of 2006, but the exit of UAE, the world's third-largest oil-exporter, comes as a much stronger blow.
"It's a major blow for the single currency project. Oman has withdrawn, Kuwait has a currency basket and now the Gulf's second largest economy has said it won't participate," said Simon Williams, regional economist at HSBC in Dubai.
"I don't think it signals a change in currency regime, or disagreement over the maintenance of the dollar peg."
The choice of Saudi Arabia was seen as a fresh sign that the kingdom, which is the Gulf region's largest economy, was regaining the prominence it had lost to the UAE, which had raised its profile in recent years with rise of Dubai as the region's trade and tourism hub.
Some analysts said at the time that the headquarters of both the GCC Secretariat and the central bank should not be in the same country.
"The UAE decision to withdraw has been coloured more by emotion than rational thinking and it's unfortunate that they have opted to walk out rather than find reason," said John Sfakianakis, chief economist at HSBC's Saudi affiliate SABB.
"Egos should be supplanted by common sense. The union is not coming to a complete end but it complicates matters further."
