Less than 24 hours after Dubai’s finance chief was demoted, the UAE announced its decision to withdraw from the GCC Monetary Union, putting the broader union at risk. This decision comes two weeks after a major milestone; selection of the location of the GCC Central Bank. UAE officials did not conceal their reservations about the choice of Saudi Arabia to host the institution. UAE newspapers heavily criticized the Saudis in what may have developed into a political rift.
For starters, the GCC Secretariat is already located in Saudi Arabia and other institutions in other GCC countries, and with plans to diversify the government institutions, they believed that the GCC Central Bank should be located in the UAE, given its development as one of the region’s financial hub, possibly with a presiding Saudi National.
Despite the political headlines,the GCC monetary union was already facing many hurdles and the 2010 deadline had already been abandoned, particularly as economic policies have diverged in the wake of the global and local economic crisis. Changes in the GCC policy agenda- now focusing on policy responses that would shield the GCC countries and boost growth and liquidity – took precedence over convergence and made delay more likely. Furthermore other aspects of the customs union may face delays. This decision should not come as a big surprise. Oman announced its decision not to participate several years ago. Kuwait de-pegged from the dollar in 2007 (and pegged to a dollar-dominated basket) although it vowed to join the union. The UAE’s decision to pull out, despite the fact that it was the first country to apply to host the union in 2004, versus Saudi Arabia who applied in 2008, might be a fatal blow. With only four out of six members willing to join, any potential union seems ripe for significant delays.
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