‘Fundamental’ reservations spurred UAE quitting single currency

• Last Updated: November 23. 2009 2:11PM UAE / November 23. 2009 10:11AM GMT

DUBAI // The UAE’s withdrawal from the Gulf Arab monetary union was based on fundamental reservations including currency plans and the role of the monetary council, the UAE central bank chief said.

“The UAE had fundamental and secondary reservations on the monetary union agreement which were not considered,” state-agency WAM quoted Governor Sultan bin Nasser al Suweidi as saying.

The UAE’s pull out of the region’s single currency project in May came after the Saudi Arabian capital Riyadh was chosen to host the headquarters of the planned regional central bank.

Suweidi said the central bank’s location decision was “political” and did not consider the advantages of the UAE banking sector. But this was not the only reason. One of the fundamental reservations, he said, was “sidelining the GCC unit of account” issue.

The monetary union agreement had no mechanism which would ensure “gradual adoption of a unit of account by the GCC countries for a reasonable period of time to test their monetary policy and assess what can be amended before moving it into the economy, and its impact on the GCC banking systems”, Mr Suweidi said.

A unit of account was adopted by European nations ahead of monetary union and the introduction of euro notes and coins.

The second fundamental reservation was the role of the GCC monetary council “which was limited to conducting studies while it should have had a role in monetary policy and other practical areas”, the governor said.

The governor added that the UAE had additional reservations on the monetary union agreement such as “the absence of a unified inflation index”.

He reiterated that the UAE withdrawal from monetary union was not a reason for the country to change its monetary policy, and the dirham will remain pegged to the dollar.

*Reuters