Little progress was made at the recent GCC meeting, with Iran’s president adding some interesting colour to the occasion, writes Nicholas Noe.

The December 2007 Gulf Cooperation Council (GCC) meeting seemed to promise some substantive movement on a number of important political, financial and economic fronts.

However, even with the unprecedented visit and speech of Iranian President Ahmadinejad (the GCC was, after all, originally designed to counter Iranian threats in the Gulf in the early 1980s), little changed in terms of political rapprochement in the region, much less in terms of smaller steps on security cooperation, boundary disputes or trade issues.

In fact, the Iranian president may have actually made things worse at the summit by failing to take advantage of the GCC’s ‘outstretched hand’s – he avoided any discussion of his country’s nuclear programme, pointedly referred to the “Persian” and not the Arabian Gulf, and ignored the subject of the three islands claimed by the UAE which Iran occupies.

Lost resolve

On the financial front, the results were perhaps even more disappointing, since news reports had variously suggested that some member states might finally take the opportunity to break with the dollar peg for their currencies.

The final communiqué, however, made no reference to the issue. Indeed, the summit participants seemed eager to sweep the issue under the rug for the moment, according to one report in the local Qatari newspaper As Sharq.

“Monetary officials in the Gulf countries,” the daily explained, “have come under increasing pressure to abandon the dollar peg for two reasons: (a) the depreciation of the dollar against other major currencies; and (b) the rise in inflationary rates, particularly in Qatar and the United Arab Emirates, most of which is seen as imported due to the dollar depreciation.”

Despite these pressures, the GCC as a whole eschewed either a full break with the dollar peg or a changeover to a basket of currencies – a move which Kuwait took earlier last year and which contributed to a 5% rise in the value of the dinar.

According to several reports, the decision to stay put was based on four points: first, oil is priced in dollars, and so are most of the other Gulf exports; second, with a comfortable budgetary surplus, the Gulf countries are able to absorb any negative aspects of dollar depreciation; third, most of the banking transactions in the Gulf are performed in dollars so introducing a third currency might increase the cost of currency conversion; and fourth, consideration was apparently made of the fact that rising inflation is also the result of spiking prices in world commodity markets and abandoning the peg will not resolve this particular problem.

Citi’s advice

That said, shortly after the summit ended with no movement on the dollar peg, Citigroup’s emerging markets strategy team in the region released a report predicting that the UAE and Qatar may just as well opt to change their fixed exchange rates in the next six months.

The report added that the GCC as a whole may itself move to a basket of currencies or adjust the value of the pegs higher by 5-10%, but “the first option appears to make the most sense to us, [although] it is not clear that this will be the preferred route? Any change in currency regime could either happen unilaterally or multilaterally.”

Of course, the headline ‘achievement’s of the summit was the announcement of a common market by 2008. But even this passed largely without much acknowledgement since much of the easy work of integration – a common customs union for example – had already been put in place.

The problem has been, and remains, that on the ground, local actors have been painfully slow in adopting and/or modifying official practice.

As a result, traders routinely still complain of cross-border inefficiencies and outright prohibitions, for example, that should have been taken care of by the customs union years ago.

Even the UAE central bank governor, in one interview with a local daily, admitted that the GCC states are behind in achieving common currency parameters such as the free flow of capital and people across borders, compatible laws in land and property ownership and tax laws.

Although the announcement of the common market is designed to push member states – especially federal ones – to move faster, nothing in the way of a framework, a timetable or a set of sanctions was promulgated by the summit to guide and expedite the process.

Since an efficiently functioning common market is seen as key for reinvigorating the now effectively delayed process of currency convergence (tentatively imagined for 2015 instead of 2010), the 28th GCC summit seemed to leave more questions than provide answers for the next year – something that will undoubtedly continue to frustrate traders in the region while invigorating speculators who continue to profit from the gaps between GCC rhetoric and reality.