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When I saw the headline in Gulf News yesterday morning, ' Why Oman pulled out of the single currency', I thought that everything might be revealed about that surprise decision announced at the AGCC summit in December. Actually, I didn't learn much from the article. Instead, I'd recommend reading an analysis published in Gulf News of 16th December by Emilie Rutledge, Visiting Professor at United Arab Emirates University.

I can't discover any official announcement in the Omani English language press. Reading the official report of the summit in the Times of Oman of 11th December, one would never know that Oman's withdrawal from Gulf currency union in 2010 had actually been mentioned at the summit. Of course, NOT mentioning something can be construed as a sign of displeasure. 'We don't like it, so we won't acknowledge that it exists!' But that could be unfair. Any statement that could be construed as criticism of one's peers could also be considered negative and unworthy.

In fact, when I read the initial reports which mentioned sovereignty as an issue , I was rather reminded of Britain's refusal to join the Euro. There are even five economic tests which the Gulf countries can use to assess whether they are ready to join a currency union, including capping budget deficits at 3 percent of gross domestic product, public debt at 60 percent of GDP, and inflation at the GCC average plus 2 percent. Interest rates are to be no higher than the average of the lowest three states plus 2 percent and countries must have foreign exchange reserves to cover 4-6 months of imports. Khaleej Times quoting Reuters.

The Khaleej Times also reported that a Gulf official had apparently said, on condition of anonymity, that the decision was positive in that the Sultanate had no objection to the other AGCC countries going ahead with currency union, and would still like to attend the relevant meetings without voting rights.

The Chinese news agency pointed out that the AGCC customs union had been put back at the previous year's summit, from 2005 to the end of 2007. National sovereignty therefore seems to be a strong factor in these decisions.

What's involved in the Gulf currency union? Currencies are pegged to the declining dollar. Presumably a shift to another currency such as the Euro, which the Financial Times reports has now overtaken the US dollar in the international bond market , would mean that the value of 'cash in hand' e.g. income in US dollars from the sale of oil and gas, would become less, since the local currency would effectively be revalued.

Gulf News of 12th December claimed that

'a report from HSBC Global Research says [Oman] may end up on the margins of regional development, especially since foreign investors will find it a less attractive place to do business.

While Oman's departure may not leave huge economic ripples behind, it still is a blow to the unified front the GCC has been trying to build.'

And from Gulf News of 11th December

'"If we are talking about 2010 being pushed back, it increases the likelihood that there could be a revaluation," said Simon Williams, an economist at HSBC in Dubai. "There are other arguments against revaluation in central bank governors' minds, but if they decide to push back 2010, then that argument falls away."

Again on the 12th December, Gulf News reported an affirmation by Ahmad Bin Abdulnabi Macki, Oman's Minister of National Economy, that Oman would not be joining the currency union, when he was pressed for a statement on the sidelines of the signing of the Barka II Independent Power and Water Project and privatisation of Rusayl Power Company.

Explanations began to emerge in a Reuters report re-published by the Khaleej Times on 13th December. The undersecretary for economic affairs, Abdul Malik bin Abdullah al-Hinai, said

“No doubt there are benefits for Oman from monetary union, but the question is whether it is realistic or not. Prerequisites to a common currency such as a customs union and a common market have still not been completed, making the 2010 deadline unfeasible. ”

He also said that because Oman had started development later than the other Gulf countries, it still needed to spend more on infrastructure, which would presumably make it difficult to meet targets for capping budget deficits and public debt.

Al Hinai continued,

'“We have still not passed the barriers which are hindering customs union. We still have not reached a full common market and there are problems with the customs union. In order to have a monetary union we need to have a smooth customs union and a complete common market.”

Gulf finance ministers and central bank governors have not agreed how to assess economic criteria, although Abdul Rahman Bin Hamad Al Attiya, Secretary General of the GCC, said a deal should be reached before the next ministerial meeting in April.

Even the Financial Times has weighed in.

'Oman, which potentially stands to gain the most from the union, given its relatively small per capita reserves of oil, has not explained the reasoning behind its delay. However, it comes after a month of renewed doubts, with both Oman and Kuwait suggesting the deadline was unrealistic.'

Emilie Rutledge writing in Gulf News pointed out that:

"the main reason for the delay in the finalisation of the customs union was the unilateral decision by Oman, preceded by Bahrain, to sign a free trade agreement with the US."

She also suggested that Oman, 'with GDP per capita income 63 per cent of the GCC average and an economy constituting just five per cent of the GCC's total GDP', would have benefited from entering 'into a monetary partnership with its economically larger and wealthier neighbours.'

When a Gulf Dinar does come into existence, Ms Rutledge proposed that 'international investors are likely to buy Gulf Dinar-denominated assets as a hedge against the possibility of the currency being used to invoice oil and gas sales.' Such an eventuality would also put Oman into a weaker position since it would have to face transaction charges and exchange rate risks.

Besides, a revalued Gulf currency would make Oman's non-oil exports more expensive.

'Oman will be less attractive to higher-end European visitors if euros buy fewer Gulf Dinars than they currently do Omani riyals.'

Oman is trying to diversify its economy away from oil and gas and is relying on tourism not only as a money-earner, but also as a relatively attractive employment option for the 40 percent of its population that is under 15. A more expensive currency could price out even the up-market tourist. No income means no jobs.

Actually, the reason could be quite simple. Why change something when it works? People are used to the dollar. The greenback may be weakening but it is still relatively stable. Why go through the bother of change when it could cause economic instability and upheaval?

It isn't just Oman. Both Bahrain and Saudi Arabia have subsequently announced that they have no intention of unpegging their currencies from the dollar. Even the UAE's central bank governor, Sultan Nasser Al Suwaidi, has said that 'it might be a while before the central bank went for converting part of the country's dollar reserves into euros or any other currency.'

However, a light began to go on in my brain when I read this entry in a blog last week.

[The announcements by Oman and Bahrain] appear to be more about controlling speculative runs on the dollar than about what the actual policy might turn out to be, with the need to maintain valuation of dollar denominated assets.'

Ah, yes. Bahrain and Oman have signed FTAs with the USA. And what about this little snippet from the governor of Oman's central bank,

Oman favours keeping most of its $5 billion of central bank reserves in dollars rather than euros because the US currency pays higher interest. [ ] About 80 per cent of the bank's foreign exchange reserves are in dollars, 15 per cent in euros and 5 per cent in pounds.'

Reuters report published in Khaleej Times.

The consensus is that Oman's departure from the projected monetary union is unlikely to put off the date of currency union, . It will eventually go ahead. Oman should be very careful to assess what the impact of this is likely to be.