UAE may make decisive shift away from dollar reserves


By Haseeb Haider
Khaleej Times, Dubai
Tuesday, October 31, 2006

ABU DHABI -- The United Arab Emirates Central Bank may cut its U.S. dollar-dominated reserves by up to 90 percent and is looking at other currencies such as the yen, euro, and sterling, UAE Central Bank Governor Sultan Nasser Al Suwaidi said yesterday. He did not elaborate.

"The bank hopes to lower the dollar share of its foreign currency reserves to a range of between 50 to 90 percent," Al Suwaidi said. At present, he said, 98 percent of the bank's reserves holdings are in U.S. dollars. The foreign currency reserves of the UAE currently stand at over $25 billion. The Central Bank is yet to convert 10 percent of the total reserves into euros and gold, a decision it took earlier this year.

"It is our investment policy to diversify the reserves. There are  euro, yen, and sterling ... We are still waiting for the appropriate time and circumstances," Al Suweidi told reporters at a briefing after the conclusion of the two-day conference of Gulf Cooperation Council central bank governors and head of monetary agencies in Abu Dhabi.

The GCC central bankers meeting discussed sovereignty matters relating to monetary union. It agreed that an explanatory note shall be forwarded, showing the sovereignty concessions GCC members states will make in case the monetary union is approved. This will include drawing up and implementation of monetary policy, issuance of the unified currency, determining exchange rate policy, approval of the legislation relating to the union requiring amendments to the national banking, financial and monetary rules, and regulations in line with the GCC framework.

The GCC Central Banks and Monetary Agencies, at a meeting in Abu Dhabi yesterday, also agreed on a six-point memorandum of recommendations on GCC Monetary Union to be presented to finance ministers and central banks for developing a consensus. The outcome will be submitted to the heads of states at their meeting in Riyadh, Saudi Arabia, in December for a final adoption.

"We cannot disclose the recommendations we have agreed today until they are presented to the meeting of GCC finance ministers and central bank governors taking place in Jeddah on November 4-5," Al Suwaidi said.

On the subject of the currency peg of the future GCC single currency, whose name has not yet been decided, he said that it would be pegged to U.S. dollar, as per the recommendation of International Monetary Fund.

"The idea is: Instead of pegging it with a basket of currencies, it should be pegged to the single currency, the U.S. dollar, as at the end it would have a tilt to a single currency," he explained.

Al Suwaidi was of the view that the ideal thing would be a free float of the GCC single currency. According to plan, the currency would free-float after five years.

In reply to a question regarding the headquarters of the GCC Central Bank in Abu Dhabi, the governor said that Qatar and Bahrain have also expressed their desire to host the offices of the supreme body.

"Though we were the first, in offering to set up the regulatory institution here. ... we respect the desire expressed by two members of the GCC bloc," he added.

In answer to a question about the prospects of Abu Dhabi in the race for hosting the GCC Central Bank, he said: "Anything is possible."

Al Suwaidi said the name of GCC central bank has also not been yet decided. "It could be GCC Currency Board or GCC Central Bank," he said.

In reply to a question, he said that GulfStat is being established, which would gather information on vital economic and financial statistics on GCC, on the pattern of European Union.

In answer to a question on rising inflation, the governor said inflation would reduce from a current level of 6.5-7 percent to 4-5 percent by the beginning of the 2007. The rise in inflation was due to hiking rents, he said.

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