Flip through the latest issue of Gulf Weekly.
THE UAE's withdrawal from the proposed Gulf monetary union may not derail the region's single currency plan, but any
common currency that does not have the backing of the UAE would be like France, the euro zone's
second-largest economy, abandoning the euro.
Within the GCC, the UAE has the largest number of banks, largest assets and largest deposits in the region. It also has 50 per cent of the GCC's international money transfers.
So, when the decision to base the joint central bank of the proposed union in the Saudi capital Riyadh was taken, the UAE, the second-largest Arab economy, was naturally stung, leading to it breaking ranks with Saudi Arabia, Kuwait, Qatar and Bahrain.
The UAE's central bank governor Sultan Al Suweidi says a decision to base a joint Gulf central bank in Saudi Arabia was politically motivated and it ignored his country's financial advantages.
UAE's Foreign Minister Shaikh Abdullah bin Zayed Al Nahyan says the Gulf state would consider rejoining the Gulf monetary union if terms change and its neighbours agree to allow the joint central bank to be based in the country.
The UAE's public outcry is very much contrary to the usual behind-the-doors decision-making, where all differences are kept away from public gaze.
When Oman pulled out of monetary union in 2006, it did not describe why that decision was taken. Kuwait, meanwhile, said its choice to drop its currency's dollar peg in 2007, contravening a deal by the bloc to keep it until union, was a purely economic decision as it sought to fight inflation.
Analysts say the UAE decision to quit monetary union marked a protest against Saudi Arabia's dominance over Gulf decision-making.
What are the major ramifications of the decision?
Although Saudi Arabia's central bank governor Muhammad Al Jasser says he didn't believe that the withdrawal will affect the monetary union because there are still four countries that are excited about it, even the very optimistic of analysts say the project initially envisioned for 2010 would face major delays.
The GCC acknowledged earlier this year it would fail to meet that deadline and said a new timetable would be set once a monetary council, the precursor to the central bank, starts operations.
"Progress on the monetary union has been very slow and given the tasks central banks have ahead of them I don't see it happening in the next five years," says Monica Malik, an economist at EFG-Hermes.
"Greater harmony must be made with respect to monetary policy, instruments and procedures."
A Reuters poll shows, neither Saudi Arabia or the three other remaining Gulf Arab states are likely to unilaterally walk out on their single currency plan.
However, respondents were divided over whether the project to create a European Union-style single currency would have enough momentum to see the light of day.
Ten out of 15 economists drawn from banks and research houses say they did not expect another of the region's oil exporters to follow the lead of the UAE and Oman and withdraw from the Gulf Cooperation Council (GCC) monetary union plan.
Of the five respondents who said it was likely another state would pull the plug on the project unilaterally, three said Qatar was most likely to withdraw and two said Kuwait.
Meanwhile, Moody's Investors Service says that the decision of the UAE not to participate in the proposed monetary union will not directly affect the country's sovereign ratings.
Furthermore, any potential postponement or cancellation of the GCC currency union project that may or may not follow the UAE's decision would not directly affect the sovereign ratings of other GCC member states.
Moody's points out that many of the common advantages of a currency union - including the removal of internal currency risk, the potential boost to intra-union trade, and accompanying institutional and structural improvements - are muted in the case of the GCC.
At the same time, the disadvantages of a currency union - such as members' loss of independent monetary and exchange rate policies - are also less applicable given that GCC states already have fixed exchange rate pegs.
However, any adverse political consequences of the UAE's decision, such as a deterioration in intra-GCC relations or a structural worsening of the UAE's relationship with Saudi Arabia would be viewed negatively by Moody's and could potentially weigh on the UAE's sovereign ratings over time.
Above all, the move is a blow to GCC unity more generally and could be interpreted as a sign of how the balance of power between Saudi Arabia and the smaller, richer GCC states has shifted over time.
