Question

what are the necessary steps to reach a common currency within the GCC?

(In 500 words discuss the main challenges and opportunities face a common GCC currency)

Answer 1

GCC (Gulf Co-operation Council)

The Cooperation Council for the Arab States of the Gulf originally (and still colloquially) known as the Gulf Cooperation Council (GCC)  is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf except Iraq, namely: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.The Charter of the GCC was signed on 25 May 1981, formally establishing the institution.

All current member states are monarchies, including three constitutional monarchies (Qatar, Kuwait, and Bahrain),two absolute monarchies (Saudi Arabia and Oman), and one federal monarchy (the United Arab Emirates, which is composed of seven member states, each of which is an absolute monarchy with its own emir). There have been discussions regarding the future membership of Jordan, Morocco, and Yemen.

The original 2,673,110-square-kilometre (1,032,093 sq mi) union comprised Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The unified economic agreement between the countries of the Gulf Cooperation Council was signed on 11 November 1981 in Abu Dhabi, UAE. These countries are often referred to as "the GCC states" or "Gulf countries".

Objectives

In 2001, the GCC Supreme Council set the following goals:

• Customs union in January 2003
• Common market by 2007
• Common currency by 2010

The idea of establishing the Gulf Co-operation Council (GCC)1 has emerged from political, economic and security considerations. As a result the objectives of the GCC Charter have covered all those aspects. During the last twenty years of its existence, the GCC has passed through many stop-and-go phases.2 However, at its December 2000 Summit, GCC member States agreed to take the necessary steps to achieve a unified currency.

FAVORABLE AND UNFAVORABLE FACTORS

1. Some Favorable Factors

a. Political will has been playing a stimulating role in the economic integration of GCC member States.

b. Oil may be both a favorable and unfavorable factor for the GUC. As a favorable factor, it plays a major role in the accumulation of wealth in GCC countries, which leads to a high level of foreign assets. Great financial wealth also accrues to the private sector as a result.

c. In general, the economic environment of the GCC is conducive to competitiveness and productivity. Inflation is very low, in the range of one per cent, or even negative in some years. The infrastructure is adequate, and the private sector benefits from the presence of expatriate workers at competitive wage rates and with adequate skills.

d. The stability of the exchange rate is definitely one of the most important favorable factors in GCC monetary unification.

e. Certainly, the pegging of their currencies to the US$ represents one of the key factors for achieving a GCC Unified Currency

2. Some Unfavorable Factors

a. Even though the business environment of the GCC is conducive to competitiveness and productivity, in order to increase productivity the whole environment for doing business needs certain improvements. In this respect, there is still a set of investment-related regulations (such as commercial law and company law) to be improved. These regulations together with -and within- the judiciary system as a bloc, should, for instance, facilitate the liquidation of collateral. Monetary unification will require governments to remove their legal discrimination. Regulators should encourage the development of market-based control mechanisms. The importance of such control mechanisms is accentuated by the dynamic nature of financial markets in the face of the inevitable hurdles facing most regulatory changes and by the need to protect the financial sector from the danger of over-regulation.

b. Owing to the vastly similar economic policies followed by the GCC governments, the dominant share of the oil sector in their economies, and the pervasive role of the public sector, the economic cycles of the GCC countries have been –and in the absence of necessary reforms– will continue to be strongly correlated over time. This is actually the other side of the coin: oil may be also an unfavorable factor for GCC monetary unification. Unilaterally developed economies represent unfavorable factors in the monetary unification process. More diversified economies can better absorb and neutralize asymmetric shocks, which could jeopardize the GUC.

c. Oil revenues still account for 30-40 per cent of GDP. But, apart from oil, in the last decade these countries have developed petrochemical industries, and some light industry. The services sector also is widely developed, as are banking and financial services. However, for a GCC bank seeking portfolio diversification the appeal for interregional investments is diminished, not necessarily by the intrinsic risks of the investments themselves, but by the minimal degree of diversification that the institutions’ already regionally biased portfolio would offer.

d. Delaying the implementation of a harmonized tariff schedule until 2005 reflects the long time- frame for unification. This is in respect for the difference between the States that have low tariffs and those whose tariffs are higher.

Based on the EMU experience with the Euro, the GCC countries must solve two main problems. The first is the transition itself from a nationally centered monetary system to a common system.

The GCC countries have some great advantages compared to any historical monetary union (including the EMU), such as their cultural homogeneity, their ‘healthy’ fundamentals and the pegging of their currencies to the US dollar.

The GCC countries, with their economic strength and determined political will, have the necessary potential to back the creation and functioning of a new common monetary system.

In our opinion, some important conditions for achieving Gulf monetary unification still remain, provided that the GUC designers develop their current comparative advantages and learn from international experiences, while keeping in mind their own specificities.