The recent opening of the Gulf Monetary Council in Riyadh is undoubtedly a historic moment. However, this should in no way suggest that the GCC countries should speed up the process of implementation of the Gulf Monetary Union (GMU).
Among other things, the scheme in its current form suffers from an acute lacuna, with two member states, the UAE and Oman, opting to shun the planned union. If a third of the GCC’s six-member grouping decides to stay out, this is clearly a major shortcoming.
The UAE’s absence is exceptionally significant by virtue of it commanding the second largest GDP among Arab states let alone within the GCC entity. In fact, the UAE is a regional leader in trade, finance and aviation, to name a few such areas.
Technically, the GMU agreement went into effect in March 2010, following its ratification by the other four states, Saudi Arabia, Qatar, Kuwait and Bahrain. Yet, these members have not committed themselves to a specific deadline to complete the union. The GMU’s ultimate goals include unifying monetary and fiscal policies and introducing a single currency.
Rise in revenues
The GMU’s criteria require member states to ensure that governmental budget deficit should not exceed 3 per cent of the GDP. Also, the public debt ratio must be below 60 per cent of the GDP.
Bahrain has problem with the budgetary deficit criteria, as that for fiscal year 2013 is projected at 9 per cent of the GDP. However, actual shortage is expected to be considerably minimal on the back of possible rise in revenues and a decline of expenditures.
In addition, member states are required to maintain low inflation and interest rates, plus stable exchange rates as well as sufficient foreign exchange reserves, all of which are not concerns at the moment.
True, GCC economies share numerous qualities including a near absence of corporate tax and total absence of taxation on individual income. Also, petroleum is the key source of export and treasury earnings in all GCC economies.
Another quality relates to the pegging of local currencies to the US dollar. Kuwait stands out by linking the dinar to a basket of currencies. However, the dollar comprises around 70 per cent of the basket’s weight of currencies, a status emerging from it being the currency of choice in the oil market.
GCC countries differ on their economic orientation with some placing emphasis on the role of the private sector and economic freedom more than others.
First things should come first with regards to execution of integration within the GCC entity. As such, efforts ought to be focused on implementation of two other projects, namely the customs union and the Gulf Common Market (GCM).
It is now hoped that the customs union would be completed by 2015. Sticking points entail a fair distribution of revenues and final destination of goods taking into account points of entry and economic might of member states.
On its part, the GCM went into effect in the start of 2008 with the goal of ensuring a free flow of factors of production among member states. Unlike the GMU, all GCC states are parties to the customs union and common market initiatives.
In practice, GCM aims at finding a unified regional market through which nationals could benefit from available opportunities in all member states, and certainly a noble objective.
Also, the experience of the euro and the Eurozone should serve as a reminder to consider all things when deciding the GMU’s next move.