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GCC bank solution is crucial
All options must be considered to resolve the dispute over the location of the gulf central bank because it is key to economic integration in the region.
- By Nader Habibi, Special to Gulf News
- Published: 23:06 June 1, 2009
- Image Credit: Illustration: Nino Jose Heredia/©Gulf News
The decision of Gulf Cooperation Council (GCC) leaders on May 5 to select Riyadh as the location of the GCC Central Bank (GCB) was an unexpected surprise to the UAE and many experts who were following the negotiations.
However, the announcement by the UAE that it will pull out of the GCC monetary Union in protest against this decision was also equally unexpected.
The UAE is the second largest economy and the largest financial centre in the GCC. If the UAE carries out this threat what remains of the GCC monetary union will be rendered ineffective and it will also be a major setback for plans to introduce a common GCC currency. Furthermore, if unresolved, this dispute will also have an adverse effect on the progress of other GCC plans for economic integration.
Hence it is crucial for the unity and success of the GCC as a whole that the member governments find a solution for this dispute and bring the UAE back into the GCC Monetary Union. Political disagreements among GCC members are not unusual and they are not without precedence. In 2005 the GCC Customs Union was threatened by a dispute between Saudi Arabia and Bahrain over Bahrain's Free Trade Agreement with the United States. While the GCC has survived these occasional disagreements, each dispute has had an adverse effect on the pace of economic integration among its members.
The search for a solution to the current dispute over the location of GCB must start with a look at the UAE's grievances. The UAE leadership has put forward two reasons why it deserves to be the host country for GCB. First, the UAE has the largest and most globalised financial sector compared to other GCC countries and it is host to the largest collection of international financial institutions in the region. Second, since Saudi Arabia and Bahrain are already serving as host countries for three GCC institutions, the UAE believes that, as the second largest economy in the GCC, it deserves to host at least one GCC institution (namely the GCB).
In light of modern communication technology, the physical location of the GCB has little bearing on its effectiveness and efficiency. There is also no reason to believe that the GCC member that hosts the central bank will enjoy more power and influence over GCC monetary policy because of its location. For example while the European Central Bank (ECB) is located in Germany, the monetary decisions are made collectively by a board of governors and there is no evidence that German government has more influence in ECB than France or Italy.
Therefore the dispute over this issue is primarily a political dispute over the prestige and respect associated with hosting such an important institution. One has to acknowledge that there is some legitimacy to the above mentioned objections by the UAE. The GCC governments must design a clear set of rules on how such political disputes will be resolved in the future. This particular case, however, demands immediate attention before it causes further tensions among GCC members.
There are several ways the GCC can address UAE's demand. One option for member governments is to reconsider their earlier decision and change the planned location of the GCB from Saudi Arabia to the UAE. This option, however, will be strongly opposed by Saudi Arabia and it will be very difficult for other GCC members to convince the Saudis to concede.
A second option is to offer a special enhanced role in management of the GCC Central Bank to the UAE to compensate for rejecting its demand to host the institution. For example the GCC members can agree to an arrangement that the presidency of GCC central bank will be permanently reserved for a UAE national. Such an arrangement is not without precedence. For example, there is an understanding between Europe and the United States that the director of the International Monetary Fund is always a European national while the president of World Bank is an American.
The third option for GCC is to address UAE's grievances by choosing it as the location for the next major GCC institution. For example with the growing interest in nuclear technology among its members, the GCC might decide to establish a joint institution to regulate and coordinate the region's nuclear industry. The central office for such an institution can be located in the UAE. Another potential institution that might come under consideration in the next few years is a GCC representative parliament. The UAE can also be considered as the host country for such an institution.
The fourth option is to divide the responsibilities of the GCC Central Bank and allow a portion of these responsibilities to be managed from an office in the UAE. In most countries the central bank generally performs two distinct functions. It regulates the operations of the financial institutions and it conducts monetary policy by controlling the supply of money and setting the interest rates. The GCC can create two offices for its central bank. One office will be located in the UAE and be responsible for oversight and regulation of financial institutions. The other office will be in Saudi Arabia and will be responsible for the monetary policy and management of GCC's common currency which is expected to be introduced in the next few years.
Finally, the fifth way to resolve this dispute is to set up the GCC Central Bank in a member country other than Saudi Arabia and the UAE. Perhaps Bahrain can serve as an ideal host for GCB because it has the smallest economy in GCC and as a result, it is not a contestant for GCC leadership.
- The writer is the Leir Professor of economics of the Middle East at Brandeis University's Crown Centre for Middle East Studies.
Your comments
Mr. Habibi's proposals are well intended, although difficult to achieve. From past issues it appears that the UAE has every right in what it did.
The solution to this problem and future problems is simple: all GCC members have equal saying when it comes to the decision-making process.
Marc Jons
Dubai,UAE
Posted: June 02, 2009, 14:46
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