The countries of the Gulf Cooperation Council (GCC) are seeking to issue their single currency, following in the footsteps of the European Union, which had issued earlier its euro single currency.
The issuance of a single currency by economic cartels is a very advanced step as a result of joint economic action.
In this respect the Dubai Economic Council issued a book that deals with this important topic.
The countries of the GCC have different views on this issue, which is the reason why only four countries have so far agreed on issuance of a single currency, while two countries are still waiting due to technical and organisational reasons, especially as a single currency requires a margin of national sovereignty wavering in the currency field.
Furthermore, requirements to set up a single currency are complicated and difficult to adhere to because they are bound to financial and monetary policies, general debt and annual budget deficits, exchange rates, inflation, labour, interest rates and the payment system, all of which are complicated issues that need a flexible econ-omic system and a complete adherence to the financial and monetary policies issued by single currency establishments.
Hence there are many global experiences where agreements are applied, such as free trade and customs unions; however, there are only five single currency agreements, outlined by Mohsin S. Khan from the Boston Peterson Institute for International Economies.
As one of the authors of the Currency Union and Exchange Rate Issues: Lessons for the Gulf States, which is a rare book in its field and issued by the Dubai Economic Council, Khan considers GCC countries to be homogeneous; however, the EU's single currency experience is considered the most vital on the global level, where the euro has taken its place beside the United States dollar.
As it seems, the Gulf group is treading, albeit slowly, in the footsteps of the European group in issuing its single currency. As a first step towards setting up the Gulf Central Bank, the Gulf Monetary Council was established with the participation of four GCC countries, while two countries have delayed their decision.
Unique experience
The EU has presented a unique experience which will be very useful for GCC countries, especially after the difficulties encountered by the European currency as a result of the international economic crisis and the debts accumulated by some of the Maastricht Treaty countries of the European Economic and Monetary Union.
Other complexities faced by the EU include the lack of commitment on the part of major countries such as Germany and France towards agreed-upon standards, such as the 3 per cent limit of deficit in the annual budget, as it reached 12 per cent in Greece, and the foreign dept percentage of gross domestic product (GDP) which was set not to exceed 60 per cent but surpassed 100 per cent in countries such as Italy and Greece, thus creating real problems which called for the intervention of other EU member countries to save the European single currency.
This involvement contributed to overcoming the crisis and led to the joining in of new countries in the EU, such as Estonia in early 2011.
Every experience has its individuality which stems from the economic and political structure of its countries, despite the fact that there are common basic and agreed-upon similarities for issuing a single currency which were outlined earlier.
This also applies to the Gulf group which has covered important legroom towards unifying its currency, such as pegging its currency to the US dollar, agreed on a price margin for its currency to move towards one another and coordinated over exchange policies. These preparatory steps are important in setting up strong foundations for issuing a single currency.
The currency peg to the dollar at this time has served this direction, as pointed out rightly by Ronald MacDonald, professor of political economy, University of Glasgow, United Kingdom, and one of the previously mentioned book's authors. The author also pointed out that the peg policy led to importing the dollar monitory policy, which may not suit, at times, the economic conditions of the GCC countries.
In addition to the financial and monetary foundations necessary for monitory union, such as the deficit percentage and public debt ratio, Paul Grauwe, professor of international economies at Belgium's Leuven University, has defined other basics adopted by the EU in issuing its single currency.
Inflation rates as pointed out by Grauwe must not exceed 1.5 per cent in Eurozone countries, over the average inflation of three countries in the EU.
Moreover, profit rates must not exceed 2 per cent over the average of the three European countries with the lowest inflation.
Over the past four years, inflation rates have greatly varied in GCC countries between 4 per cent and 12 per cent, while interest rates remained close to one another.
In addition to economic fundamentals, the EU's experience points towards the importance of structural, organisational and political basics.
Willem H. Buiter, professor of European Political Economy at the London School of Economics, also pointed this out in the Currency Union and Exchange Rate Issues: Lessons for the Gulf States, which means that GCC countries have to make bigger concessions related to national sovereignty, such as finding a Gulf Commission — similar to the European Commission — with vast authorities.
On European lines
A ministerial council and a legislative authority have to be set up as well, because the GCC Advisory Board does not enjoy the powers of the European Parliament.
A Gulf Court of Justice has to be set up as well, similar to the European Court of Justice. In viewing the development of Gulf cooperation, we find that there needs to be more trust between its members, especially as common agreements give equal rights to GCC countries.
These agreements also give GCC member countries a similar veto right regarding substantive decisions.
The GCC Monitory Council's statute in Article 15 of the Gulf Monetary Union (GMU) agreement regarding the independence of the Central Bank states: "Neither the Monetary Council nor any member of its Board of Directors or Executive Body shall receive instructions from any GCC bodies or any governments of member states or any other entities that would influence the performance of their tasks and duties under this statute."
The statute of the Gulf Monetary Council in Item 2 of its tenth article states: "The meeting quorum shall be deemed valid if two thirds of the Board members are present. Decisions of the Board are unanimously taken in objective matters and by absolute majority of the members present in procedural matters. Each Board member shall have a single vote."
These legal provisions present a strong legal foundation that enhances trust and flexibility in making decisions which mirror the interest of all GCC monetary union member countries.
It is worth taking note that such decisions are made by the absolute majority in the EU, which has given vast powers to the European Central Bank, as the tasks of similar establishments require a high level of proficiency for them to be able to achieve their goals.
With regard to professional aspects, the closeness of GCC countries' financial and monetary policies, their agreements in unified customs, the common Gulf market, coordinated monetary policies in pegging their currencies to the dollar and other common elements provide the necessary components to set up a single currency.
By taking the above-mentioned requirements that can be achieved — due to the quantum leap the single currency represents for the GCC economic bloc — there will be many local, regional and international gains. The GCC will benefit from an independent and a more stable monetary policy to suit its economic conditions and will allow these countries to transform their currency into an international reserve currency, thus giving the GCC a distinguished position in international economic relations.
All about the GCC
The Gulf Cooperation Council, or the GCC, is a political and economic alliance made up of six Gulf states. It aims to boost economic cooperation between members and, through collective security, to guard against any threat. The GCC was formed in May 1981 against the backdrop of the Islamic revolution in Iran and the Iraq-Iran war.
Its members — Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Qatar and Bahrain — share similar political systems and a common social and cultural outlook.
Collectively, the GCC countries possess almost half the world's oil reserves.
In 1984, the GCC created an embryonic collective defence force — the Saudi-based Peninsula Shield. GCC members signed an intelligence-sharing pact in 2004, aimed at countering terrorism. On the economic front, the GCC's common market came into existence early in 2008. GCC countries are working towards adopting a single currency.
A customs union was set up in 2003. GCC countries weathered the global economic downturn better than many other parts of the world, as Gulf economies were cushioned by healthy budget surpluses.
Structure
Supreme Council: The highest decision-making body is composed of the GCC heads of state. It meets once a year. The presidency of the council rotates. Decisions on substantive issues require unanimous approval.
Ministerial Council: Made up of foreign ministers or other ministers, the council meets once every three months. It proposes policies and manages the implementation of decisions.
Secretariat-General: The administrative body prepares meetings and monitors the implementation of policies.
Consultative Commission: Made up of five representatives from each member state, the commission advises the Supreme Council.
Commission for the Settlement of Disputes: Formed on an ad hoc basis to seek peaceful solutions to problems among member states.
Secretary-General: Appointed by the Supreme Council for three years, renewable once. The present Secretary-General is Abdul Latif Bin Rashid Al Zayani.
Issues
Security is a major issue for the GCC but finding a formula that satisfies all states is a challenge. It seeks to reduce its dependence on the US for security. Talks with the EU on a free trade deal began in the 1990s but by 2010 had stalled on the issue of export duties. Its relations with Iran have become strained due to Tehran's nuclear programme, though it has preferred to engage with Iran rather than adopt a confrontational stance.
-Information courtesy: Bbc.co.uk
Dr Mohammad Al Asoomi is an economic expert based in the UAE.
