Quest for common change

Gulf Cooperation Council (GCC) member states, through their finance ministers and central bank governors, have periodically reiterated their commitment to a monetary union and a single currency. Remarkably, and to date, inherent difficulties have prevented them from establishing a Gulf-wide monetary union that will settle on a common currency. Senior officials from Bahrain, Kuwait, Qatar and Saudi Arabia have called on the United Arab Emirates and Oman, which withdrew from the plan, to rejoin. Neither Abu Dhabi nor Muscat seems to be ready, which means the 2001 Bahrain Summit decision, to agree on a single currency by 2010, will probably not be implemented in time.

If the June 2009 quadripartite pact (Bahrain, Kuwait, Qatar and Saudi Arabia) to create a joint monetary union council prevails, however, chances are excellent that the agreement to launch a single currency soon will create a region-wide two-tier system, which does not bode well for member states.

Emilie Rutledge, an economist with an earlier stint at the Gulf Research Centre in Dubai and who now teaches at the United Arab Emirates National University, has written a lucid study explaining why GCC governments have such horrendous impediments to overcome. She has divided her book into six cogent sections examining the characteristics of the GCC economies, asking whether the area may be optimal for a joint currency, what specific policy prerequisites must be met for a GCC Monetary Union, its costs, benefits and, finally, what real prospects the six countries faced. She closes the study by identifying future issues and controversies, which is a delight to read.

Unlike many economics tomes, this one is written in English, with few footnotes. Its references to texts by authors and dates is an unfortunate practice but editors who shun detailed annotations often impose this on hapless authors. While the specialist reader will be irritated by the practice, the general reader will be satisfied and it is to Rutledge's credit that her prose is free of excessive jargon. In fact, her discussion of GCC economics (pages 11-34), along with her well-structured charts and tables, are exquisite.

Shot from the hip

To her credit, Rutledge states the obvious without exaggeration: "At a time of momentous shifts in the balance of world economic forces epitomised by the present oil price boom, the weakening US dollar and the global credit crunch, the meteoric rise of the Arabian peninsula cannot be understated. Neither, therefore, can their planned monetary union" (page 1). Because GCC states have become the world's premium oil and gas suppliers, their accumulated wealth — "their sovereign wealth funds are by far the world's largest and the influence of these funds is becoming increasingly apparent" — means that these resources must be invested wisely.

Towards that end, the author asks clear questions: Are GCC economies diversified sufficiently? (no); how will such potential changes affect the region as a whole? (rather well); and will the GCC states adopt a two-tier system to manage its monetary union initiatives? (yes)

One of the more interesting sections of the book compares the region with the European Union and highlights outstanding preparations (both economic and political) to better determine a putative launch date (pages 61-78). She correctly argues that the present dollar peg exchange rates are no longer optimal and while the smaller member states may perceive their larger partners in overwhelming terms (ie Qatar versus Saudi Arabia), the dollar peg actually presents a specific problem: indirect taxation. To avoid such pitfalls, a future Gulf dinar is more likely to serve GCC economies and place them on a path of financial independence (page 118), she anticipates. The ramifications for a new currency, which could become a potential anchor currency throughout the Muslim world, perhaps even an alternative oil-invoicing currency even if the latter is a doubtful proposition for political reasons, illustrate Rutledge's sophisticated analysis (page 119-120).

Still, even if rational explanations propel GCC leaders to accelerate their monetary union at the forthcoming GCC Kuwait Summit in December, raw political reasons largely determine both pace and substance, something Rutledge understands very well. Oman dropped out in 2006 for a variety of reasons, including pressure from Britain and the United States, which unfortunately are not detailed in the book. Likewise, Abu Dhabi's decision to withdraw was a rare but very real public rift with Riyadh, because Saudi Arabia wished to locate the proposed central bank in its capital. Abu Dhabi was under the impression that past promises to locate a GCC institution on its territory (none exists yet) was not an excessive request. GCC states will have their monetary union and common currency, if not in 2010, soon thereafter.

Dr. Joseph A. Kéchichian is an author, most recently of Faysal: Saudi Arabia's King for All Seasons, Gainesville, Florida: University Press of Florida, 2008.