GCC union will help increase trade

Dubai: The Gulf Cooperation Council's (GCC) Monetary Union established this month in Kuwait, is expected to enhance regional trade, reduce the cost of transactions and encourage tourism, economists said.

The positive impact will outweigh any disadvantages, including the anticipated price increases, they said.

"In concrete economic terms, the unified currency will reduce transaction costs of trade between member states," Dr Abdul Aziz Abu Hamad Aluwaisheg, director-general of International Economic Relations, told Gulf News.

"These include, among other things, fees currently charged for currency exchanges among member states.

"Lowering of transaction costs will encourage trade and benefit tourists as well," he said.

Additionally, distinguished characteristics of each GCC country are expected to increase regional trade.

For example, industries are the main feature of Saudi Arabia's economy, while the UAE — which is not a member of the monetary union — could specialise in other economic sectors, such as tourism and transit trade.

"Both Kuwait and Bahrain could be distinguished as services centres. Kuwait seems to be in a better position because of its 15-year-old dream of [building its] new silk road, which will make trade between the GCC and central Asia go via Kuwait," prominent Kuwaiti economist Ali Al Nemash said.

Earlier, trade among the six GCC countries increased due to the establishment of the GCC Customs Union in 2003, which still needs more steps before it is completely in effect.

The GCC Customs Union would impose a five per cent tariff on imports at the first port of entry and it would also establish a unified customs law.

Trade among GCC members Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain and Oman rose to $20 billion (Dh73.56 billion) in 2003, compared to $15 billion in 2002. By 2008 it reached $65 billion, according to GCC figures published recently.

Increased traffic

The number of citizens who travelled between member states increased from 4.5 million in 1995 to over 15 million in 2008 as a result of the open travel policy after commencement of the Custom Union.

GCC Secretary-General Abdul Rahman Al Attiyah was quoted as saying that GCC members agreed to complete all steps required to set up a customs union, ahead of the summit held earlier this month in Kuwait.

During the Kuwait summit, four Gulf nations announced the establishment of the Gulf Monetary Union. Kuwait, Saudi Arabia, Qatar and Bahrain joined the union, while the UAE and Oman opted to stay out.

Furthermore, economists say the establishment of the union comes at a time when giant economic blocs have been created in other parts of the world.

"It is no more economic institutions alone or countries by themselves in the world," Al Nemash said.

"The region's countries have realised that forging an economic bloc has become a necessity in order to not be marginalised in the international economic and political arena," Al Nemash said.

"There is a need to create an economic bloc, especially since [more than half of] the world's oil is in my region," he explained referring to figures that the GCC's crude oil reserves are estimated at nearly 57 per cent of Opec's reserves and 45 per cent of the world's oil reserves. Yet, the establishment of the monetary union could have a negative effect on GCC countries where per capita income is lower than in other member nations.

‘Unified currency plan'

"The unified currency plan could raise the cost for the consumer in countries with lower income than others, as the value of the single currency is expected to be higher than the local currencies in these countries," he said.

Therefore, an increase in salaries is required to curb an anticipated increase in the cost of living.

"Yet, if I put a scale, I see the positive consequences are many and the negatives are limited even if they stay in the long term," Al Nemash added.

On the other hand, economists refer to the European experience and its success as a model for the region. "Look at the euro and how successful it's been. Our people talk about the problems of the euro, but the reality is it's been an incredible success. The savings in foreign exchange dealings alone," Mark Mobius, executive chairman at Templeton Asset Management Ltd., Hong Kong, said.

While the details of the single currency have not been decided yet, Aluwaisheg said: "The most likely scenario is that first the new currency will be used as a unit of accounting, and after a sufficient period of time it will be introduced as a currency in circulation for exchange and trade."

While the debate over pegging the future Gulf single currency to the US dollar or a basket of currencies continues, experts believe this could attract more investments and boost tourism in the region.

With additional inputs from Gaurav Ghose, Financial Features Editor

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