Middle East
All the Gulf states except Kuwait have the US peg, which should be maintained in the initial phase of any future unified Gulf currency. Image Credit: Gulf News Archive

In these past 40 years, the Gulf states have achieved significant progress on economic cooperation, starting with the abolition of duties on locally made products to unifying customs tariffs. There was also the GCC power grid and rail network.

However, progress towards issuing a Gulf-wide currency has ground to a halt. The GCC states have only agreed on the exchange rate margin for their currency transfers within the region, in addition to establishing a headquarters for the Gulf Central Bank.

Realistically speaking, the currency union is one of the most difficult stages in unifying the GCC economies and establishing a common market. In the European Union, the euro was issued decades after its formation. Yet, it took the EU states less than 40 years to bring out the common currency. Thing brings us to an important question about the reasons behind all complexities hindering an agreement on a unified GCC currency.

Strengthening monetary cooperation is one of the most complex issues due to the ramification of multiple policies, which directly and significantly affect the overall economic, financial and investment conditions in bloc countries. This issue is even more complicated in cases where there are frequent interventions in monetary decisions, which explains the collapse in the Turkish currency and bringing the dollar exchange rate to 18 liras last week, compared to 2.5 seven years ago, and with expectations of reaching 20 liras.

Who has the oversight?

The process of issuing a GCC unified currency faces several obstacles, although there are real possibilities for future success if it does take place. There is the already established convergence of the Gulf economic structure where all member-state currencies, except the Kuwaiti dinar, are pegged to the US dollar. The biggest obstacle facing a unified GCC currency is on the oversight aspect.

The US Federal Reserve, for instance, enjoys complete independence from the government and even the US President has no right to interfere in its decisions or affairs. The European Central Bank, despite having its headquarters in Frankfurt, was never headed by a German official, and Germany, the largest economy in the union, has no right to interfere in its decisions. In addition, the central bank president is elected after consultations among all member states.

Only by adopting such a well-thought out approach can a unified Gulf currency see the light. This begins with ensuring the full independence of the Gulf Central Bank, away from any interference, with its chairman and board of directors to be elected and given full powers to formulate monetary policies suitable for the Gulf’s economy as a whole.

Move cautiously

A unified Gulf currency, if agreed upon, must be linked initially to the dollar as well, especially as the GCC states lack the competencies in working out unified monetary policies. It is an issue that must be dealt with cautiously.

The peg to the dollar over the past 40 years has undoubtedly contributed to stabilizing the monetary conditions in the GCC countries, even though in some cases the US Fed policy was never appropriate for GCC economic conditions and affected the states. Therefore, as soon as a unified GCC currency is pegged to the dollar, it is necessary to lay solid legislative and technical foundations to break this peg later and harness the Gulf’s monetary policies to serve the region’s development approaches.

The Gulf Central Bank must be granted complete independence to work away from any interference by any party or country. This will prove to all member states they are adopting the right monetary policies and will give them an equal opportunity in the participation of managing the bank regardless of local affiliations.

By doing so, the Gulf Central Bank will exercise its powers independently and away from the so-called national sovereignty that obstruct many aspects of co-operation.

The writer is a specialist in energy and Gulf economic affairs.

- Mohammed Al Asoomi