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French Version

GCC countries are not yet prepared for a single currency

The basic scheme for the formation of a Gulf Cooperation Council (GCC) monetary union (GMU) have been set and GCC countries are discussing the policies to be adopted and the exchange rate. The policy of advancing integration and the dream of a GCC common currency is not new.

In 1982, the GCC countries ratified an agreement that stated clearly "the member states shall seek to coordinate their financial, monetary and banking policies and enhance cooperation between monetary agencies and central banks, including an endeavor to establish a joint currency in order to further their economies."

The GCC countries have crossed a long way on the road to achieving regional cooperation. In 1983 the Free-Trade Area - under which tariffs on goods within the GCC area were eliminated - resulted in a six-fold increase in volumes of trade between the GCC countries.

In January 2003 the GCC Customs Union unified tariffs on imports. The results exceeded expectations when the volume of inter-regional trade increased by 20 percent.

On the level of the unified trade and finance regimes, the GCC countries are moving according to the schedule set in 2001 during the 21st GCC summit in Muscat, Oman; it is expected that by 2007 the GCC common market will become a reality, while the launch of a common currency is planned for January 2010.

There are several aspects that favor a GMU. Among them a strong political will combined with historically stable exchange rate regimes and currencies that are pegged to the U.S. dollar which simplifies the perspective of a single currency. On the economic side, the six GCC countries share the same macro economic structure; oil and gas exports are their major source of government revenue and they are all implementing restructuring plans emphasizing the importance of liberalization and diversification.

Yet despite the efforts of GCC countries over the past years to align their economic policies, a large gap still exists among members mainly in budget deficits and public debt rates. A single currency would result in arbitrary restrictions on national budgetary policies and control over taxation and public spending programs. This could limit the ability to pursue expansionary monetary and fiscal policies during periods of falling oil prices.

These restrictions could be tolerated in case the benefits are substantial. Theoretically and based on the Euro experience, the GMU is an attractive option as it would result in a reduction in foreign exchange transaction costs, eliminate rate risk, promote pricing transparency and consequently increase competition. The single currency would furthermore impact the financial sector by encouraging cost efficiency and reducing the costs of hedging against exchange rate volatility.

However when we take into account the fact that all GCC currencies are already stable and indirectly unified through their pegging to the dollar, then the expected benefits from one Gulf currency are significantly diminished. In addition, if the new currency is to be pegged to the dollar, then there is really no significant gain on the micro level while major adjustments will have to be made on the macro level. On the other hand not pegging the GMU to any currency and making it float could be a dangerous option given the fact that the GCC countries export oil and gas and import all other durable and nondurable goods.

Oil is priced in U.S. dollars and the region does not have the political and economic clout to impose pricing oil or importing manufactured products with their own new currency. The same argument makes it is quite unrealistic to hope for the GMU to be a reserve currency, despite the fact that the GCC countries represent an economic bloc that has a GDP of $388 billion and controls 45 percent of the world's known oil reserves.

Moreover, the integration within the GCC countries remains economic in nature. On the political, social and security sides, progress is slow and more difficult to achieve. A single currency entails much more than a common market; renouncing national sovereignty over fiscal and monetary policies entails unified political and ideological systems.

Bypassing the process of social and political integration and importing the Euro experience is a risky endeavor given that the EU and the GCC are very different types of societies with different market systems and political motivations behind economic decisions.

The GCC countries have achieved a lot, and are moving on the right track toward a common market. The common currency project at this stage is a jump into the unknown that could hinder a process that has succeeded well until today.

Beirut,25July2005
Redaction
The Daily Star


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