Introduction
The Gulf Cooperation Council (GCC) consisting of the six states of Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates came into being in 1980. In the recent past, the countries making up the GCC have agreed to initiate the historic step to have a single currency in place of the many national currencies, similar to what was seen in the European Union. The targeted date for this single currency for the GCC is 2010. (1). This initiate of the GCC has been criticized by a senior academician from Saudi Arabia on the main grounds that the GCC countries do not constitute an ideal zone for a single currency, nor are any of the criteria for an ideal currency zone met by the GCC. (2). This raises the question of the applicability of monetary unions in the GCC.
Applicability of Monetary Union in the GCC
All the countries in the GCC are politically stable with no apparent current threats to their stability. All these states have a similar structure and are in a similar state of development. They share the same language and culture. Though unemployment varies among the member states it is at a low rate. All these countries have strong foreign exchange reserves and stable and similar interest rates. All the national currencies are currently pegged to the U.S. dollar. This strength of similarities in aspects that are important for a unified currency suggests that monetary union in the GCC will proceed without problems that cannot be resolved easily. (1).
However, a key issue that is emerging is the critical decision on the choice of the right exchange rate regime for the new single currency of the GCC. Currently, all the national currencies are pegged to the U.S. dollar and it would be natural for the new currency to be pegged to the U.S. dollar, but the depreciation in the U.S. dollar and the disparities in the economic cycles raises doubts on the appropriateness of pegging the single currency to the U.S. dollar. The exchange rate options besides pegging to the U.S. dollar are managed float, basket peg, and pegging to the export price of oil. In the perspective of the International Monetary Fund (IMF), a basket peg of the major countries is the best option to introduce flexibility in the exchange rate for the new single currency and mitigate the impact of swings in the value of the major currency. However, such an option may not be feasible for the GCC because of the complexities involved in the understanding of the mechanisms involved. Instead, it would be better to have a basket peg made up of the U.S. dollar and the Euro for the new single currency to reduce the complexities involved. (3).
Barriers to Applicability of Monetary Union in the GCC
Despite the many common features that the GCC shares there is hardly any economic integration between the member countries. This lack of economic integration can be seen from the lack of free movement of goods, services, capital, and labor between the member countries. In addition to the economic issues, there are political issues in the lack of political integration and the lack of political institutions that transcend the national political institutions, raising doubts on the political accountability to the Central Bank of the GCC. Furthermore, there is the issue of the loss of some political sovereignty implied in the monetary union and there are apprehensions that there will be the political ability to convince the citizens of the member states to accept this lowering of political sovereignty in the absence of economic and political integration among the member states of the GCC (4).
Works Cited
- Alsowaidi, Saif. S. “A Single Currency For The GCC: Launching A New Culture”. International Business & Economics Research Journal 6.11(2007): 39-48.
- Kawach Nadim. “Monetary union in Gulf branded ‘unrealistic’ by senior academic. 2009. zawya.
- “IMF Executive Board Discusses Paper on GCC Monetary Union: Choice of Exchange Rate Regime. 2008. International Monetary fund.
- Buiter, Willem, H. “Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council”, Open Economies Review 19.5 (2008): 579-612.