The Gulf Cooperation Council - Case Study Example

GCC Central Bank al Affiliation) GCC Central Bank Executive Summary and Background The Gulf Cooperation Council also known as the GCC is a union among Arab countries for political, economic and religious ends. Its membership mostly constitutes Arab monarchies of Saudi Arabia, Qatar, Oman, Bahrain, Kuwait and the United Arabs Emirates. These countries are normally referred to as the GCC states and on the council’s founding in 1981, the states had various objectives which included: the establishment of a common military unit in the Peninsula, encouraging economic growth through privatization, encouraging of social, cultural, political and economic ties among the member countries, formulation of uniform policies on economic, social and political development, encouraging technological and scientific research and development in mining, industries and agriculture, and also to establish a common currency among member states. In establishing this bloc and highlighting its objectives, the member states had to act fast for its smooth operations. Just like in every organization, frictions are bound to occur but the conflicts experienced by the council have been minor, not grave to the extent that member states do not agree on certain matters; so far it has been good apart from certain hiccups in its structural model. Discussion Since the inception of the GCC in 1981, it has gone through a lot of changes in achieving its objective of setting up a unitary monetary system. For instance, technological and scientific research and development have revolutionized the mining of oil in these countries. This has seen an increase in the production of oil in these countries, which has espouse the rise in the per capita income of individual countries in the bloc. In agriculture, the union has also not been left behind in the breeding of various livestock, resulting in more and better breeds, which are disease-resistant as well as of good quality. The encouragement of the private sector to take active role in the economy has paid off (Mohsin, 2009). Infrastructural development has been realized, unemployment levels have reduced and economic growth and development have accelerated in a manner formerly unknown. Most of the GCC members have attested to this change. Because the council comprises of Islamic States, their cultures and traditions are similar with slight differences, so with the council’s encouragement to strengthen ties among the council, people were encouraged to ensure unity and a long-lasting cooperation among these countries. The setting of joint ventures among the member states was also encouraged by the council to exploit the available market in the Persian peninsula. The formulation of uniform policies amongst the members in areas such as finance, trade, customs and administration was encouraged. This was done to first ensure uniform development and secondly to avoid conflicts that may see a member withdraw owing to the perception that other members were exploiting them. The establishment of a unified military forces was hatched in order to keep peace and stability in the peninsula and help other members in case of external aggression. For example, the cases of Bahrain uprisings, the United Arab Emirates, Saudi Arabia and Kuwait sent their troops to quell the uprisings and also in Syria where they have sent troops to help fight the Islamic Militants. They have also provided training grounds as well as landing bases to forces committed to fighting the Islamic Militants like the United States. The main objective and which has been elusive is the establishment of a common currency by the GCC. On 15th December 2009 the GCC members which included, Bahrain, Qatar, Kuwait and Saudi Arabia formed the monetary council. This monetary council was to form a joint central bank with a common currency regime. It got a draw back when the United Arab Emirates and Oman withdrew from the common currency proposal and it is understood that it will take up to a decade to establish a common currency (Seyd, 2008). The formation of a joint central bank is quite a challenge like the Federal Reserve whose main functions are: Provision of financial services to the United States government and other financial institutions as well as operating and overseeing the nation’s payment system, maintenance of financial markets systems and stability, as well as supervising and regulating commercial banks and other financial institutions. So such functions are what the GCC central bank was to perform. But before any establishment of a GCC central bank, certain factors among the member countries should not be overlooked just like they did when they were forming the European Systems of Central Bank (ECB). The political will is a key factor in the bank’s formation in that if a country does not want to join the union, they should not be compelled to, so persuasion and political will should be a factor in the formation of the GCC central bank. Prevailing economic conditions and stability are the factors to consider before the bank’s formation. For the central bank to function properly, independence must be guaranteed. This independence should be in form of personal independence where the executive board of directors is not confined to fear of job loss or limited term when they do not bow to certain political pressures. Financial independence to the central bank is paramount so that it does not depend on the various governments for financial support. Instead, they should generate their own revenues and fund their operations with no hindrance (Seyd, 2008). The central banks also move monetary policy from the political field and should be given power beyond the implementation face. To function the newly established entity, the Gulf central bank should harmoniously work with other national central banks where power over monetary policy is evenly distributed. With independence comes limits which are enshrined in the charters and it also comes with accountability on the part of those employed by the central banks. The pooling of foreign exchange reserves among the member states according to the overall weight that each member receives is essential to enable the Gulf central bank stabilize the fixed exchange rates of members’ national currencies (Mohsin, 2009).When it comes to Seigniorage, the wider the usage of a particular currency, the more revenue the issuing authority will obtain. This is because currency is a store of value and medium of exchange. In the event of introducing a common currency, the problem that arises is ascribed to the conversation rates between national currency and the new single currency. To solve this the weights of the member states is vital and they can be determined first by weighing a country’s GDP to the total GDP of the GCC. Population comparisons relative to that of GCC are relevant. This will espouse the elimination of currency power rivalry at the exchange time. The Gulf central bank might have to borrow a lot from the ECB, but there are slight differences, which are bound to exist between them. A case in point is the cultural, economic and political differences. In Europe, one country’s entry into the union is determined by a number of factors like the macro-prudential approach to financial sectors and the respective GDPs of such countries. In the gulf, the overriding factor for the bank’s formation is cohesion and stability. The peninsula having a common religion, politics and even tradition, the formation of a union is for tolerance from my point of view. The Islamic religion unlike the secular European Union prohibits interest as it is considered against the Islamic doctrine. Its similarity to the ECB is that each member only gets its share according to its weight in the union. Provision of independence to the GCC central bank will help a great deal since conflicts would be minimized and the stability of the union will be ensured (Mohsin, 2009).The GCC has always been dollar-pegging so when the Federal Reserve changed a monetary policy they too had to change and this gave them financial strength during the recession when the dollar devalued and they remained unchanged unlike other economies but on trying to re adjust to their own system things seems to be a bit different. Such developments have shown that the GCC countries ought to try and pursue their own monetary policies in order to achieve independence in the financial markets. The sharing of a history of language and religion has been a condition for which most people think the GCC is a success, coupled by the fact that most of the members are oil exporters with the exception of Bahrain. A daunting task that awaits the union is the political and economic will. Here, members differ since population, GDP and even foreign exchange strength among these countries differ. This is why you get the United Arab is adamant about heeding to the common currency among other member states. The choice of exchange rate regime is proving to be a headache to these countries, a situation where only two products form three-quarters of exports and half the GDP. These products are normally oil and natural gas. In this case, diversification of the economy is needed so that unemployment can be reduced and other sectors thrive to constitute a strong exchange rate regime (Kholifey, 2012). The pegging of their currencies against the US dollar, if avoided, can help eliminate the dependence attributed to the depreciation of the dollar; avoiding the dollar peg can bring about changes in investment and commerce patterns, which can espouse diversification in the economy of these GCC countries. Another argument is the undervaluing of the GCC countries exchange rates just because of their large surplus current account, but with the inelasticity of imports, such exchange rates will only marginally affect current accounts. Float management also can help the GCC countries promote the non-oil sector hence encourage diversification within the economy. The homogeneity of the GCC states offers it a fertile ground for monetary union but they are marred with setbacks like the withdrawal of the UAE, which offered a balance to Saudi Arabia. The GCC is totally different from the Euro zone and comparing these two economic turfs in the course towards the formation of the union is unwarranted. . According to Alkhater, who is a director of research and monetary policy at Qatar central bank, the cost of not establishing a single currency could be high for GCC countries in the future. So formalizing it now could save time and resources and ensure economic prosperity for the member countries. The Euro zone crisis has significantly contributed to the deceleration of the GCC monetary union in that the Euro zone having been a major bloc and a significant region in the world economy, they could almost collapse owing to fear of the GCC members, hence the reluctance to form the union. The question of transparency and openness, which was another burning issue in the Euro debt crisis, has also arisen among GCC countries where certain individuals could borrow money against the regulations of the organization (Kholifey, 2012). It is these cases that that bring about conflict among member states. Another factor was the fact that most of the members like Saudi Arabia whose total export sin the GCC is below five percent. They do not see the need to belong to such blocs since after all, it is the international markets that generate most of their revenues. The GCC structure is composed of the supreme council, the secretariat and the ministerial council. It is the supreme council that ratifies the overall policy from the secretariat and the ministerial council is the overall decision maker. It comprises the members’ six heads of states that meet once a year and in case of an emergency (Dokopil, 2012). The ministerial council comprises of various foreign affairs ministers of the six member states. They draw policies and other administrative frameworks on how the council can achieve its objectives. They meet once every three months and anytime in case of emergency. The secretariat headed by a secretary general ensures that the day-to day-operations of the council run smoothly. They help in the implementation of the various policies passed. The core objectives of the GCC central bank are: Supervision and regulation of financial systems among member states to ensure stability as well as regulating the functions of the members national central banks, conducting the member states’ monetary policy by influencing money and credit conditions within the bloc in the pursuit of full employment and stable prices, financial service provision to the member states and while at it overseeing the nations’ payment systems. The GCC central bank is also tasked with the difficult task of ensuring the stability of the common currency and cushioning the members against external risks. The best decision to the Persian peninsula countries is to move fast in establishing the union and a single monetary unit. From the expert’s point of view and also as far as I have understood, the advantages beat the disadvantages; more wealth can be created, more jobs through economic diversification would be realized and the Peninsula would be stronger than it is. The Euro debt crisis should not scare them from developing a GCC monetary union through a central bank. References Dokopil, M. (2012). Gulf Arabs Should Not Delay Single Currency-Qatar Bank Official. Reuters. Kholifey, A. A. (2012). GCC Monetary Union. European Central Bank. Mohammed, A. J. (2010). GCC Monetary Union:Hard Currency. Emerging Markets. Mohsin, K. K. (2009). The GCC Monetary Union :Choice Of Exchange Regime. Working Paper Series. Syed, B. (2008). Global Crisis Brought Power To GCC Central Banks. Economomitor. Read More