Central Bank for Gulf Cooperation Council - Assignment Example

? CENTRAL BANK FOR GULF COOPERATION COUNCIL Executive summary The gulf region has been in a union since 1981 and tackles its major problems collectively as a region. However the issue of unifying the currency and operating from a central bank seems not to work well for the members, with some of them withdrawing from the union. This paper analyses the structure of the proposed central bank for GCC, its objectives and functions as well as why the implementation has been retarded. Introduction Economic structures of countries in the GCC region are similar as most of them have their GDP majorly influenced by natural minerals and more so hydrocarbon sectors. Low education levels as well as underdevelopment are also a common feature in these countries and thus making them depend on foreign labour. In a strive to improve their economy, the GCC countries have tried to diversify their economic activities after realizing that the natural resources are in the process of getting depleted and therefore inculcated capital intensive projects (Cobham & Ghassan 2011). Although most investments are done nationally, it is evident that all these countries have a common goal and thus face a common problem of acquiring capital. In response to this the financial sector, which plays a critical role in economic diversification, the GCC countries have taken the initiative to develop it. The development of financial sector has been done individually with each country operating guided by its own principles. However in2009, the central bank of the GCC was proposed that would collectively operate across the whole GCC region. The GCC banking system is more of a web of different structures and situations rather than a homogeneous block. This is contrary to all other economic activities that tend to be common. It is to this reason that the central bank was formed (Cobham & Ghassan 2011). . Operating with a common currency, the central bank aims at ensuring that the GCC countries move together towards achieving their common goal. This goes hand in hand with the objectives of the GCC as an organization. Being a multinational central bank, the structure and functioning of the GCC is expected to be similar to that of the European central bank which is a well-functioning multinational financial institution. However the location of the central bank of GCC is completely different from that of the European central bank. This creates a doubt on the overall efficiency of the proposed GCC central bank. it therefore deems necessary to understand the banks functions and objectives as well as its pros and cons, that is sources of failure as noted by other people. Discussion Structure The proposed GCC central bank will be a central bank for a common currency to be established in the GCC region. Its capital stock will be owned by the central banks of the major countries, dividing it according to their GDP ratios. Since the bank has not been established yet, its headquarters have not been stated clearly. As the GCC is located in the Arab region with almost every member country being Muslim dominated, then the bank has to take into consideration the Muslims way of living in addition to pursuing its usual activities. Relation with European Central Bank Being a multinational financial institution, the proposed GCC central bank portrays several similarities with the European central bank. Firstly, the formation of the bank aims at unifying the currency for the member states. However, there are debates that the GCC region might not be ready for a common currency. The main retardant to attaining the common currency, which also acts as the major difference between the location of the ECB and the GCC central bank is the lack of the political consensus in the latter. A common currency requires a set of common rules and regulation to prevent inflation and other economic disasters that result from inappropriate money supply trends (Cevik, Teksoz & International Monetary Fund 2012). Self-adjusting mechanism has been seen to fail after the 2008 crisis and thus a common currency has to be backed up by a harmonized political process and physical policies, something which the GCC members lack. Another similarity evident in the two banks is their functioning. Both are aimed at regional development with their members being neighboring countries (Hassan & Nakibullah 2008). This calls for the closely related policies as geographical location has a slight impact on many economic activities. Arguments for the bank The geographical location of the gulf region provides the GCC members with almost equal natural resources. Underdevelopment on the other hand has resulted to low capital formulation that leads to low investments hence making the natural resources the main contributor the country’s GDP (Hassan & Nakibullah 2008). Due to the fact that the natural resources are being depleted, joined efforts towards economic diversification can work very well for the GCC countries. Since capital and money supply control are key contributors of the industrial and service sectors, then a common currency would guarantee economic improvement. The regional central bank would therefore be required to control the flow of this currency. Moreover, European central bank has been seen to increase and fairly distributed economic growth in its member countries as well as stable markets. In addition, GCC states have huge financial reserves which can be used as backup or capital stock for the central bank. Arguments against Political differences have been highlighted as the major cause of failure of the GCC central bank. Common currency calls for similar fiscal decision. The GCCC members operate with different objectives and hence sometimes come up with contradicting ideas. For instance, Kuwait changed its monetary policy in 2007, withdrawing from the pegged system without consultation from other members (Cevik, Teksoz & International Monetary Fund 2012). Economists have held that the pegged currency to the dollar has been a retardant to economic growth and thus should be aborted. Objectives of the GCC The main objective of the central bank is to stabilize the region’s economy and thus accelerate economic progress uniformly among members. This defines its task of defining and implementing the monetary policy of the Gulf region, conduct foreign exchange operations, maintain foreign reserves of the banks operating in the region. Conclusion The proposed central bank of the Gulf region can bring a positive impact on the economic progress of the whole region. However, the member countries have been postponing its launch, based on the fact that the bank must operate a common currency across the whole region. All these delay can be attributed to differences in political and fiscal decisions a case different from the euro zone. REFERENCES ECB official advises GCC not to introduce common currency before harmonizing institutions - Xinhua | English.news.cn. (2013, September 16).< http://news.xinhuanet.com/english/business/2013-09/16/c_132725401.htm>[Accessed 3 December 2013] Cevik, S., Teksoz, K., & International Monetary Fund. ,2012. Lost in transmission?: The effectiveness of monetary policy transmission channels in the GCC countries. Washington, D.C.: International Monetary Fund COBHAM, David, & DIBEH, Ghassan. ,2011. Money in the Middle East and North Africa: Monetary Policy Frameworks and Strategies. Routledge Hassan, M. K., & Nakibullah, A. ,2008. Gulf Monetary Union and Regional Integration. GULF NEWS (2013, December 1). Four GCC countries to announce common currency by end-December - Zawya. [Accessed 3 December 2013] Read More