Central Bank of the Gulf Cooperation Council - Research Paper Example

GCC Central Bank Executive Summary This report proposes a structure for the suggested GCC Central Bank and compares with the structure of European Central Bank. It also identifies the arguments for and against the establishment of the GCC Central Bank, as well as its objectives and functions. The report suggests that the GCC Central Bank should have four decision making bodies namely: Executive Board, Governing Board, Advisory Council and General Operations Committee. This structure is similar to the ECB because they both have an executive board which implements the monetary policy of the central bank. However, the central bans differ in terms of those who formulate the monetary policies. In European Central Bank, monetary policies are formulated by the General Council while in GCC Central Bank the monetary policy should be formulated by the Governing Board. Those who argue against the GCC Central Bank suggest that the bank it affects the independence of the GCC member countries while those who support it suggest that the bank will promote economic stability in the GCC region. The main objective of the GCC is to develop monetary policies and implement them. Introduction GCC members have been intending to create a monetary union since 1980s. So far, significant efforts have been made towards that end. Economic integration is becoming real by the day, and the use of a single currency is almost becoming a reality as well. Currently there is an interregional movement of goods and services, labour and capital. Establishment of a common market in 2008 further improved the efforts of the GCC towards a unionized monetary system (Fasano-Filho & Schaechter, 2003). Most of the convergence criteria for entry into a unionized monetary system have also been attained. However, the main challenges for the GCC in its push to develop a single central bank for the region have been the decision of the required exchange rate for a single currency and the location of the central bank (Boero et al, 2011). There have also been significant disagreements concerning the structure of the new central bank. The suggested GCC Central Bank should have a clear organisational structure which will determine how decisions are made and how such decisions are implemented. This enables the GCC Central Bank to set clear roles and responsibilities for various members of the Bank and to ensure that the right decisions are made at the right time for the benefit of all member countries of the GCC. This report suggests that the GCC central bank should have an executive board responsible for general implementation of the monetary policy, a general operations committee responsible for various financial operations including foreign exchange and issuance of currency, a governing board responsible for the primary decision making in the organisation, and an advisory council responsible for advising the board of governors about the economic conditions and needs as well as external factors affecting the monetary system of the GCC member countries. Structure of the Suggested Central Bank of the GCC The suggested Central Bank of GCC should have four decision making bodies as part of its organisational structure. They include: The Executive Board, The Governing Board, The Advisory Council, and the General Operations Committee. In order to achieve the objectives of the GCC Central Bank, these decision making bodies will collaborate and share ideas during decision making. The decision making bodies of the central bank will also be represented by directors and managers from all member countries in order to meet the monetary goals of each member while upholding the sovereignty and independence of each country. A single headquarters of the GCC Central Bank should be identified and agreed upon by all member countries. The other countries should then participate by having their own representatives in the headquarters where they represent their countries in various governing bodies. Each governing body should have a member from each of the member countries. The structure of the GCC Central Bank is shown below. The Executive Board of the suggested GCC should be made up of six members, one member representing each of the six member countries of the GCC: Bahrain, United Arab Emirates, Qatar, Oman, Saudi Arabia and Qatar. This board carries the central responsibility of implementing the monetary policy that is formulated and proposed by the governing board. The executive board also issues decisions to central banks of member countries and delegates duties to the governing body to implement monetary policies that impact on member countries. The executive body should be made up of a president, the president, and other four members. A member from each country is appointed by the president of that country, and then all members elect a president amongst themselves, who then appoints his own Vice President who should be from a different country from the president’s country. The governing board should be the main decision making body of the organisation. It formulates monetary policies and acts upon the recommendations and advice of the independent central banks of each member country of the GCC given by the advisory council. The governing board should consist of the six members of executive board and all the six directors of the member central banks from the six GCC member countries (Khan, 2009). This amounts to 12 members of the executive board. The Board of Governors should meet regularly to review the monetary system and economic performance of the GCC region as well as the recommendations given by the advisory council through the member central banks. During the meetings, the governing board should come up with relevant monetary policies and propose them to the executive board for implementation. The advisory council should be made up of six members from each country, and the six members of each country should operate in their country and represent the ideals of the GCC Central Bank in that Country. The six members should meet regularly and study the prevailing economic conditions and monetary systems of their countries and advice the Central Bank of that country. The Central Bank then presents the recommendations to the governing board through their representative in the board for the board’s decision making. Lastly, the General Operations Committee of the GCC Central Bank is composed of several members. The Committee carries out various operations in the Central Bank including open market financial operations, issuance of money, and credit control. They are like the employees of the Central Bank who carry out various operations of the GCC Central Bank as suggested by the executive board and the governing board. Similarities and Differences from the European Central Bank The overall structures of the Central Bank of Europe and the suggested GCC Central Bank are related. One of the similarities between the two banks is that it has an executive board of six members. The system used to come up with six members in the executive board of ECB is different from the method used to come up with the six the executive board members of the GCC Central Bank. The GCC’s executive members should be a member from each of the six member countries. The European Union has 18 member countries by 2014, meaning that not all countries are represented in the executive board. The executive boards of ECB and the GCC Central Bank perform the same function of implementing monetary policy. Another similarity between the two banks is that their main decision making body is the governing body. However, the government body in Europe is known as the Governing Council while that of GCC Central Bank is known as the Governing Board. The central banks of the member countries also play a significant role in the decision making of the Central Bank. In GCC, the central banks of the member countries get advice from the Advisory Council and assess them before giving recommendations to the governing board through their representative in the board. In the European Central Bank, the Central Banks of member countries act on decisions made by the executive board to implement monetary policies of the ECB independently in their countries (Vives, 1992). One of the differences of the banks is that the GCC Central Bank will have an additional body known as the General Operations Committee which will oversee daily banking activities including open market operations, currency issuance and exchange, and credit control. In the ECB, these functions are carried out by the executive board. Arguments for and against the Central Bank of GCC One of the arguments for the GCC Central Bank is that it hastens the implementation of unionized monetary system in the GCC region and achieves economic integration objectives more successfully. Supporters of this central bank suggest that the Central Bank will be used to implement monetary policies jointly among all the member countries of the GCC; hence achieving price stability in the region (Khan, 2009). The supporters argue that price stability is important in the region, especially because the region produces a lot of oil which is usually affected by price fluctuations throughout the world. The second argument for the GCC Central Bank is that it makes the use of a single currency more successful through the issuance and control of the currency. As a result, economic transaction among all the members of the GCC will be easier. This leads to effective transfer of resources within the region and improvement of the overall economic stability and growth in the region (Tietmeyer, 1990). Furthermore, the single currency protects the member countries from problems associated with international foreign currency exchange. The main argument against the suggested Central Bank of the GCC is that it undermines the sovereignty and political independence of the individual central banks of each member country (Košak, 2007). In this case, opponents of the GCC Central Bank suggest that the Central Bank plays the role that could be played by single banks; hence making the independent countries to lose their sovereignty and independence in economic and political decision making (Rutledge, 2009). Opponents also argue that the Central Bank of the GCC will favour some more economically privileged members of the GCC than the less privileged ones. Objectives and Functions of the Central Bank of GCC The main objective of the GCC Central Bank is to achieve price stability in the region. Price stability refers to the level of inflation which should be kept at desirable levels to increase employment and promote economic stability (Estrella et al, 1995). The GCC Central Bank should aim at lowering price levels in countries that have high prices and increase the prices of countries with low prices so that uniform and desirable price levels that promote a stable economy van be achieved. The second objective of the Central Bank of the GCC is to support the general macroeconomic policies in the gulf region and achieve the overall objectives of economic integration of the GCC (Khan, 2009). In this regard, the Central Bank of the GCC intends to support the monetary policies of each country and enable each country to achieve its independent economic objectives so that they can contribute to the overall union’s objectives. Thirdly, the Central Bank of the GCC pursues the objective of achieving stable currency (Tietmeyer, 1990). This will enable the region to maintain good flow of currency and investment within the region and from foreign countries. The main function of the GCC Central Bank is to implement the monetary policies of the GCC union. This is done through: issuance of a single currency to increase money supply, foreign exchange operations, interest rate policy, and credit control. The Central Bank of GCC will control financial markets of the GCC member countries through implementation of monetary policies (Fasano-Filho & Schaechter, 2003). The Central Bank will also keep the foreign reserves of the GCC region on behalf of the other member central banks and increase the efficiency of financial markets. Conclusion The suggested Central Bank of the GCC will be an important step to achieve a unionized monetary system in the GCC. However, structural and logistical problems have slowed down the process. In this report, a structure of four governing bodies and six member central banks is suggested. The structure of GCC Central Bank and ECB are similar in because they have three similar bodies which carry almost the same functions – the executive body and the governing body. The difference between the two central banks is that the GCC Central bank has an advisory committee which lacks in the ECB. The argument against GCC Central Bank is that the central bank enhances economic and price stability. Those who argue against the central bank suggest that that it undermines sovereignty and independence of each member country. The main objective of the GCC Central Bank is to achieve price stability while its function is to implement the monetary policies of the GCC. References Boero, G., Silvapulle, P., & Tursunalieva, A. (2011). Modeling the bivariate dependence structure of exchange rates before and after the introduction of the euro: A semi- parametric approach. International Journal of Finance & Economics, 16, 4, 357-374. Estrella, A., Mishkin, F.S. & National Bureau of Economic Research. (1995). The term structure of interest rates and its role in monetary policy for the European Central Bank. Cambridge, MA: National Bureau of Economic Research. Fasano-Filho, U., & Schaechter, A. (2003). Monetary union among member countries of the Gulf Cooperation Council. Washington DC: International Monetary Fund. Goldberg, L.S. and Klein, M.W. (2005). Establishing credibility: Evolving perceptions of the European Central Bank. Cambridge, Mass: National Bureau of Economic Research Hamori, S. and Hamori, N. (2010). Introduction of the euro and the monetary policy of the European Central Bank. Singapore: World Scientific Pub. Co. Khan, M.S. (2009). The GCC monetary union choice of exchange rate regime. Washington, DC: Peterson Institute for International Economics. Košak, M. (2007). Ownership structure and performance of the banking sector: The evidence from the SEE region. Programme/Abstracts, 160-161. Rutledge, E. (2009). GCC monetary union: A cost-benefit analysis. Abu Dhabi: Emirates Center for Strategic Studies and Research. Tietmeyer, H. (1990). The Role of an Independent Central Bank in Europe. Excerpts From Press Articles, 2-6. Vives, X. (1992). The Supervisory Function of the European System of Central Banks. Giornale Degli Economisti E Annali Di Economia, 9, 523-532. Read More