The Gulf Cooperation Council Central Banks Functions - Essay Example

The Gulf Cooperation Council Central Bank’s Functions Affiliation Executive Summary In the near-coming decades, the gulf region is anticipated to have an essential political, social and economic role within the region. The previous three and a half decades have notably experienced tremendous developing interest in monetary integration and currency confederacy. The union is primarily meant to facilitate the adjustment procedures during unfavorable market situations. The currency unification would be constructed by the preceding openness of the countries in the association. Financial bodies are definitely likely to see a myriad of trials and a fresh set of gainful imperatives. The novel set of commercial subtleties will bring significant demographic and economic changes within individual member countries. It is because of this that the merger seeks to inaugurate a fledging monetary union. The management and operational structure will have to accommodate the system of Islamic banking in its structure (Sturm Michael, 2005). The Central Bank of the Gulf Cooperation Council shares critical financial management essentials. The difference comes in the scope of autonomy, the depth of economic power of the member states and the unique geopolitical facts of the Gulf region. The comparison is made against the already established European Central Bank. Some of the objectives include the elimination of foreign exchange risks, expanding the nature of global financial bargaining power, stabilizing the currencies of the member unions and generally assuring the economic power of the nations involved. Challenges are bound to arise, including the fluctuation of the international oil prices that is the economic backbone of most Gulf States. There also are many wars and instability in the region and religious in-fighting even within Islam, the single dominant religion in the region. Introduction The Gulf Cooperation Council embraces the nations within the Arab Persian Gulf, leaving out Iraq. The member states include Kuwait, Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The suggestion to establish the confederation was inspired by Saudi Arabia. It then was initiated in Abu Dhabi on May 25th 1981 after which it was legitimately actualized on November 11th 1981 in Abu Dhabi. The members saw it necessary to form a mutual currency and establish a Common Bank. The hint of the Gulf Central bank was agreed on 5th of May 2009 at the advice-giving gathering held in Riyadh. It was unanimously agreed that Riyadh, Saudi Arabia would play host to the fresh bank. The proposed bank has however never materialized. Autonomous fiscal policy, monetary policy, trade policy, and revenues and spending would be its key tenets. (Takaji, 2012). The bank is also projected to hold discourses on the anxiety of bank shocks, monitor the mutable currency situation, deal with the reimbursement system and also be a financier of last recourse. The Structure The Gulf Cooperation Council’s Central Bank shall act as a foremost establishment in the union. It will have a distinctive structure that will comprise of both the unrestricted and reserved systems. It will be independent of the regimes of the individual states. It will be brought to life by a legislation passed by the council members. This law will consent plus make possible all the operations of the group. As a result, the bank will not need funding from the public. It will originate its powers and modes of functionality from the GCC Central Bank act of legislation. This legislation will be subject to repeal by the member states. There will exist four major components of the bank. It will consist of the Board of Governors, the Cooperation’s Open Market commission, 6 regional branches of the Central Bank that will exist in every member country and finally the member banks throughout the Gulf region. The GCC Board of Governors The Board of Governors will be made up of six chances of membership representing the six member entities. The board will be the top union monetary agency. It will be set to be in charge of the six regional banks in the six countries. Also, it will be the only body that formulates the monetary dogma. It will administer and standardize the cooperation’s unionized banking arrangement. The governors will be employed by the council assembly of fellows. The governor’s position will rotate among nationals of the member countries. One term will take four years and will begin every January 7th. A person who has served a complete term can be renominated for another term if his or her performance was marvelous and approved by the council assembly. The act will provide for the modalities involved in removal of a governor from the office. The board will be expected to create yearly reports of operations to the union speaker of the assembly parties. The chairperson and the vice chairperson of the Board of Governors will be appointed from amongst the serving Governors. The GCC Open Market Commission. The open market commission will consist of 12 members. It shall be constituted of six members of the Board of Governors in addition to the leaders of the six regional divisions of the bank. The Open Market Commission will be anticipated to achieve the open market undertakings; the core element of regional monetary plan. These undertakings directly impact on the amount of GCC Central Bank balances accessible to depository entities. By doing this, the bank will totally influence financial, monetary, currency and credit situations. The open market commission also guides the actions undertaken by the GCC Central Bank in the foreign exchange markets. The chair and vice chair of the commission are permanent members while the others alternate membership at one and two year intervals. All the heads of the regional GCC Central Bank underwrite to the commission’s assessment of the region’s economy and policy choices. The commission institute its own internal structure and so it elects the chairperson of the Board of Governors as its overall Head. Formal meetings will be held alternately in the capital cities of the member states. It generally assembles for meetings ten times a year. Regional GCC Central Bank Branches There are six branches of the central bank strategically situated in the six member countries’ major financial and commercial capital. Each branch is in charge of all the financial institutions in its geographical authority that subscribe to the policies of the GCC Central Bank. Every regional branch has a head who is the chief operations officer of the bank and the member country central bank’s head. The chief operations officer is nominated by the Board of Governors and approved by the union’s secretariat. Every regional branch has a board that consists of representatives of the major economic sectors that define the Gulf States. These members are required to put the bank’s interest at heart while at the same time representing divergent concerns of their sector within an agreeable policy framework. The chief executive is also expected to ensure that public interests are taken into account in the daily operations of the bank. Political Independence The overall independence of the GCC Central Bank is pertinent in ensuring price stability. The bank must not look for any form of political influence. The institutions of the GCC and national governments are assured by the treaties to honor and respect the GCC Central Bank’s independence. To give credence to certainty in credibility and accountability, the GCC Central Bank releases periodical reports on its operations and activities. It has to address its yearly report to the GCC parliament and the commission on open market. The GCC parliament has the chance to question and query the performance and policy of the bank. Furthermore, it offers its opinion on how the bank can move forward with stronger and more effective policies. The Governors of the bank enjoy massive tenure of office to ensure that at least their impartiality is guaranteed against manipulation from member states. The voting in the council is also secret to protect the independence of strategic decision makers. Members of the board however are not allowed to unfairly vote along their national inclinations. Financial Independence The GCC Central Bank’s financial independence means that the bank has its own specific budget. Its assets and capital base is contributed to by the central banks of the member states. The Gulf banking system is functionally and operationally independent. Even members of the regional branches have security of tenure. Similarities and Differences with the European Central Bank On composition, the GCC Central Bank has six branches each serving a specific region or member country. The six branches are located in the capital cities of the member states. The Board of Governors is based in Riyadh, Saudi Arabia and comprises six members. The ECB on the other hand has 11 national central banks whereby each serves its own state. The Executive Board of the European Central Bank has six members and is situated in Frankfurt am Main, Germany. It supervises and coordinates the European System of Central Banks (MU Fasano-Filho, 2003). On the size of the central employees, the GCC Central Bank is estimated to have less than half of the employees in ECB. The ECB has a staff of 600 while that of the GCC Central Bank may be 260. Both numbers are set to increase as member states increase. As concerns appointment in the GCC Central Bank, the assembly parties, via consensus, elect the six members of the board of governors. They serve a term of four years that is renewable. In the ECB, six members of the executive board are chosen by the Council of Europe for a term of seven years. These appointments are normally subjected to scrutiny from the European Commission, which is the European parliament. In the matter of strategy directions and duties, for the GCC Central Bank, policy is decided and sanctioned by the Commission of Open Market. Inside ECB, pecuniary policy is directed entirely by the Principal Council. The convention is made up of the chiefs of the 11 domestic principal lenders functioning in the European Market Union, the remaining six compositions being the complete European Central Bank Executive Board. It is a sponsor to the federations and the financial bodies. Arguments for the GCC Central Bank Of obvious knowledge is the khaleeji, which would be the common currency plus the fact that the GCC Central Bank will certainly be far much independent than other independent central financial institutions. To begin with, in the short-term, there exists a trade-off between unexpected inflation and the lack of jobs. If inflation is steeper than the economic dynamics predicted, the prices of goods and services escalate beyond the reach of the common man. The prices falsely suggest that there is increase in the value of products. Thus, when production grows to be more treasured, firms will create more. In effect, higher output signals lower levels of unemployment (Ahmed AIKholifey, 2011). Therefore, because governments are much widespread when joblessness is subordinate and output is advanced, it is implicit that governments are induced to generate unanticipated inflation. Nevertheless, economic proxies act cogent and are also not imprudent. That is because régimes have an incentive to follow unpredicted inflation. This means that even the most sensible governments will not chase clandestine inflationary strategies. Nonetheless, this means that this inflationary prejudice will be mirrored in the need for higher interest tariffs and upper inflation. However, since inflation and interest levels are raised, regimes can create inflation covertly. The obvious answer for this difficulty would be to take that control away from the government. The most commanding effect on inflation in the short-range is the monetary strategy. Hence, taking monetary procedures away from administrations and giving it to a sovereign central bank anticipate lesser inflationary traits anticipated along with minor interest rates to device monetary policy (U Fasano, 2003). The next argument is the inflationary show of countries with autonomous central banks. The inflationary act of these nations has nearly always been healthier than the inflationary performance of states with popularly controlled banks. Moreover, it is emergent that enduring interest rates, which reproduce inflationary outlooks, fall with the advent of sovereign banks. Countries with self-determining central banks like the GCC Central Bank have lower rates of inflation. Arguments against the GCC Central Bank Co-ordination of economic guidelines. This is a very ancient and perhaps also one of the most famed urgings, that budgetary and fiscal policy would toil best if they were functioning collectively. If fiscal and monetary strategies are not harmonized, if they are not acting together to oversee the delivery of a general strategy, the economic policy in total will not be operative. Nevertheless, if a completely distinct and independent body runs the monetary plan, it consequently cannot be coordinated with economic policy or with any other fragment of management economic rule, such as a fair labor policy or business policy. Financial and other monetary policies have an upshot on inflation; accordingly not even inflation shall have a synchronized policy. The incentive for the regime to evade inflationary rules is an extra argument. If the GCC Central is tasked with keeping low inflation, the member governments will hold that monitoring inflation is somebody elses work. This means that the administrations can hunt expansionary economic dogmas, or other inflationary plans without dreading that they will be responsible for the consequent inflation. Finally, the GCC Central Bank will be conservative. These days, a suitable monetary policy fundamentally means a fitting interest rates policy. A proper interest rate policy hinges on a number of effects. An example is redundancy; there are constantly persons changing occupations or retraining them. So some joblessness is entirely normal. Only a sovereign bank can solve the huge job losses ayttributed to inflation. Important Functions and Objectives of the GCC Central Bank The core function of the bank is to ensure price stability in the Gulf region. This will ensure that market health is assured due to enshrined competitiveness. The production of goods and selling within the region will be more lucrative as there will no longer be unfair pricing especially of oil. The region controls the world’s oil market and so a stable pricing of their commodity will be of much help to the whole globe. Also expected of the bank is to draw and implement the financial policy for the gulf region. It is also meant to direct the foreign exchange functions. Additionally, the bank will take charge of the foreign reserves of the central banks of the individual nation states. This offers more security and a greater bargaining power and space in the global financial market. It is further meant to ensure smooth operation of the fiscal market infrastructure under their own set target systems. They also will be deeply involved in developing a modern technical stage of securities in the Arab Zone. Moreover, they will have the exclusive mandate to authorize the releasing the common currency bank notes for the region. Individual member countries will be allowed to produce the equivalent coins but the quantity will be commanded by the GCC Central bank initially (C Montelli, 1999). The bank will also have power to amass statistical data to fulfil the duties of the Gulf system of Central banks. Also, the bank shall authorized to contribute to monetary stability and supervision. Conclusion The bank will be a financial management body for the Gulf States and is extremely important for the world’s confused state of currency affairs. When finances are handled and managed prudently, the resultant effects are always economic stability and the overall prosperity of the people. With the recent global recession, collective administration of the financial regime of a region can shoulder the member states in terms of offering incentives and loans to jumpstart economies. Additionally, with a stable foreign exchange management entity, global financial markets’ bargaining power for the region can only increase. Economic power can only be guaranteed by a stable financial policy. Such a healthy policy ensures that economies grow and inflation is checked. Inflation causes massive job losses which in turn progresses to political instability and eventually lives are lost. More devastating is the fact that broken economies fuel illegal businesses that endanger the lives of people. A united bank for the gulf region will do well for the economic prospects of the citizens. References Ahmed AIKholifey, A. A., 2011. GCC Monetary Union, NewYork: IFC Bulletin. C Montelli, O. T., 1999. What does the single monetary policy dofor the European Central Bank. 2nd ed. Frankfurt Am Main: European Central Bank. MU Fasano-Filho, M. S., 2003. Monetary Union Among Member Countries Of The Gulf Cooperation Council. 2nd ed. NewYork: International Monetary Fund(EPub). Sturm Michael, N. S., 2005. Regional Monetary Integration in the Member states, Frankfurt Am Main: European Central Bank. Takaji, S., 2012. Establishing Monetary Union In the Gulf Cooperation Council:What Lessons for Regional Cooperation, Tokyo: Asia Development Bank Institute. U Fasano, Z. I., 2003. GCC Countries:from oil dependence to diversification. 4th ed. New York: International Monetary Fund. Read More