Central Bank of the GCC - Essay Example

Central Bank of the GCC Executive summary The purpose of this project report was to suggest the structure of the Gulf Central Bank and compare it with the European Central Bank, and then explain the arguments for and against it as well as its objectives and functions. The ECB and GCB have common decision making bodies namely: governing body, advisory body, and the executive body. The difference between the two central banks is that the GCB has other decision making bodies which the ECB lacks including the operations committee and the national central banks. Those who argue in support of the GCB say that the central bank enhances oil price stability and economic efficiency in the region while those who argue against it argue that it may be influenced by political pressure and the independence of national central banks will be affected. The report also suggests that the main objective of the GCB is to achieve price stability, economic stability and economic efficiency while its function is to implement monetary policies. Introduction GCC is an economic integration of six countries that have come together for easy exchange and trade among each other. The six country members of the GCC include: Bahrain, United Arab Emirates, Oman, Kuwait, Saudi Arabia and Qatar. The members of the integration have benefited a lot from the integration through reduced barriers of trade and good diplomatic and economic relationships with other members of the union. GCC Monetary union has been one of the key objectives of the GCC members since 1980s (Lycett et al, 1984). Towards the goal of monetary union, the members have encouraged regional integration and intraregional movement of goods, services, technology and capital. As a way of encouraging the development of the monetary union, some member countries have suggested the introduction of a common currency that can be used as a common means of exchange among all countries just like the Euro used in the European Union. The need for one currency then called for a common monetary policy implementation in the gulf region. Because monetary policy is the work of a central bank, the Gulf Cooperation Council suggested the formation of a central bank of the union. The central bank would implement the monetary policy of the union and issue a common currency for all member countries to use for exchange amongst each other. This project report highlights the structure of this proposed central bank of the GCC and explains some of the similarities and differences between it and the Central Bank of the EU. The report will then highlight the arguments for and against the central bank as well as its main functions and objectives. Discussion In terms of organisational structure, the GCC structure should have various arms with different roles and responsibilities. The main decision making bodies of the central bank include 6 member banks, Board of directors, Operations Committee and Executive Board. Each decision making body needs to work together to implement the monetary policy of the central bank. The figure below shows the structure of the proposed GCC Central Bank. At the top of the decision making of the central bank should be a board of governors which should have 6 members; one from each of the six member countries of the GCC. Each of the directors should be appointed by the president of the member countries to represent their countries in the decision making process of the GCC. The Board of the Directors will be located at the headquarters to be agreed upon by the member countries. Its main function will be to make the overall decisions regarding monetary policies and other functions and deliberations of the central bank. This will be done through annual meetings and other emergency meetings. The executive board is responsible for carrying out the implementation of the monetary policies of the central bank. The executive board receives advice from the advisory board and recommendations from the member central banks, and then communicates them to the board of directors who then give the executive board the permission to push on with the implementations. The executive board also advises and gives directions to the operations committee on their daily routine duties and responsibilities. The board sets reserve requirements and controls the discount rate in the member countries. The executive board is made up of 12 members, each one of them heading different departments of the central bank, and one chief executive officer who oversees all the decisions of the organisation and chairs all the meetings of the executive board. Member banks include all the 6 central banks of the member countries. These central banks account to the decision making bodies of the GCC central bank because they implement the GCC monetary policies in their countries. For instance, the central bank of Qatar may issue the GCC common currency in Qatar on behalf of the GCC Central bank, and control the commercial banks of Qatar in line with the recommendations of the GCC Central Bank. The advisory board is also another important decision making body of the GCC central bank which forms part of its structure. The advisory board will be responsible for studying the market and economic conditions of each country and provide advice to the executive board about those conditions. The board then acts upon them and develops appropriate policies with the approval of the Board of Directors in order to respond to the market economic situations (Ayadi and Groen, 2013). The executive board may also face some challenges and ask the advisory board to conduct research on the challenges and give recommendations on how to tackle them. The advisory board should therefore be made up of economics and banking experts with sufficient qualifications and experience in economics and banking. These advisory board members should be appointed by the executive board and approved by the board of governors. Lastly, the organisation structure of the GCB should be made up of the operations committee which should be responsible for decisions regarding routine operations of the central bank such as Open market operations in order to control money supply and interest rates (Ayadi and Groen, 2013). The operations committee also directs trading departments on issues concerning securities purchases and sales. One of the similarities between the structure of the proposed GCC central bank and the European Central Bank (ECB) is that the central bank makes key decisions, but the role of implementation is delegated to National Central Banks of different countries making up the European Union. The difference here is that the National Banks of the European Union have more powers to implement key decisions from the ECB (Ayadi and Groen, 2013). On the other hand, GCB implements some of the crucial decisions of monetary policy across all countries of the GCC. For example, the control of oil prices will be implemented by the GCC central Bank. Oil prices will be denominated by the common GCC currency and implemented by the central bank without intervention from national central banks as it is the case with European countries whereby prices of key commodities are controlled by the national central banks. Another similarity between the ECB and GCB is that the key decision maker is the governing council. In both cases, the governing body formulates the monetary policy of the European region and authorizes the national central banks to issue the joint union’s currency. The management of foreign reserves and control of interest rates are also carried out by the governing body in both cases. However, the governing body in ECB is known as the governing council while in the GCB it is known as the governing board. The GCB and ECB are also similar in terms of the advisory body. The ECB calls its advisory body the General council, while the GCB calls it the advisory board but the functions are similar. In both cases, the advisory board collects statistical information and provides advisory tasks to the central banks. The difference between the two central banks is that the central bank of Europe has 3 decision making bodies while the GCC central bank has five key decision making bodies. The European Central Bank does not consider national central banks as part of its key decision making body but the GCC central bank should allow the central banks of member countries to contribute their recommendations and opinions for decision making to the executive board. This is important because the central banks understand the economic and monetary challenges and opportunities of member countries. The ECB also lacks an operations committee responsible for making key decisions on routine and daily operations of the central bank. These functions are carried out by an operations committee in the GCB, but they are carried out by the executive board in the ECB (Vives, 1992). The executive board of the ECB therefore has an extra duty to make decisions regarding key operations of the central bank including open market operations. There are various arguments for and against the central bank of the GCC. The proponents of the GCC argue that the central bank will be the best way to control oil prices in the gulf region. The central bank will achieve this by creating, issuing and controlling a common currency upon which oil prices will be determined (Espinoza et al, 2012). Normally, central banks are responsible for the control of inflation using monetary policies. Those who argue for the central bank suggest that the central bank will issue currency and control interest rates in order to control inflation. Inflation in the gulf region is mainly determined by the oil prices. Therefore, if oil prices rise, inflation in the region rises. The central bank will then step in to control this inflation by selling bonds and increasing interest rates in order to reduce inflation and cause decline in oil prices. Some supporters also argue that the central bank enhances economic stability in the region. This is because the central bank issues a common currency that leads to easy and successful implementation of monetary policies in the region (Cevik et al, 2012). Using one currency as a medium of exchange also achieves economic efficiency by reducing the costs associated with exchange of one currency for another. Those who oppose the central bank argue that a central bank for the gulf region is not feasible because it takes up the roles of national central banks; hence the monetary goals of the wider region will conflict with the monetary goals of the independent national central banks of different member countries (Espinoza et al, 2012). The national central banks will therefore lose their independent authority to implement monetary policies for their countries. The second argument against the central bank for GCC is that the central banks will be affected by bureaucracies whereby public interest is sought by the national leadership of the member countries and discretion of the central bank is limited by the governments of each country. The independence of the central bank will also be affected by political pressure which may cause bias in the conduct of monetary policies (Ayadi and Groen, 2013). The political interests of leaders of member countries to win elections may override the regional objectives of price and economic stability; hence the central bank may fail in its mandate due to lack of support by member countries. This is already seen through the slow implementation of the monetary union due to withdrawal of Oman and UAE as a result of the location disagreements. The main objective of the GCB is to achieve desirable level of inflation and price stability – especially the prices of oil. Monetary policies affecting all member countries are implemented in order to achieve the price stability (Ayadi and Groen, 2013). Another objective of the GCC central bank is to achieve economic efficiency and stability through the issuance of a common currency. Furthermore, the objective of the bank is to increase cooperation of the GCC member countries diplomatically and economically. In terms of functions, the central bank of GCC carries out various monetary policies including issuance of a common currency, control of the interest rates of the region, management of the foreign exchange reserves and carrying out open market operations. These functions are important in achieving the above objectives of the central bank. For instance, reduced costs of foreign currency exchange are achieved through the issuance of a common currency by the central bank of the GCC. In conclusion, it is true that GCC’s central bank is an important milestone in achieving a unionized GCC. The central bank will be made up of five decision making bodies: the governing body, the executive board, the national central banks, the advisory board, and the operations committee. The governing body is the key decision maker while the executive board implements the monetary policy of the central bank based on recommendations of national central banks and advices from the advisory board. These implementations are carried out with the approval of the governing board. Those who argue in support of the GCB say that the central bank enhances oil price stability and economic efficiency in the region. The main argument against the central bank is that it may be influenced by political pressure and the independence of national central banks will be affected. The main objective of the GCB is to achieve price stability, economic stability and economic stability while its function is to implement monetary policies. References list Ayadi, R. and Groen, W.P. (2013). Banking and Insurance in the GCC Countries: Is there Regulatory Convergence with the EU? Research Papers, 4. Accessed December 5, 2014 from www.sharaka.eu. 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. Espinoza, R.A., Prasad, A., & International Monetary Fund. (2012). Monetary policy transmission in the GCC countries. Washington, D.C.: International Monetary Fund. Lycett, A., Marfleet, P., & Tarbush, S. (1984). Gulf banking. The Middle East Magazine, 114, 27-36. Smits, R. (1996). The European Central Bank: Institutional Aspects. International and Comparative Law Quarterly, 45(2), 319-342. Vives, X. (1992). 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