The Function of Gulf Cooperation Council - Term Paper Example

Function of GCC Central Bank Contents Contents 2 Executive Summary 3 Introduction 4 Discussion 5 Structure of suggested Central Bank of Gulf Corporation Council (GCC) 5 The Supreme Council 6 The Ministerial Council 7 Secretariat General 7 Comparison of GCC with European Central Banks 8 9 Arguments for & against of GCC 9 Objectives & Functions of GCC 11 Objectives 11 Functions 12 Conclusion 14 References 16 Executive Summary In this study function of GCC Central Bank will be thoroughly analyzed. It has been stated in this study that central bank development is most credible in global financial market and regional market. Decisions are usually made upon a thorough analysis of these markets. For instance as elaborated in this research economic and finance ministers conducted a meeting to frame monetary policies in the GCC countries. There have been further elaborations done on three aspects such as supreme council, ministerial council and secretariat general. GCC brought forth a new avenue of investment, economic opportunities and trade. The major focus of GCC was to remove restrictions in international and internal trade, in order to establish common platform of external tariffs. In this study it has been revealed that the council has established a single currency for future operations. Introduction Gulf Cooperation Council is also known as Cooperation Council for the Arab states of Gulf. It is a regional intergovernmental economic and political union of Arab stats of Persian Gulf. In this particular study, various aspects of GCC will be closely analyzed. This report will majorly deal with a suggested structure for GCC’s Central Bank. On the other hand, there will be similarities and differences drawn between approach of GCC and European Central Bank. The member states of GCC consist of Islamic monarchies of Kuwait, United Arab Emirates, Saudi Arabia, Oman, Bahrain and Qatar. In 2011, GCC was proposed to form a confederation by Saudi Arabia. However objections have been raised by many countries regarding this proposal. There has been lot of discussion regarding membership of Yemen, Jordan, and Morocco. When there was a two day summit conducted in 2013, Gulf Union formation had topped the agenda. Objectives of GCC states comprise of formulation of similar regulations, fostering technical and scientific process, establishing research centers, setting up joint ventures, enhancing private sector’s cooperation, strengthening ties amongst people and facilitating unified military presence. This area encompasses some of the fast growing economies across the globe mostly due to the support of natural gas and oil revenues. Petroleum revenues effectively contribute towards the total revenue structure. In 2009, GCC was supposed to start its operations of banking mechanism and new currency. This was done so as to implement the approach of common currency by the end of 2010. In this study various structural recommendations are incorporated that are well aligned with performing central bank located across the globe. Monetary policies of different regions will also be taken into consideration in this particular study so as to outline the desirable results. GCC mainly consists of three segments such as ministerial council, secretariat general and supreme council. There would be arguments highlighted against and for GCC central bank. This in turn shall portray the clear image of Gulf Corporation Council. On the other hand, functions and objectives of GCC Central Bank will also be highlighted. There are certain regions where GCC is facing tough challenges and it shall be discussed further in this analytical study. Discussion Structure of suggested Central Bank of Gulf Corporation Council (GCC) The Gulf Countries that includes Bahrain, Kuwait, Oman & Qatar aimed to have a common currency by the beginning of 2010 and accordingly they had designed the institutional structure of Gulf Central Bank. Figure 1: GCC Boundaries According to the institutional framework of the Gulf Central Bank, GCB was expected to start its operation for introduction of new currency & banking mechanism by 2009 so that they can meet the deadline for implementation of the common currency by 2010. Though financial market didn’t expect the concept of common currency could be implemented by 2010, feasibility of the project largely depended on the decree of political forces. A number of structural recommendations were made to set up a well governed central bank taking into consideration well performing central bank of many countries as well as monetary policy voting formulas. To develop a central bank to be the most credible in regional & global financial market certain decisions had been made. According to reports, Gulf Central Bank was to be managed by an Executive Board that consists of Governor of National Central Board & monetary authorities from Monetary Policy Committee. Responsibilities like monetary policy making & important decision making were delegated to this Executive Board. The monetary union was supposed to be constructed by a meeting held by the finance & economic ministers of Saudi Arab, Kuwait, Qatar & Bahrain. Apart from that; the Central Bank was decided to have a strong line of staff & administration that can ensure effective functioning (Hammarskjöld, 2007). Broadly, the organizational structure of GCC consists of three segments: the Supreme Council, the Ministerial Council & the Secretariat General. However the main objective of these three governing bodies is to coordinate, integrate & co-operate the economic, social & cultural aspects of nations include. The Supreme Council The Supreme Council is the highest authority of GCC that consists of head of the state of six member countries. Generally, the Supreme Council meets once in a year. But for emergency purpose, head of any two members can meet for the purpose of decision making. Hence, the chairmanship of the Supreme Council is held by each member of the state. Resolutions are carried out by majority voting of the participating members. The council is responsible for determining the overall policy formulations of GCC & for authorizing recommendations presented by the Ministerial Council & Secretariat General. The Ministerial Council The Ministerial Council comprises of the Foreign Ministers of the six member countries. The governing body meets once in every three months for discussing basic occurrences. But in case of emergency, Foreign Ministers of any two members meet for urgent discussion & decision making. This council is responsible for drawing up policies & formulation of recommendations for the purpose of the development of the cooperation and coordination among the member states in their economic, cultural and socio political sphere. Secretariat General The department of Secretariat General is obligated for preparing reports, final accounts & budgets for GCC. It also drafts the rules & regulations and holds responsible for providing support to the member states for implementation of the policy decisions made by Supreme Council & the Ministerial Council. The Secretariat General is appointed for a minimum term of three years which is renewable by the terms of Supreme Council & recommendations from Ministerial Council. Dubai International Finance Centre took an active part to promote issues relating to financial & economic problem in both local as well as regional levels, to accelerate economic development in this region & to enhance integration of Middle East with the global economy. The currency was expected to be among the five major currencies in the world. Hence, further expectations were also made that to hedge risk against oil price shock & inflation, international investors & central banks from other countries would like to hold their underlying assets, denominated in the currency to be introduced. But, policy makers also understood that sound functioning of GCC should be ensured much before than introducing the currency in order to establish credibility of the Central Bank & the new currency as well. Currencies of all other countries that form GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arab & United Arab Emirates) except Kuwait were linked to dollar to achieve the common goal of one currency. Location of Headquarter was another issue that rose during the formation of GCC. Though idea was to situate the Central Bank in a city with good banking network, sizeable financial market, sound infrastructure & quick international connectivity and transportation, participation of a no. of such cities made it complex to choose one. Hence, decision had been taken to locate different departments in different cities, separately from the Headquarter in order to have integrity among the countries & to avoid any sort of collision. Comparison of GCC with European Central Banks The European Central Bank aims to establish a single currency i.e. euro to control purchasing power & price stability since 1999. Though the main objective is similar to that of GCC, priorities are different as a result of operating in a different economic structure. ECB works towards bringing stability in monetary policy whereas GCC aims to bring economic, social & cultural uniformity. ECB inherits a complex structure that includes strict legislations & policy formulations aiming mainly at financial stability. In contrast, GCC constitutes a comparatively simplified structure that includes policy formulation for economic up gradation, bringing socio political uniformity in large region, industrial expansion & stimulation of employment (Kaltenthaler, 2006). Arguments for & against of GCC Gulf Corporation Council has brought a new avenue of trade, investment & other economic opportunities for six Gulf countries. It aimed at removing restrictions in internal & international trade & to establish common external tariffs. The council has planned to establish a single currency as well. The GCC has done their policy formulation taking into consideration of two major aspect, such that education & economic diversification. GCC aims for economic integration that enhances the scope for greater economic opportunities, promoting the socio political & cultural aspects of that region. It also plans to empower women in terms of higher education which indicates equal opportunities for all in the economy, thus strengthening the economy. In fact, females’ participation in workforce has resulted in substantial improvement in productivity. Though there is lot more scope of improvement in this avenue, credit must be directed towards GCC & its strong administration. According to the reports published by World Bank, uniformity in decision making & standardization in policy formulation have resulted in a no. of economic advantages that helped the region to address burning challenges. The system also helped in boosting economic growth, inviting diversification & stimulating employment. Economic integration also resulted in influencing domestic as well as international trade to a great extends. Elimination of barriers to entry & loosening the imposition of tariff will lead to reduction of restrictive trade practices that in turn experiences substantial incoming of foreign capital. Increasing level of foreign direct investment as a result of expansion of investment avenues shows quality job creation. Increment in the scope of employment expands the scope for higher education & adoption of technological knowledge that in turn in leaves a positive impact on the local labor market (Kannan, 2012). GCC’s idea of currency union encourages the internal trade among the member states mainly due to removal of transaction cost & exchange rate volatility. However, GCC is facing challenges in three major regions such that the issue of scarcity of water, geographic barriers & large integration. The Arab Gulf countries are closer to Strait of Hormuz than that of Gulf. Around 20% of the global oil production in which Gulf’s participation is around 90% passes through a different region. On the other hand, expansion of industries as a result of rapid economic expansion & foreign investments increases the requirement of water as a raw material. Thus, scarcity of water is hampering the industrial growth. Geographic barriers such that presence of Arabian Sea, Red Sea & northern desert island among the six participating nations hampers international trade. The six nations constitutes for about 18% of the Saudi Arabian Region. Hence, large integration also creates complexities in terms of establishing uniformity in administration. The concept of union of currency also holds exchange rate risk, all six members having long standing pegged exchange rates. Reducing control over own monetary policy leads to instability in price level that influences inflation & price index levels of individual members adversely. Objectives & Functions of GCC Objectives The main objective behind formation of the GCC was to establish integration & strong interconnection among the member states to strengthen cooperation & to set up uniform regulations among all sectors such that economy, finance, trade, tourism, legislations & administration to foster technical up gradations, research & development, promoting entrepreneurship & integration among private sectors (Low & Salazar 2011). The other objectives of GCC can be attributed as: To support all Middle East countries in terms of achieving participation or membership of World Trade Organization. To expand Generalized System of Preferences (GSP). Currently, the system provides the opportunity for duty free entry into US market for about 3500 products. Hence, GCC aimed at enhancing such opportunities in terms of increasing limits. To expand international trade & resolve outstanding disputes, GCC’s main objective was to establish strong negotiations with Trade & Investment Framework Agreement (TIFA). To achieve strong negotiation power for Bilateral Investment Treaties with various countries & hence obligate the government for providing an equal treatment to the foreign investors as domestic players in terms of legal & trade restrictions. To have a strong bargaining power for free trade agreements with interested countries which leads to opening the economy to a great extent & hence paving the way for economic & financial reform. To promote trade development with a target of more than $1 billion US funding & invite partnerships with private organizations. Functions To understand functions of GCC, functions of the three governing bodies viz. The Supreme Council, The Ministerial Council & the Secretariat General should be separately discussed. Functions of Supreme Council To lay down the policy & postulates for the Corporation Council in order to form a standard structure that all entities of the organization should follow. Periodic review of the financial reports, recommendations & studies to evaluate the scope for joint ventures & accordingly provide necessary approval. Review internal reports i.e. reports coming from various authorities & departments concerning economic, financial & other fields. Monitor various policy proposals in terms of international trade & decision making. Set & approve the rules & procedures of the Commission for settling disputes & set up a nomination system. Appointment of Secretary General & amendment of the Charter of the Cooperation Council. Giving approval to the council’s internal rules & procedures and to the budget of Secretariat General. Functions of Ministerial Council To prepare policy proposals & recommendations of projects that leads to enhance coordination & cooperation among the member states and accelerate development. To provide recommendations to the ministers who may help those to formulate policies adhered to the resolutions of cooperation council. To study & approve periodic reports & review internal rules & regulations of various administrative and financial affairs, as proposed by Secretary General. To encourage privatization, cooperate with various private sector activities & promote existing cooperation among Chamber of Commerce & the industries. Functions of Secretariat General To prepare reports relating to integral plan of action for the member states, prepare & review the reports on functioning of the cooperation council as a whole & to follow up the level of implementation of the recommendations made by Supreme Council & Ministerial Council by the members of the council. To prepare reports as requested by the Supreme Council or Ministerial Council, drafting the financial & administrative regulations in line with expansion & growth of the Cooperation Council as well as preparation of budgets & closing accounts for the council. To provide recommendations to the Chairman of Ministerial Council conveying the level of implementation of current resolutions & indicating the gap to be filled up during formation of new resolutions (Smits, 2004). Conclusion Gulf Corporation Council gave rise to new dilemmas, new challenges & new opportunities to the economic, social, political, monetary & energy forces. Being the economic performance of Gulf region below its expectation, many experts have doubted the relevance of this council. Economic challenges such that high unemployment rate, lack of use of vulnerable energy, low women participation, inefficient public sector and many more faced by GCC countries during the period of time further strengthens the confusion (Khamis, Hassan & Oulidi, 2010). However, according to World Bank report, integration among the six Gulf Countries will increases the probability for GCC to contribute more efficiently towards solving the challenges such that boosting economic growth, enhancing diversification & stimulating employment generation for the youth. To be more specific, high standard of institutional practices adopted by GCC may result good governance which leads to institutional transformation. Apart from that, economic integration which leads to a practice of uniform domestic investment rules & regulations may enhance foreign domestic inflows. Thus, integration can help to attract investment opportunities removing the barriers to trade which in turn will produce quality job opportunities. Till now, the advancement especially in the field of infrastructure in Gulf Countries can be attributed as the use of expatriate human resource. But with increasing opportunities of employment in the region will tend to train & develop the local human capital which in turn gives emphasis to higher & technical education that will give big boost to the existing labor market. Hence, to address short & medium term challenges the Gulf Countries are facing, requirement of GCC is of utmost importance to bring uniformity in imposition of economic reform, accelerate the pace of economic diversification, job creation & foreign investments and above all cross border integrity. References Hammarskjöld, UN., 2007. United Nations Documents Index. New York: United Nations Publications. Kaltenthaler, K., 2006. Policymaking in the European Central Bank: The Masters of Europes Money. Maryland: Rowman & Littlefield. Kannan, A., 2012. Global Environmental Governance and Desertification: A Study of Gulf Cooperation Council Countries. New Delhi: Concept Publishing Company. Khamis, M & Hassan, A & Oulidi, N., 2010. The GCC Banking Sector: Topography and Analysis. Washington DC: International Monetary Fund. Low, L & Salazar, L., 2011. The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN. Singapore: Institute of Southeast Asian Studies. Smits, R., 2004. The European Central Bank in the European Constitutional Order. Boston: Eleven International Publishing. Read More