Gulf Cooperation Council Central Bank - Case Study Example

GCC Gulf Cooperation Council Central bank Executive Summary The report discusses the proposition of a central bank for the GCC.The discussion is aimed at designing the structure of central bank for the GCC, its proposed similarities and dissimilarities with ECB and arguments for and against the formation of a central bank for the GCC. It is found through this report that the conditions that led to the formation of GCC were very different from that which led to the formation of European Union. The structure of the central bank of the GCC should however be quite similar to that of Central bank of Europe in few major aspects. Introduction The Gulf countries or the countries lining the Persian Gulf are Bahrain, Kuwait, Oman, Saudi Arabia, United Arab Emirates, Qatar, Iran, and Iraq. Most of these countries are part of the Gulf Corporation Council. The gulf corporation council was formed in May 1981 and its member countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The GCC was formed in the backdrop of a tense situation that existed in the region at that time. The original motive towards the formation of GCC was to pursue common security objective against external and internal threats that seemed to threaten the countries of the council. The member countries share a lot of commonalties between them in the form of custom, religions, politics etc. GCC wants to introduce a single currency for the region in the lines of Euro. The ultimate aim of the council is to achieve complete unification of the member states. The following report aims at studying the feasibility of a central bank for the six member countries. Discussion Structure of the suggested Central Bank for GCC A central bank for the GCC region would obviously be an important milestone in achieving greater economic union and ultimately a proposed common currency (tentatively to be named khaleeji). To decide on the structure of the proposed central bank let us look at the org. structure of the central banks of some of the countries of the council. Figure 1: Structure of central bank of Bahrain (CBB, 2012) Figure 2: Structure of Central bank of Kuwait (CBK, 2011) Figure 3: Central Bank of Qatar (QCB, 2008) Figure 4: Central bank of Oman (CBO, 2010) As seen in the above figures the common features of the organization structure of the central bank of the four among 6 members of the GCC is that they are headed by board of directors. Next in line of the Board of Directors come the Governor and Deputy Governor. In designing the structure of central bank of GCC the structure of ECB can be used to serve as a model. The ECB has three main decision making bodies 1. Executive board 2. Governing council 3. General council In case of ECB the main decision making body is the Governing council which comprises of the governors of the central bank of the 18 countries which are members of the European Union. The decisions of Governing council are implemented by the Security Council (ECB, 2014). If we look at the organizational structure of GCC then we find a similar structure. The organization structure of GCC comprises of Supreme Council The ministerial council The secretariat general. The supreme council is the main decision making body. The ministerial council meets every 3 months in order to implement the decisions taken by the Supreme council (GCC, 2012). The org structure Of the GCC should comprise of Primary council which is formed by one person representing each of the member states. The Primary Council should appoint a president for the bank. The Primary Council should be the highest decision making authority to report directly to the president. The Primary council can be assisted by sub councils which will meet more often and implement decisions of the Primary council and forward suggestions to the Primary council if any. The sub council may be further sub divided into various departments to assist in the functioning and efficient running of the bank. Similarity or Dissimilarity with European Central Bank The need for Gulf Corporation council was felt in the midst of security concern in the region. The Council consists of member states which are pretty similar to each other in various aspects. Though the council’s main aim and forming objectives were security concern, it also aims at economic and political union of the countries of the council. While the motive of regional political union has been the founding reason for the European Union and subsequently ECB, GCC was set up mainly out of security concern (Takaji, 2012). In fact this is perhaps the only instance in the world where member countries have come together to form an alliance out of security concern. The member countries of the Europe although similar differ from each other in respect of their economic conditions, people’s mentality and spending rationality, sources of income etc. However the Member countries of GCC are similar to each other in more than one respect. Firstly most of these countries are Monarchies or were monarchies in the past. Secondly they share a common religion that is Islam. Their sources of income or livelihood are also same in respect that they primarily depend on Oil and Natural gas to sustain their economy. The member states share the same culture and music style and even speak the same language. But the major concern that binds them together and eventually the fact that led to the formation of the GCC is that they all perceive the same security threat. Their main concern is to sustain their monarchies. But the fact remains that the Gulf countries are almost always engaged in tussle with each other. This ensuing tussle is the result of the monarchies that exists in each of the member states and the ego of the monarchs. However each of the monarchies should depend on the other neighbor for ensuring political stability and economic prosperity. As the problems and issues facing the two regions are hugely different from each other there ought to be several dissimilarities between the two central banks. But they would also be similar on the ground that their ultimate objective is to bring greater economic and political unification of the two regions. Arguments for and against the GCC Central Bank The GCC was mainly formed in the backdrop of security issues that were being faced by the gulf countries at the time of its formation. Although primarily formed over security concern its main objective soon became to achieve greater economic and political cooperation among the member countries. With the view of achieving greater economic cooperation among member countries the GCC aims to set up a central bank and a common currency. The arguments supporting the formation of a central bank in the region would be A central bank formed in the region would help in bringing more economic stability in the region. The central bank could help form policies aimed at greater economic cooperation among the member countries. It could also serve as the lending organization for big corporate houses. A central bank could form monetary policies aimed at controlling inflation in the region. The central bank could be used to help a member state if it is affected by economic downturn by financially and through advice to help it come out of recession. The arguments which oppose the setting up of a central bank for the region are given below. If any of the member countries is faced with an economic downturn then all of the member countries will be severely affected. The different countries pursue their own economic policies which are normally independent of the economic policies of other countries. But a common central bank would result in the countries losing their independence in respect of framing their own economic and monetary policies. When a member state falls into economic recession, the Central bank would help by providing financial help along with guidelines to come out of the situation. But that country or its citizen may not be ready to accept those guidelines and may see those as unnecessary interference into their internal affairs. Most important objectives & functions for GCC Central Bank The GCC was set up with a view to ensure greater cooperation among its six members in the field of economic, political and security domain. To ensure greater economic cooperation among its members a very important task would be to set up a central bank for the region. The important objectives and function of the GCC Central bank would be To establish a uniform currency (Khaleeji) for the region. The uniform currency would help in maintaining a uniform exchange rate across the region. The single currency would help the member countries in their export and import. To help the member countries achieve greater economic cooperation among themselves. To acts as a banker to the central banks of different countries. The common central bank would lend to the central banks of different countries. The common central bank would help in controlling inflation in the member countries. As the common central bank will act as lender to the central banks of different countries it will control inflation by adjusting the interest rates at which it lends to the central bank of a country. When a member country is faced with economic recession it can help by providing financial assistance and associated bailout package. It can help in forming uniform monetary and fiscal policies across the member states. It will help in eliminating trade barriers among the member states and form policies facilitating free trade. It can help and give loans to big corporate and other institutions or help in facilitating trade and commerce among member states. Conclusions From the report it is found that although GCC was primarily formed with a view to mitigate security concerns of the member countries, its main objective has now changed to achieving cooperation in economic, political and security. As it is compared with ECB it is found that the conditions which led to the formation of the two unions and will ultimately lead to the formation of central bank of GCC are quite different. The Objectives of the central bank should be similar to that the ECB follows or takes as the main objectives in guiding its operation. The arguments in favor of and in against of forming a central bank for the GCC is discussed next. It is found that the central bank would result in better economic cooperation and establishing a uniform currency among other benefits. However the formation of central bank would curb economic freedom of the member countries of GCC. References Central Bank of Bahrain (2012). Organization chart. Retrieved from: http://www.cbk.gov.kw/www/organization.html. Central Bank of Kuwait (2011). CBK organizational chart. Retrieved from: http://www.cbk.gov.kw/www/organization.html. Central Bank of Oman (2010). Annual report. Retrieved from: www.cbo-oman.org/annual/annual_report_2010.pdf. Central Bank of Qatar (2008). Structure. Retrieved from: http://www.qcb.gov.qa/English/AboutQCB/Pages/Structure.aspx. European Central Bank (2014). Organization chart of the ECB. Retrieved from: https://www.ecb.europa.eu/ecb/orga/orgachart/html/index.en.html. Takaji, S. (2012). Establishing Monetary Union in the Gulf Cooperation Council: What lessons for regional cooperation? ADBI Working Paper Series, 390 (1). The corporation council for the Arab States of Gulf (GCC) (2008). The organizational structure. Retrieved from: http://www.gcc-sg.org/eng/index2beb.html. Read More