The Gulf Cooperation Councils Role in the Economy of the Gulf Nations - Essay Example

GCC central Bank Introduction The past three decades have seen heightened concern in monetary incorporation and currency amalgamation. The Gulf Cooperation Council (GCC) is an economic integration among four countries, which include Qatar, Kuwait, United Arab Emirates and Bahrain (Al-Tamimi, 2013). These countries came together with the aim of forming similar regulations in the economic and financial field, coordination and interconnection. This integration would benefit the countries by doing away with tariffs on regional commodities and adopting a common tariff for the GCC commodities, allowing free movement of citizens and freedom to work in either of the countries and allow the use of common monetary, banking and financial policies (Badr-el-din, 2007). However, in order for the GCC integration to be carried out successfully, creation of a unified central bank is one of the primary issues to be considered (Jadresic, 2008). The idea of monetary union among the GCC members seems to be closer to realization after the countries agreed to institute a central bank that would give a unified currency by 2015. This paper will discuss the proposed structure of the central bank, its similarities and differences with the European Central Bank and the arguments for and against it. The Proposed Structure of Gulf Central Bank As the GCC members strive to attain the goal of a common currency by 2015, the Dubai International Financial Center (DIFC) issued a report on the proposed structure of the Gulf Central Bank (DIFC, 2008). The report by the DIFC outlines a possible structure of the central bank. It is proposed that the Gulf central bank will have its workers and administration, acknowledging that the administration would be the most credible in the regional and international markets (DIFC, 2008). It is proposed that the Gulf Central Bank (GCB) will be headed by an executive board, and a monetary policy committee that consist of the governors of the central banks of the member states and monetary authorities (Rutledge, 2009). The executive board will be the primary monetary policy making and decision-making body for the GCB (Al-Tamimi, 2013). The report also articulated that the council of governors from the national central banks and the monetary authorities would meet periodically to deliberate on the monetary policies of the GCB (DIFC, 2008). Additionally, the GCB will have a president who will be appointed by the heads of member states among the council of governors from the national central banks of member states (Jadresic, 2008). The President will have the determining vote and is the official spokesperson of the GCB while the governors will have equal voting rights (DIFC, 2008). It is proposed that the president will have a secretariat that would assist him or her to work together with the national governors and establish the agendas of meetings and be responsible for any communication and flow of information (DIFC, 2008). Additionally, it is proposed that the board meetings will be held every time in a distinct city on a country rotational basis. In addition, the DIFC (2008) report also proposes that there will be additional non-voting members to the Executive board who will act as external experts and offer briefs on numerous issues. The executive board will be required to publish the minutes to their meetings under the “Chatham House rules” (Badr-el-din, 2007). The proposal also emphasizes on transparency with proposed frequent press conferences and communication to the public and markets. On the voting rights, it is proposed that one person will be entitled to one vote, and the president will hold the casting vote (DIFC, 2008). The executive board members will have a 20% of the voting rights while the rights of the governors will depend on the GDP of the respective member states (DIFC, 2008). The governor’s voting rights will also be grounded on a quota system based on economic criteria such as the population, trade and size of financial markets. The GCB will have an internal organization that will consist of numerous units that include the operations, legal, research and statistics, banknotes and external relations (Badr-el-din, 2007). The operations unit will oversee the foreign exchange interventions, periodic liquidity auctions, middle and back office and GCC payment systems. The legal unit will be tasked with drafting the administrative circulars and decrees regarding the numerous areas of central banking and financial market management (DIFC, 2008). The research and statistics unit will be tasked with overseeing the business cycle evaluation and longer term studies that engross the pillar of the updated material for the executive board members (DIFC, 2008). This unit will also guarantee consistency in data reporting and distribution of pertinent facts to decision makers in a timely manner. The Bank notes will be tasked with designing, printing and circulating the currency. Lastly, the external relations unit will manage relationships with external organizations and institutions, market and the public (Bedr-el-din, 2007). Comparison of the Gulf Central Bank to the European Central Bank The structure of the GCB was made almost similar to that of the ECB. Just like the GCB, the ECB consists of three primary decision-making bodies that consist of the executive board, governor’s council, and the general council. Just like in the GCB, the governing council has the responsibility of implementing guidelines and making decisions to ensure continued performance of the duties of the monetary system and institute policies associated with interest rates and liquidity (Rutledge, 2009). Just like in the GCB, the ECB’s governing council consists of governors from the national central banks of the member states, the president and the executive board. On the other hand, the Executive board in both GCB and ECB has the primary role of adopting monetary policies and managing the daily operation of the banks (Rutledge, 2009). In both central banks, the executive boards have a president appointed from the governors. The two banks stress on independence and reliability as the primary attributes that describe them. This is because they believe that without trust of the members, the idea of one central bank for the region would not work (Jadresic, 2008). In order to attain accountability and gain public trust, these two banks have set up strict regulations in relation to numerous functioning of the banks (Rutledge, 2009). For the independence part, it is only the GCB and the ECB that are tasked with monetary policy powers in the region and not any other institution (Al-Tamimi, 2013). This implies that the ECB and GCB are the sole policy makers and no organization or institution overseas over them. The ECB and GCB are similar in the voting rights. These two banks have adopted the one-man vote where one person is entitled to one vote, with the president having the casting vote. Just like in the GCB, the ECB executive board members have a 20% of the voting rights while the rights of the governors will depend on the GDP of the respective member states (DIFC, 2008). However, the GCB and the ECB differ in numerous aspects. For the accountability part, GCB’s executive board is required to publish the minutes to their meetings hold frequent press conferences and communication to the public and markets (DIFC, 2008). On the contrary, the ECB does not publish the minutes to its meetings and does not hold regular press conferences (Rutledge, 2009). Additionally, the ECB does not have banking supervision powers while the GCB will supervise the banks of the member states. Arguments for and against the GCC central bank The integration of the GCC countries and the formation of the Gulf central bank have attracted both positive and negative criticisms. The positive camp asserts that the Gulf central bank and the unification of the gulf currency will assist the member states to generate a mass of new cash that can be used in trade deals with other countries and commercial partners (Laabas & Imed, 2009). The development of the central bank can at some point be a significant bank in the development of a currency that can be used for international transactions such as the dollar and Euro (Al-Tamimi, 2013). Additionally, Badr-el-dun (2007) articulates that the Gulf central Bank will enhance the position of the Gulf countries in the future through the unified currency together with the economic integration and coordination. After establishment of the Gulf Central Bank and a common currency, the GCC members will have a wider advantage of widening their range of collective bargaining power that will allow the countries to negotiate with other economic trading blocks to generate a stronger bargaining power (Al-Tamimi, 2013). Additionally, having a central bank will eliminate the need for the national banks to keep foreign exchange reserves for intra-trade transactions since all transactions will be done in the new common currency. However, there are misconceptions regarding the Gulf Central bank. Some critiques argue that the central bank will bring a unified currency that will result to a high inflation and increase in other economic problems (Laabas & Imed, 2009). Additionally, having a central bank and a common currency will relinquish the member states off their national currency and its capability to carry out a monetary policy (Rutledge, 2009). Under the monetary union, the national banks are prohibited to unilaterally take the ingenuity of changing the exchange rate of the common currency or the interest rates. Such decisions on changing the exchange rates and the interest rates will be left to the new Common Central Bank (Al-Tamimi, 2013). Conclusion The Gulf Cooperation Council will play a significant role in the economy of the Gulf nations. This is because it will do away with tariffs on regional commodities and adopt a common tariff for the GCC commodities and allow free movement of people within the region. Notably, the institution of the Gulf Central Bank marks the establishment of an economic block. The proposed three-branch structure of the GCB makes it powerful and complex due to its independence. The proposed central bank’s structure is similar to the European Central Bank except for the publication of minutes and supervision of national banks. The Gulf Central Bank is anticipated to strengthen the bargaining power of the gulf nations and generation of mass cash for trade. However, it is also anticipated to do away with the member nation’s capability to carry out a monetary policy and increase the inflation rates. References Al-Tamimi, A. T. (2013, December 29). Gulf countries take steps to achieve monetary unity - Al-Monitor: the Pulse of the Middle East. Retrieved November 30, 2014, from http://www.al-monitor.com/pulse/business/2013/12/gulf-gcc-monetary-union-central-bank.html# Badr-el-din, A. I. (2007). Economic co-operation in the Gulf: Issues in the economies of the Arab Gulf Co-operation Council states. London: Routledge. DIFC. (2008, September 15). DIFC Report Outlines Proposed Structure for Gulf Central Bank | Dubai International Financial Centre. Retrieved November 30, 2014, from http://www.difc.ae/news/difc-report-outlines-proposed-structure-gulf-central-bank Jadresic, E. (2008), “On a Common Currency for the GCC Countries”, IMF Policy Discussion Paper. Laabas, B. & Imed, L. (2009), “Are GCC Countries Ready for Currency Union?” (Arab Planning Institute- Kuwait) Rutledge, E. (2009). Monetary union in the Gulf: Prospects for a single currency in the Arabian Peninsula. London: Routledge. Read More