GCC Common Currency - Essay Example

Running Head: GCC COMMON CURRENCY GCC Common Currency [Writer’s name] [Institution’s name] GCC Common Currency Background The Gulf Cooperation Council (GCC) came into being in 1981, it consists of 6 states Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Trade among these states is completely duty- free, and citizens of every country are free to join and search for employment in other countries which are apart of GCC (Rouhollah 1988). In pervious years, the GCC Secretariat was working to identify an equally approved CET. At last, in December 2001 all the countries of GCC decided on a common external tariff, this consisted of 5% of imports, as well as the development of a customs union on January 2003, which had been planed 2 years ago. The Gulf Cooperation Council Ministers of Finance also decided to use a two tier common external tariff structure; a 0% rate regarding imports which fall under three tariff lines at the HS 6-digit level, mostly “necessary “goods, as well as a 5% common external tariff that is essential for “other” merchandise which may be regarded as being, unnecessary and not fundamental. More steps were being planned so that customs officials of the GCC countries come to a decision regarding the custom’s union. To this end, an agreement was made regarding the approval of a common list of banned products and a different list of restricted items was to be made so that issues regarding safety, health or moral ground that will require import licensing can handled. Some major issues regarding the import of alcohol and pork products were also easily resolved. Another agreement was signed in order to permit the import of the above mentioned products from the entry ports of the six member countries that permit for only those imports which were mentioned above. The receiver member country will not remove the collected customs duties on the imports, which land on their entry ports. As for the safeguard of domestic industry, an agreement amongst the GCC member countries was made for not utilizing the tariff escalation; however they decided to utilize grant tariff exemptions in its place on imports of intermediate contribution as well as equipment for domestic production along with export industries. A set of common measures was taken for allowing such exemptions. As for the collection of tariff revenue, the GCC Custom Committee came to a mutual agreement that will permit custom department in every member country to collect revenues as soon as the items land on their port. After it was decided that the national authorities will then shift the revenue into a common account, before the fourth of every month. After this step, it will calculate and divided by utilizing a fixed distribution formula and then distributed to all of the member countries via bank transfer. Nevertheless, for quite some time it remained undecided, as to who would calculate and distribute the funds. The distribution formula of collected tariff revenues was based on a on a combination of criterions, like the member countries’ proportion of total GCC imports, proportion of total GDP and proportion of total Gulf Cooperation Council populace, calculated as an average of the previous 5 years. An agreement was also made which showed the revenue shares from about 45 - 47 % for Saudi Arabia, and 20 – 23% for the United Arab Emirates. The rest will be distributed amongst the remaining countries like Kuwait = 12%, Bahrain = 9%, Oman =7% and Qatar =6% (Arabia 2000 2008). Advantages and Disadvantages Usually, the common market provides Gulf Cooperation Council‘s member countries with the following benefits: 1) Making improvements in services like transport and communication which are usually the responsibility of private and public sectors, 2) Improving the job market as well as living conditions, 3) Giving the tourism amongst member nations a huge boost. Disadvantages Market initially, when member countries adapt for the common market, international competition becomes furious. This thing influences badly on certain divisions of national economy in the short run. For instance, companies which are sustained by a government with subsidies or protections from international markets may be buffeted about by the storms of the international competition, because of lacking in competitiveness against international markets. What is worse, if the companies fail to manage with the international competition, it will lead to increase in unemployment. Internal and External Benefits The economic union gives member countries the following advantages: 1) promote international comprehension, 2) greater overall democratic function, 3) creating economic unity, benefit, and evolution, and 4) foreign policy and common security as well as with cooperation in areas such as justice and home affairs (Rutledge 2008). Internal and External Disadvantages United Arab Emirates pulled out the common currency due to the fact that Central bank will be in Saudi Arabia not in U.A.E, is that a matter or a good reason to leave the common currency. Thus it can be said the U.A.E’s choice to withdraw was an emotional one, as they did not think of their own setbacks. The following will also describe the set backs of their banks, a how it was only an emotional decision. The prediction for a feasible GCC single currency have become extremely weak due to the UAE's harsh decision to withdraw from the plan, this made the other countries think twice about the success of this plan. They were even doubtful about going through with the plan of a common currency. The UAE announced on 20 May that it had withdrawn from the single currency plan, bringing the number of countries still committed to the scheme down to four. Sultan Nasser al-Suwaidi (governor of the Central Bank of UAE) officially declared their withdrawal from the common currency project. He also said that the choice not to get involved in the project would not have an effect on United Arab Emirates monetary policy. Apart from this, it would not even affect the dirham's peg to the dollar. Economists say the UAE decided to withdraw from the project because the GCC decided at a meeting on 6 May to locate the new currency bloc's central bank in Riyadh. As Saudi Arabia in this project will be contributing 60% of the GPD and 65% of the population, there might well have been anxiety in Abu Dhabi regarding the fact that GCC monetary policy could possibly be tilted in favor of Saudi Arabia; therefore they pulled out from this common currency for essential reason. However it is like France withdrew from the euro because the central bank was set up in Germany. As for the economic side of things, the belief that United Arab Emirates has the accurate components (such as largest financial sector by means of assets, extremely liberal economy) must be inferred carefully.  Germany was selected to host the European Central Bank not only because it is the biggest economy in the Euro region, but because the Bundesbank, Germany’s central bank, had a verified track record of keeping a strict control on the inflation throughout the 20th century, and is the most powerful part of the European System of Central Banks.  This is why the German was considered to have the most respected currencies, to which a lot of European currencies were pegged prior to agreeing on switching to Euro (Arabia 2000 2008). Undoubtedly, not even one of central banks in the Gulf area has leadership qualities to be successful as a nominee for Gulf central bank. Apart from the daily challenges in applying important monetary policy, a central bank is also accountable for doing a lot of research work regarding the economic issues.  One barely finds any proof of efficient intellectual research whilst going through the GCC central banks’ websites. Another matter of importance is the accessibility of economic data that central banks utilize to assess the future course of the economy.  The accessibility of high quality data provides excellent potentials of doing high quality quantitative research, which in turn may have a strong effect in improving the general research environment.  Every member country is different from each other when it comes to economic data coverage.  UAE is well-known for its extremely bad data quality of consumer prices as well as data concerning national income aggregates, whilst public accessibility of Qatar’s poise of payment data is almost fictional. Thus in this case, both the Kuwait and Saudi Arabia can be considered to have the best kind of the quality of data available in the GCC region, even though more work is required to attain recent data coverage. However it can be noted that it has done well in managing assets conservatively and reining in lending through conservative capital requirements far more decisively than other central banks in the region. However, visa requirements and lack of openness are concerns, and it may have been better to give it to Abu Dhabi to keep the power balance within the GCC. The UAE argued that it was the first country to ask to host the Joint Central Bank in 2004 and there were concerns about the GCC Secretariat and the bank being located in the same country. Apparently, calls for a compromise such as having a rotation system for the Central Bank were dismissed as unpractical, the paper added. Future There are a few important things which will take place in the future for each and every one of the GCC countries. First of all, they will expand their local markets, as well as their domestic financial markets, in their own exchange. Secondly, they have a bright future as they are planning to develop a better economic integration in the member countries. The current financial disorder will give a strong impulse to integration which is associated with all GCC countries themselves. Even though they have a plan to introduce the Gulf Monetary Union by 2010. If you assess the criteria portrayed in the agreement for the attaining it. Since the deadline is 2010 they can move process rather slowly. That could be important as it means that the committee would have a currency that the rest of the world might utilize as part of its international reserves. It would also be money that would guard against the danger of the oil reducing. It is an excellent risk diversifier. It would be given by countries which have vast natural resource wealth, as well as financial wealth; however this could change the fact that the wall was truly broken. Coming to the Middle East and the GCC countries in particular, I think that we are not having a financial crisis. Yes, we have contagion and the world's equity markets are showing greater coherence recently. Nevertheless it is a extremely current incident. It's only in the past few months. If one is to analyze the pervious five years, then it can noted that a strong decoupling is being developed . Maybe not a complete decoupling, but when we are talking about changes in the forecast growth, they are all forecasting a substantial reduction in growth for the developed countries. All the other forecasts for the emerging-market countries talk about a slowdown, but no recession or contraction. Then the country is left with low growth rates. This is most likely the best way to find out if of de-coupling has started in that specific country. . Thus it can be said that the world is undergoing massive changes. If the emerging markets are analyzed, and especially the GCC, one question arises in most of the people’s mind I.e. will these changes have a negative impact on all the financial markets". This is due to the capability of the GCC countries especially t the finance the current projects that they contain, their treasury, as well as their financial resources. They are not as reliant on the financial markets of the urbanized countries. In 2009, they were arguing to have an intense test of the de-coupling theory. One change which the world ahs gone through regarding in financial and economic geography, is that all the financial investors and economical developments are taking place in the east . As a result of the financial confusion, the countries of Asia, China and the GCC striving the develop separate market . The future is going to be extremely dissimilar from what we have gone through in the post-war world; this is because when u turns 60 years. I see a strong appearance of the budding markets. That's where the investments are, that's where future development is, where the scenario took place. The process of finance is going to move eastward. This will be a long-standing tendency. This economic rationale helped the GCC governments overcome concerns over the limited openness of Saudi Arabia's capital mark. All the kingdom now needs to crown its achievement is a physical manifestation of its burgeoning supremacy. Additionally, just 30% of the combined numbers of funds in Kuwait and Saudi Arabia have conventional structuring, while 70% are shari'a compliant. Funds also vary in terms of their NAV calculation frequency. Just under half (48%) are valuated weekly and 26% are valuated daily. Other differences - most Saudi funds have no subscription fee, compared with the range of 0-0.5% charged in Kuwait. In Kuwait, management fees are 1-2%, while in Saudi they range from 1.0% to 2.25% (global investor 2009). In 2008 there was ahuge ecomincal fall faced by the GCC, in spite of world trade falling approximately twenty precent.. nevertheless, tin the bigning he exports of GCC seem to be falling sharp . just Kuwait and Qatar will not be effected by negative existing account balances this year (Arabia 2000 2009). Foreign exchange reserves of this council is still quite less. At the end of the year there were still sufficient barriers, especially for UAE, Saudi Arabia and Kuwait. The EU report said that the unin will have to base their monetary policy of currency on the following terms : (i) A mutual understanding between the countries regarding nature as well as capacity of the GCC monetary authority; (ii) Cooperation in developing regulatory and managerial frameworks, in particular for the financial sector, statistical methods for important financial and economic indicators; and (iii) mutual understanding regarding the customs union and the issues regarding it , keeping in mind then customs revenue hall be shared. (iv) introduction of a common currency (Arabia 2000 2009). Perhaps at the fore of which is the agreement to launch the GCC common currency next year, and eliminating all obstacles that block its was, particularly against the backdrop of the historic global economic crisis which has generated transformations in the economic thought as a whole, and turned upside down theories which until recently were considered to be gospel truth which can never be contested the fact that the GCC Common Market, in its economic, political and social dimensions, provides tremendous opportunities for enhancing the status of GCC on the global level, particularly if it succeeds in investing the infrastructures owned by its countries in line with prudent collective management (The Jordan 2009). The potential and multiple challenges facing the GCC countries, particularly in the context of oil price fluctuation and the current global economic crisis, are the formidable challenges to these countries. Despite of that, it is believed, that there are huge investment opportunities to be captured. Such opportunities, however, are vulnerable as a result of the current economic downturn and faltering world economies, he stated. Driven by this outlook, it is called for collective investment of the GCC achievements made through the past decades. GCC states appear to be pursuing a strategy of high spending on development to boost growth and create jobs for nationals despite the effect of this increase on prices that have pushed inflation to record levels,” the study said. Available data showed the combined actual expenditure by the six countries surge by around 26 per cent in the first quarter of this year. This increase was coupled with efforts to expand the capacity of local economies to absorb higher expenditure, but the absence of flexibility in their fiscal and monetary policies because of the peg between local currencies and the US dollar has led to heightened inflationary pressures, which are compounded by high population growth, soaring prices and house rents (Arabia 2000 2009) Recommendations Gulf governments had repeatedly expressed the need for urgent action during the past few months because of the global economic recession and a falling oil price. A Monetary Union would act as a buffer against future crises. The economic meltdown has proved to be a huge test for the Euro and so far the single currency has been resilient. The worst-hit countries like Ireland and Spain have been unable to adopt more aggressive monetary policies to counter deep recession but their decision to join the Eurozone has probably saved them from the same fate as Iceland, So there is a lesson to be learned from Europe. It went to add all Gulf countries are preoccupied with the global crisis at the moment and until there is a sustained period of economic stability in the region and a convergence of key data such as inflation a Monetary Union could not become a reality. They need to speed up cooperation and use the economy of scale in establishing the GCC single currency and monetary union,' he said. 'They need to review their financial risk management and establish a common institutional floor to build up future financial systems. There are clear moves towards nationalising significant parts of the financial systems, and reviewing domestic economy control systems and re-establishing good governance's checks and balances. It is almost certain that in the future, many economies will reduce their financial dependency on global financial markets (Arabia 2008) However, work on a framework for the common currency should continue with or without the UAE and Oman. Abu Dhabi may have felt roiled by Riyadh but efforts should be made to encourage the UAE to return to the fold. References Arabia 2000(2008); GCC should learn from financial crisis - Gulf News Editorial retrieved from www.uaepropertytrends.com/ptrends on 2 December 2009 Arabia 2000 (2009); Decision to walk out from GCC Monetary Union dictated by new economic priorities in the UAE: Khalfan Al Ka'abi Arabia 2000 (2009); GCC Secretary General / Press conference, Arabia 2000 (2009); GCC states expected to become the world's fifth economic power, says Minister Arabia 2000 (2008); GCC hopes and challenges summit/ editorials Arabia 2000, (2008); GCC currency plan is on the right track: UAE newspaper Global investor (2009); Fund business grows in GCC retrieved from http://www.isfmagazine.com/Article/2226923/AssetManagement/26294/Fund-business-grows-in-GCC.html on 2 December 2009 The Jordan (2009); Moody's: UAE pullout from GCC currency union plan has no direct effect on its ratings Middle East & North Africa Business Report Rouhollah K. Ramazani (1988); The Gulf Cooperation Council: Record and Analysis University of Virginia Press Rutledge Emilie (2008); Monetary Union in the Gulf: Prospects for a Single Currency in the Arabian Peninsula Routledge Read More