Value of the Gulf Cooperation Council Currencies - Research Paper Example

? Value of GCC Currencies INDEX Topic Page Number Introduction 3 1. Currency in GCC: an Overview 3 2. Economic Structure: 4 2. Research Objective: 5 3. Research Question: 5 4. Research Methodology: 6 5. Literature Review: 6 5.1. Valuation of different GCC Currencies in World Market: 7 5.2. Positive and Negative of introducing a Common Currency: 8 5.2.1. Microeconomic Benefits 9 5.2.2. Macroeconomic Cost: 9 5.3. GCC Monetary Union: A long Hard Road 10 5.4. GCC Monetary policies Challenges: 11 5.5. Will all GCC Countries be Winners? 12 6. Recommendation: 12 7. Conclusion: 14 8. Bibliography: 15 1. Introduction: The Gulf Cooperation Council (GCC) is also known as the Cooperation Council for the Arab States of the Gulf (CCASG). It is a political and economic union of the Arab states neighboring the Persian Gulf and the Arabian Peninsula. The six member states of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. They are often known as “The GCC States.” Some of the general objectives of GCC countries are a follows: promotion of scientific and technical progress in different industries like mining, agriculture, water and animal resources; setting up joint ventures among the member states; cheering cooperation of the private sectors; strengthening ties between the peoples of the member countries; and establishing and developing a common currency for all the member countries. The common currency of GCC is known as Khaleeji (meaning Gulf in Arabic). At present, the GCC monetary union is the third monetary union in the world in terms of GDP, after the Euro and 2) the unofficial monetary union between the United States and the Latin American countries which declared the US dollar as their currency. There are certain problems now facing the GCC council. According to IMF report (1997), the key challenge facing the GCC countries was the financial condition and valuation of the currency in the member countries of GCC. Along with the currency the other problems were reforming the private sectors of the member countries with the growing demand of rest of the world and government slow disengagement from the economic activity (IMF, 1997, p. 16). 1.1. Currency in GCC: an Overview: All currencies in the GCC are valued or measured directly to the US dollar. The exception in GCC is Kuwait, where the currency is valued to a group of currencies that is heavily weighted in favor of the US dollar. Therefore, the exchange of the Kuwaiti Dinar to the US dollar remains relatively stable. In last five year the rate of Kuwaiti Dinar is always within 0.27-0.29 to US dollar (QNB, 2012, p.31). During 2008, GCC countries were facing the inflation as it was reached up to 11. 2%. According to the financial analyst, revolution of the economy in the upward direction was helpful in order to control the inflation rate which helped to bring down the import cost. According to the report the GCC monetary union project was mainly inspired by the Euro. The problem which was face by different countries that have Euro as their currency is a helpful tool for the monetary policy makers in GCC countries to figure out the loopholes and act accordingly. This evaluation is helpful to figure out whether introducing a common currency for all the member countries of GCC is efficient or not (QNB, 2012, p.31). 1.2. Economic Structure: It is very clear from different research that the growth of GCC as one of the strongest economy of the world is mainly on the basis of highs price of gas and oil (energy sector), and also with the help of rapid economic growth. During 2007-2011, the world GDP growth rate was 2.8% where as, GDP growth in GCC was a staggering 4.7% making it the fastest growing group of country in the world (QNB, 2012, p.4). According to the report of QNB (2012), the GCC economy has seen a golden period during 2003- 08, when GDP grew at the rate of 19.9%. This was a result of continuously increasing demand for energy sources as an outcome of robust global development, particularly in Developing Asia (QNB, 2012, p. 11). In GCC, the major and the biggest industry is the oil and gas sector. According to the report of QNB(), although oil and gas sector is responsible for 5% of world GDP but in GCC this sector is the key driver as it is responsible for 43% of GDP in GCC countries. Service sector, which accounted for 63% of world GDP, is contributing only 39% of GDP in GCC. Agriculture is the lowest contributor in GCC economy with 2% share only. (QNB, 2012, p: 4). 2. Research Objective: The main objective of this paper is to find out whether GCC’s concept of common currency is useful taking in to consideration the present financial condition of the world market as well as the status of Euro and dollar. It is very cleat that the financial structure and monetary policy of GCC is completely based on Euro. So from this paper we are trying to figure out what are the strength and weakness of having a common currency in GCC how it will help the member countries to fight with the inflation and how it help them to control its own import cost which according to various author were the main cause behind the inflation which the GCC countries confronted with last time. 3. Research Question: The main research questions are: What are the important aspects of common currency in GCC in terms of positive and negative effect of the same? Is there any other alternative that the GCC can opt for to stabilize their currency? What are the main difficulties if any member country doesn’t agree to accept the common currency? We can consider a hypothesis and continue to find answers of the above questions in light of that hypothesis. Finally after literature review and also after analyzing the answers given by the people who have participated in the open ended research we can justify whether our hypothesis is acceptable or not. The hypothesis can be like: If the common monetary policy not accepted by all the members then GCC can choose the most powerful country and their currency as the one for common transactions for all the members. 4. Research Methodology: The main method opted for this paper is literature review and several financial reports published in different economic journal to analyze the monetary condition of the GCC. In this research we have tried to pointed out several feedbacks given by different authors regarding the currency and monetary condition of GCC, its past history, future plans and also review of their financial condition to elaborate what they think about the idea of common currency in order to control inflation and also stabilize the economy with respect to US dollar. A small survey will be conducted among the people of all the countries who are there in GCC to make out their opinion about the same. 5. Literature Review: To develop and introduce a common currency for all the member countries of GCC was one of the major aims of Gulf Cooperation Council. This aim was declared way back after the formation of the GCC council in 1982. The main objective as described by the council was “ the member state shall stick to co ordinate their financial , monetary, and banking policies and enhance cooperation between monetary agencies and central bank including an endeavor to establish a common currency in order to further their desired economic integration” (Jadresic, 2002, p.3). According to the analysis of Rutledge (2008); there was a great level of anticipation that GCC might come up with the common trade plan and common currency in the 2005 summit as except Bahrain, all the other member countries was agreed upon in setting up a common convergent criteria. But that was not happen. Till 2006, there was no big setback for the MU which was agreed upon to be in place latest by 2010. But in 2006, there was the first setback as Oman opted out from the agreement. According to Rutledge, the MU was possible without Oman and Bahrain; but their withdrawal was a political as well as psychological blow for the association. The main reason behind their withdrawal according to the economist was the growing controversies involving the utility o pegging to a continuously weakening dollar along with the differences of opinion on the future exchange rate policy. According to his view, both Oman and Bahrain might have understood the advantages of a weak currency which was helpful to make their non-oil manufactured goods more internationally competitive. In 2007 there were 2 major setbacks for the Mu; first was Kuwait decision to fall back on its pre 2003exchange rate policy after citing the reason that they need to tackle the imported inflation through a gradual currency revolution. After this, in the same year, Saudi Arabia central decided to tackle their inflation separately. As a result, according to Rutledge, the possibility of launching a common currency and monetary system for all GCC countries by 2010 was almost nil in 2007 itself (Rutledge, 2008, pp.7-8). 5.1. Valuation of different GCC Currencies in World Market: GCC is consisted of six different countries. At the beginning they have their own different currencies and those are measured on the basis of their performance as well as respective countries performance. According to Jadresic (2002); at the very beginning, only the currency of Oman (rial Omani), was pegged to dollar, rest all other currencies such as Bahrain dinar, the Qatar riyal, the Saudi Arabian riyal, UAE dirham all used to get fluctuated with the value of SDR(Special Drawing rights). The SDR was referred to as IMF’s special accounting unit which was made up of a fixed basket of various main international currencies across the globe. On the other hand, the value of Kuwaiti dinner was calculated on the basis of a fixed as well as an adjustable relationship between the currency itself and a weighted basket of currencies pre decided by the IMF. From his research, Jadresic also pointed out that exchange rate of Kuwaiti dinar, the single currency of the GCC, which never lost its valuation after the collapse of Bretton Woods system as it was not pegged to that currency (SDR); in recent years the value of Kuwaiti dinar is most stable as the standard deviation was less than percent during the time frame of five years up to 2005 (Jadresic, 2002, pp. 3-4). 5.2. Positive and Negative of introducing a Common Currency: There are several positives as well as negative points associated with the implementation of a common currency in any region. Different authors as well as financial organization evaluate this and came up with their point of view about this key matter. According to their analysis, if we take a broader perspective of common currency the key benefits were: elimination of any kind of exchange rates in the bilateral transaction between member countries; no uncertainty about the exchange rate might be there in place, increase in the general efficiency of the GCC economy, as well as it might help them to develop a non oil-based economy. According to them, the negatives in general were: the entire member countries have to give up the possibility of deciding their own currency exchange rates, and the economy of all the member countries were more dependent on each other as downfall of one country’s economy started to impact the other as well. 5.2.1. Microeconomic Benefits: According to Jadresic (2002); the most important and significant microeconomic benefit of common currency in GCC would have been the elimination of foreign exchange cost in transaction among the member countries. It demolished the concept of foreign exchange commission that the households and firms have to pay while buying something. Moreover, it was also helpful for the firms who have presence in more than one country across the GCC group. Moreover, the concept of one currency was also helpful for the GCC members to develop their economy no only on the basis of oil and gas sector but also could focus on developing other sectors as well (Jadresic, 2002, pp.6-9). 5.2.2. Macroeconomic Cost: With the abovementioned benefits there were some macroeconomic costs also associated with the implementation of the common currency. According to Jadresic (2002); the implementation of common currency concept brought about the end for the possibility or the freedom of different countries to independently change the value or control the value of their currency. Although this situation was never arrived , but this concept brought an end to the possibility of changing exchange rate if any country was facing any macroeconomic misbalance. As a result, the poor economical condition of one country might affect the group as a whole. Another disadvantage of this concept was none of the central bank of the member countries could decide their own monetary policy from here on. If a member country was not facing any problem about the decided exchange rate might have to accept the change in monetary policy as well as the exchange rates if council decided to do so (Jadresic, 2002, pp.11-12). Although these problems are very hard to quantify in monetary value, but still these are some factors which are always associated with the common currency when it is implemented for a group of nation. 5.3. GCC Monetary Union: A long Hard Road: Setting up a common agenda is always hard for a group of countries. It is even harder when it is associated with the financial policy and currency. After the formation of GCC, there was an objective to set up a common currency for all the group members to make it uniform about the exchange rates as well as for the industries that have multinational operation. Taking into consideration of this aim, in the year 2001, all the members of GCC signed an agreement to implement common currency in GCC and also to carry out necessary adjustment in the economic policy latest by 2010. Ramady (2010), in his review pointed out the fact that although that date was already passed the prospect of common currency is almost nil as there was series of event took place in between. According to his review, Oman was the first country who opted out from the agreement of implementing common currency in 2006, which was followed by the Kuwait in 2007. The logic behind Kuwait opting out from this concept was a very significant one and economist across the word thought that reason was very valid. According to Ramady, if Kuwait agreed to the common currency of GCC then it would cancel out Kuwait dinar peg to US dollar, as it enjoyed the peg against an undisclosed currency basket. According to his view, the Kuwait dinar was the most stable currency of GCC as it was varied less than 1% for a span of over 25 years despite different economical crisis. In May 2009, the agreement was signed between rest of the countries about the introduction of common currency and also to introduce a common central bank in Riyadh, Saudi Arabia. But, soon after this decision, UAE also opted out from this agreement. According to him, their decision was more sentimental as they have lost out to Saudi Arabia in having the central bank in their countries, but more in depth analysis pointed out the fact that there were other reasons also. According to his research, UAE was not ready to accept the conservative regulatory approach taken or governed by the people based on Saudi Arabia to dominate the functionality of central bank of GCC as well as to have their more power in deciding monetary policies. The main difference was UAE was known for its more open ended approach towards the economy. They believed that, if the central bank was established in Riyadh, then the economic policy might get more conservative and which was completely against their approach (Ramady, 2010, p. 464). 5.4. GCC Monetary policies Challenges: As there are lots of differences among the member countries many author pointed out the fact that there have to be more synchronization before the GCC launch common currency. According to Cevik and Teksoz (2012); if any union or group of countries wanted to gain maximum advantage from implementing a common monetary policy or common currency then there must be a high level of non-hydrocarbon business synchronization among the member countries. According to their review, more the synchronization of the member countries of the currency union, the chances of asymmetric shocks reduced to lower possible degree, Apart from that , possibility of get affected by the monetary exchange rate loss was reduced to minimum for the member nations. After stating this theory, they also pointed out the fact that synchronization among the GCC countries in terms of business cycle of non –hydrocarbon business was very low, as well as fiscal rules and the business rules were also differ a lot. As a result the chance of implementing a successful common monetary policy was very less in case of GCC (Cevik and Teksoz, 2012, pp.23-24). 5.5. Will all GCC Countries be Winners? According to various author the most important question associated with the implementation of common currency was will all the member countries be benefited from it? The answer is No. According to Rutledge (2008); the most benefited countries of GCC from this MU would have been UAE and Bahrain as both of them have the most open economy among the all member countries of GCC along with the presence of strong intra-regional trade links. Apart from this, both of the countries had a well diversified and well established service sector which includes banking, tourism and finance sector-those according to Rutledge may get maximum benefit from the launching of common currency. However he also mentioned that as UAE have the most open economy among all the GCC members so therefore they also had the concern of entering the agreement with conservative economy of Saudi Arabia, which might affect their overall economy. Same way Bahrain also opted out as they assumed that instead of adopting the common currency it was better to continue with their weak currency for gaining maximum advantage from the export of their non-oil products. So, it was very clear that financially all the member countries might not be benefited from the MU however he also mentioned that only after the launch of the currency, the actual scenario might have been analyzed more clearly (Rutledge, 2008, p.115). 6. Recommendation: Te above literature review gives us a broad idea about the answers of the research questions that we have mentioned before. But this literature review is entirely based on the data and analysis of different authors and the financial organization about the potential impact of the common currency in GCC. The most important is once the currency launched in Gcc we might figure out the actual impact of it in the economy of the member countries of GCC as well as on the world economy. Now to find out the answer of the research hypothesis we have to do a survey among people of all the member countries of the GCC. Because it is very clear that not all the people have same point of view about the common currency in GCC. In a broad overview we can say that the research questioner will have 5-7 close ended questions like “do you think common currency is necessary?”, On what basis the exchange rate should determined?” etc and 2-3 open ended questions like; “What is your opinion about the key features of monetary policy?”, Should the common currency be motivated from one country’s currency or not?”, what according to you the positive and negative of this common currency and monetary policy?” The participants can state their opinion and we can analyze those to find out what they think. From a general perspective, we may recommend that; common currency is good for the group of countries when their economy is based on the common platform that is oil and gas product. Secondly, common currency will ensure a fixed exchange rate among all the member countries so there will be no ambiguity. Thirdly, no one country’s economy or monetary policy should get priority over others as we state in hypothesis because it will strengthen that specific currency which might have some adverse effect on other economy. Fourthly, the monetary policy must consider the economical perspective of all the member countries as everyone have their own characteristics. For example UAE and Bahrain have very much open economical structure where as Saudi Arabia have more conventional one. So to decide on a common monetary as well as economic policy characteristics of all the economy should be considered. 7. Conclusion: From the above analysis we may conclude that replacement of current individual currencies in all different countries by a common as well as regional currency can be a better plan if the monetary policy is designed properly taking in to consideration all the member country’s economical situation. This implementation will help the member countries to enhance economic efficiency, ensure more regional integration and most importantly boost the development of non oil based sectors. To gain the maximum benefit from the common currency all the member countries have to finish their internal as well as cross border differences, and also have to encourage intraregional investment as well as trade. Apart from this, they also have to be agreed on framework of the policy to minimize the risk factor associated with this financial policy and political integration to look ahead in the future for the growth of the entire GCC. References Cevik S, Teksoz K (2012); Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries; Andrews McMeel Publishing, Financial Systems and Labor Markets in the Gulf Cooperation Council Countries (1997), International Monetary Fund GCC Economic Insight, (2012), QNB; retrieved on 28.10.2013 from http://www.qnb.com.qa/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1355477183289&ssbinary=true Jadresic E (2002), On a Common Currency for the GCC Countries, IMF Policy Discussion paper, retrieved on 28.10.2013 from http://www.imf.org/external/pubs/ft/pdp/2002/pdp12.pdf Ramadey, A. M, (2010), The Saudi Arabian Economy: Policies, Achievements, and Challenges; Springer Rutledge E, (2008), Monetary Union in the Gulf: Prospects for a Single Currency in the Arabian Peninsula; Taylor & Francis Read More