GCC Central Bank, Its Structure and Its Comparison with European Central Bank - Case Study Example

GCC Central Bank, Its Structure and Its Comparison with European Central Bank Executive Summary The purpose of this report is to identify the structure, arguments for and against, and functions and purpose of the suggested GCC Central Bank. The report has found out that the structure of the GCC Central Bank has four main components: GCC member central banks, the Board of Governors, The Operating Markets Operations Committee, and the GCC Advisory Council. This structure is similar and different from the European Central Bank in various ways. Arguments for the GCC central bank include its mandate to stabilizes prices in the region and achieve cost saving and resource efficiency while the argument against it is that it undermines political sovereignty of member countries and independence of member central banks. Its purpose is to maintain price stability and its function is to implement monetary policies. Introduction The Gulf Cooperation Council (GCC) is an economic integration of several countries in the Gulf region of the Middle East including Bahrain, Kuwait, Oman, Qatar and Saudi Arabia. In the spirit of achieving monetary union and a common currency in the GCC states, Gulf leaders have suggested to form a GCC central bank. This was agreed in 2009 but some disagreements in terms structure and location have delayed its functioning. This is intended to seize the opportunities of increasing GDP in the region following the rising of oil prices in 2003. In order to develop a joint currency and common monetary policies, it has become apparently necessary to develop one central bank that will achieve that. This report provides an investigation of the proposed GCC bank in terms of its structure in comparison with the European Central Bank, arguments for and against the central bank, and important objectives and functions of the central bank. The project report is important in explaining why and how the central bank of the GCC should be structured in order to meet the economic needs of all member states of the GCC and promote effective economic integration in the region. Understanding the structure of the proposed central bank is important because it shows how the central bank will operate. The central bank should have a clear organisational structure which will guide its activities in order to achieve its goals and objectives. The primary function of the GCC central bank is to implement the monetary policies of the GCC. Its main purpose is to achieve stable prices within the Gulf region in order to boost economic exchange and development within the region. Including all member countries of the GCC in the organisational structure of the central bank will enhance transparency and effective utilization of resources in the region. This structure can be related to the structure of European Central Bank which implements the monetary policy of the Euro zone. Structure of the GCC Central Bank The GCC Central Bank will also be composed of a Board of Governors of the GCC Reserve System, GCC Open Market Committee, and GCC Advisory Council. These bodies will work together in close relationship to achieve the monetary and economic objectives of the GCC (Sibert, 2003). In order to take the interests of each country into consideration, one headquarters should be identified in one country and the other four countries should host one department for the GCC Central Bank; preferably within the premises of each country’s Central Bank. The overall structure of the GCC Central Bank is shown in the figure below: The GCC Central Bank should be made up of the central banks of five countries including the Central Bank of Bahrain, Central Bank of Kuwait, Central Bank of Oman, Qatar Central Bank and Saudi Arabian Monetary Agency. These Centrals Banks will not be eliminated but maintained as part of the GCC Central Bank’s organisational structure. The member banks of these Central Banks from the five countries will become member banks of the GCC Central Banks. Each of the central banks will all be governed by one director who becomes a member of the GCC governing body and is appointed by the president of the country. The Board of Governors should be made up of five members, one from each of the five member countries of the GCC to ensure a good representation of the member countries. The president of each member country will choose a member to represent their country in the board. The chosen members will then hold elections after every three years to choose the chairman of the board. This follows a similar approach as the America’s Federal Reserve whereby seven members of the board are appointed by the president and the president of the board is chosen by the Board of Directors (Hasan and Mester, 2008). In this approach independence is enhanced so that even if the GCC will determine the overall goals of the GCC Central Bank, the bank itself will implement its monetary policies to achieve the goals. The Open Market Committee will be responsible for the open market operations of the Central bank; including interbank foreign exchange, issuing of bonds, selling and buying of shares, trading in derivatives, money supply, etc. It will be operated and managed by member countries’ financial market experts. This committee should be meeting regularly to review the interest rates, bond and share prices, and other monetary policies that will determine the general price levels and stability in the economy (Bindseil and Jabłecki, 2011). The GCC Advisory Committee should be made up of ten members, two from each of the five member countries of the GCC. The Advisory Committee should be tasked with the task of conducting research and advising the central bank about the prevailing economic conditions in the member countries in order to enable the central bank develop appropriate responses in terms of monetary policy to achieve stable economy. The Board of Governors, Open Market Committee and the Advisory Committee should all be located in the headquarters for easy operations and management of the Central Bank. Relations with the European Central Bank In terms of overall structure, the European Central Bank (ECB) and the GCC Central Bank will have some similarities and differences. The decision making bodies of the two central banks will be the same in terms of structure but they will differ in size and composition. In the ECB, the central decision-making body is the Governing Council which is referred to as the Board of Governors in GCC Central Bank. In terms of functions, these bodies are similar because they are both responsible for the implementation of monetary policy. However, difference is that the Central Bank of Europe has an additional body known as the Executive Board which is composed of six members who are not directors or members of the independent central banks of member countries (Scheller, 2004). This differs with the 5 members of the GCC Central Bank who are the presidents of the independent Central Banks of GCC member countries. Instead of having an overall executive board, GCC Central Bank will have an advisory council known as GCC Advisory Council which will advice the directors of member central banks according to the decisions of the GCC Central Bank’s deliberations. The proposed Open Market Operations Committee of the GCC is similar to The General Council of European Central Bank. Both bodies are responsible for fixing interest rates, mediating the selling and buying of shares and bonds, fixing currency exchange rate among member countries until the common currencies of the GCC and Euro zone are adopted. Arguments for and against the GCC Central Bank There are various arguments supporting and opposing the development of GCC Central Bank. Those who support the Central Bank argue on the basis of a unified monetary system in order to achieve a stabilized economy in the Gulf region (Buiter, 2007). Supporters of the monetary union of the GCC also argue for microeconomic efficiency and stability achieved through the use of a common currency. In this view, the Central Bank enables the GCC to develop a single currency in order to implement monetary policies in the region successfully to achieve a stabilized economy in the region (Kamar and Ben, 2007). Medium of exchange is an important tool for economic exchange. Since economics is about utilizing resources, it follows that the elimination of the need for exchange of one currency for another saves on real resource costs and enhances efficient utilization of resources. Another argument supporting the monetary union through GCC Central Bank is that the Central Bank leads to reduced inflation and stability of prices and economic conditions in the region due to monetary policies of the central bank (Taylor, 1999). The central bank harmonizes the monetary policies of member central banks in order to develop common policies that will lead to price and economic stabilities in the region. Such policies include managing exchange rates for the region, developing a common discounting rate for the region, money supply, and issue of bonds and shares. Credit control is also unionized in order to achieve common credit level. Opponents of the unionized monetary system in the Gulf region through the GCC Central Bank argue that a common central bank undermines the independence and sovereignty of the member countries (McNamara, 2002). They suggest that the GCC Central Bank will take up most of the important monetary decisions of each country’s central bank. The member countries’ central banks will lose their independent authority and policy role (Buiter, 2007). Therefore, they may not be justified as being important because they are not independent. From a political perspective, the absence of common political institutions in the GCC reduces political accountability of the Central Bank. Opponents in this case argue that political sovereignty will have to be surrendered in order to embrace the Central Bank of the GCC. This is not legitimate in an environment in a region with sophisticated political citizenry like the Gulf region (Buiter, 2007). The Central Bank may only be achieved through clear political integration, something that is not yet seen in the GCC. Objectives and Functions of the GCC Central Bank Like any other central bank of an economic union like the European Central Bank, the main purpose of GCC Central Bank is to achieve price stability by implementing common monetary policies of the GCC region. The monetary policy functions of the GCC Central Bank will include: managing external exchange rates, setting interest rates, credit control, conducting open market operations, and issuing money (Cancelo et al, 2011). These functions are intended to achieve price and economic stability as well as reducing inflation and unemployment in the constituent economies. By issuing one currency, the GCC Central Bank will make economic transactions in the region easier and there will be reduced costs in terms of currency exchange (Taylor, 1999). The price stability should be focused in a given low level like 2% inflation as defined by the European Central Bank. The GCC Central Bank will also conduct foreign exchange operations on behalf of each country’s central bank. This ensures that there is a stable exchange rate within the region and he cost of exchanging foreign currencies within the region is minimized (Khan, 2009). The GCC Central Bank also takes care of the foreign reserves of the GCC’s Central Banks and encourages smooth financial market operations (Buiter, 2007). Financial markets in the Gulf region will be improved through the Central Bank by settling securities and implementing policies that guide smooth operations of those financial markets. Conclusion It is clear that the suggested GCC Central Bank will be one of the most important aspects of economic stability in the Gulf region. Its structure which is almost similar to that of the European Central Bank will be made up of the governing body, advisory council, member central banks, and open markets operations committee. This structure differs from the ECB in that it lacks an executive board, and the functions carried out by the executive board of the ECB are carried out by the advisory council of the GCC Central Bank. The Open Markets Operations Committee of the GCC Central bank will carry out the same functions as the General Council of the ECB while the governing body will similar except for the number of members. There are certain arguments for and against the GCC. Arguments for the GCC central bank include its mandate to stabilizes prices in the region and achieve cost saving and resource efficiency. The argument against it is that it undermines political sovereignty of member countries and independence of member central banks. Lastly, the purpose of the GCC Central Bank is to achieve price stability and its function is to implement monetary policies in the GCC including issuance of money, control of credit, setting of interest rates and managing foreign exchange. References list Cancelo, J.R., Varela, D. and Sanchez-Santos, J.M. (2011). Interest rate setting at the ECB: Individual preferences and collective decision making. Journal of Policy Modeling 33(6), 804-820. Bindseil, U. and Jabłecki, J. (2011). A Structural Model of Central Bank Operations and Bank Intermediation, Working Paper Series, 1312. Frankfurt am Main: European Central Bank. Buiter, W.H. (2007) Economic, political, and institutional prerequisites for monetary union among the members of the Gulf Cooperation Council. In: Preparing for GCC Currency Union: Institutional Framework, 20-21 Nov, 2007, Dubai, UAE. Hasan, I. and Mester, L.J. (2008). Central bank institutional structure and effective central banking: cross-country empirical evidence. 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