Implications of GCC Currency Union - Dissertation Example

This dissertation sought to add to this body of knowledge, by updating the literature with a more recent documentary search and a supporting correlational study.  It focused on the prospects for the successful adoption of a single GCC currency, and a determination of those factors that will likely determine its eventual success or failure. The study first establishes the benefits and disadvantages that are associated with a unified regional currency, and the issues attendant thereto.  It then proceeds to determine whether the GCC monetary union as envisioned has a likelihood of success, what factors and attributes will determine this success, and whether or not the desired benefits have a chance to be realized.

The dissertation found that there has been significant progress made in the integration of the GCC economies to the point that may eventually succeed in monetary unification.  It was not realistic to expect to meet the 2010 deadline, however, as there are much needed reforms that must be undertaken with respect to the liberalization of cross-border movement of resources and persons, as well as the establishment of supranational institutions to support the monetary union.

The creation of a currency union is centered upon the formulation of a new currency that will be adopted as legal tender for all the member countries that form the union.  The process is complex and delicate since it necessitates the absorption of the national currencies into one and with this the unification of monetary policy for the union (Krueger, Kamar & Carlotti, 2009).  National economic and monetary policy is necessarily implicated, such that the individual states give up to an extent their sovereign right to policy determination insofar as they are constrained by the union.

            This study examines the dynamics involved in assessing the viability of a monetary union in the Gulf Cooperation Council (GCC) region.  Out of the six countries in the region, only four have opted into the prospective union, which right away underscores the difficulties in both the processes and effects involved in the union’s establishment. 

1.1  Background of the research problem

            In 2002, the euro was adopted as the first single currency of any unified monetary region worldwide.  The euro was established by the provision of the Maastricht Treaty in 1992.  It is not commonly known, however, that some eleven years before this treaty, in 1981 the Gulf Cooperation Council formally articulated its objective to seek to establish a single, unified currency for the six-member states in this region.  Originally scheduled for adoption in 2010, the adoption date was postponed because of the destabilization caused by the intervening financial crisis and the economic recession.  A new date has not been set, speculations setting it anywhere from two to ten years hence, which provides sufficient time and opportunity to assess the merits and the wisdom of the implementation of this course of action.

One important consideration is the unit of value against which the new GCC currency will be pegged.  Some speculate that the new currency will be backed by gold, consistent with the teachings in the Quran against riba (interest).  It was not discounted, however, that the peg may be against the US dollar, at least initially (Daily Star, 15 Feb 2010).  A proposal to use the International Monetary Fund (IMF) Special Drawing Rights (SDR), a theoretical currency used by the IMF for member states transacting with it, has been rejected.