Unifying The Currency Of The Gcc Countries Economics Essay

This paper discusses the replacement as the long term of the Gulf Cooperation Council (GCC) currencies with one common currency. The countries that form membership of the GCC are, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arabs Emirates (Fasano and Iqbal, 2003). The formation of monetary union involves the creation of new multinational currency, such as the euro, and its substitution of members’ own currency (Kenen& Meade, 2008). Through an agreement that was concluded in 1985, the GCC was established. The motivation for the formation of the GCC was a desire to have common market, have similar goal as a region and unified political system since they all profess an islamic religion. The unification of the currencies is expected to come with plenty of advantages rather than disadvantages. Some of the advantages include, improved economic growth , the economies around this areas are able to blend well and these countries being rich in oil, there is need to improve those non-oil producing aspect of the economy (Emerson, 1992). However, it is important to note that, currency unification is not the only factor that may be put in place to realise greater regional economic growth or boom.

To attain fully economic growth, all other aspects should be put in place to ensure that it is a success. The other factors that may need to be addressed include, relative political stability, common exchange rate for the regional currencies and developement of great policies for business to flourish. It is important to have common exchange rate so as to get value for all currencies. It is therefore of great importance to understand both sides of the coin or pro and cons before rushing into it. This paper will also be comparing the common GCC currencies unification process to the one that was earlier undertaken by the european union. Another comparison will be made with Kuwait in regard to currency unification. This should cover long-term advantages and disadvantages.

LITERATURE REVIEW

The GCC member countries have their own individual currencies. In this paper, we are addressing the issue of introducing one common currency for all the member countries. This will come with advantages and disadvantages. It is important to critically analyse the advantages and the disadvantages so as to make an informed decision if it is worth it or not. Moreover, GCC countries have gradually taken a number of steps towards implementing market-based monetary policy, though direct instruments (such as interest rates and credit ceilings) continue to play a role in a few of these countries (Fasano & Iqbal, 2003)

Pros and Cons of common currency

The common currency adoption by the GCC will come with it advantages and disadvantages. The major advantage that will be realised is the cut of costs that are involved in exchange from one currency to the other within the region. As a result, the GCC countries will realise an improved ecnomic growth. This would be a major advantage for the non-oil economies. This would therefore mean that each member country benefit from common rate (Emerson, 1992). The main disadvantage however is that any problem that will be realised in one country may be relicated in another. This is because countries will no longer be using individual exchange rate policies. There seems to be a balance between the advantages and disadvantages.

As mention in the earlier, the main benefit that the GCC countries will realise from having one currency is the cutting of the transaction costs when converting one currency to the other within the region (Fasano and Iqbal, 2003). This is because the individual currencies do not have similar exchange rate. When buying and selling foreign currency, individuals will lose money in the process. Another way that money is through foreign exchange commissions. For countries that operate from more than one country, it will eliminate the accounting costs. Time spent at the boarders making payments will also be greatly reduced. Any uncertainty about biliteral exchange rates will be eliminated fully. At the moment, the rates that are used are derived from the countries relation to the dollar. The dollar rates may change more than once and this may cause a bigger problem. This would normally cause uncertainty.

It is a point of worth to note that elimination of the regional costs and uncertainties will be important for economic growth within the GCC (Fasano and Iqbal, 2003). In essence, this integration costs are like taxes to the individuals and businesses. Removal of this taxes will ensure that business processes are made affordable and not a burden to the businesses operating in the region. This removal will also improve the developement of its non-oil economy. From the onset, this is the main goal of GCC. Anothe advantage that it may assist in instilling discipline to the monetary policies especially to countries that do not have a stable exchange rate.

Loss of independence of monetary and exchange rate may be the biggest blow that the GCC member countries may realise (Fasano and Iqbal, 2003). Exchanged rates are measured against each other, interest rates based on foreign interest rates any extra money in circulation will lead to deficit in balance of payment. Exchange rates play an important role in the economy as a stabilizer. Disregard of these instrument will normally lead to job losses. This cost is however contained to an extend that effects to the countries in the region tend to be balanced as to expect common response. This would normally occur in scenarios where prices and wages are static or in situations where capital and labour are similar accross the GCC countries. Policy autonomy would be a problem in economies that rely on revenues. An example would be countries that have poor tax system.

Factors to consider while forming common currency

In determining the country’s readiness to join the common currency, it is important to consider a number of factors. The factor are related with stable exchange rates and currency unification that is desirable. As to the relation to existing national currencies, introduction of single currency would necessitate in each country a change in unit of account (Emerson, 1992) These factors are:

Openness: when a country is fully dependant on international trade, such a country is more likely to be more directly to be affected by any fluctuation in the exchange rates. This is normally because its goods are tradable. In such cases, any fluctuation in exchange rate, will normally yield to a change in cost of the goods. This would therefore imply that exchange rate is not an effective tool of enhancing competitiveness. It is therefore easier for a smaller economy to enter into currency union more easily that larger economy.

Factor mobility: in case of instability, if more than one country are highly integrated in the perspective that labour and capital can easily move across within the member country, exchange rate may not be an efficient corrective tool to be used to address the situation as it is. Factor mobility in this case will play a vital role in this case as the exchange rate would have played in those other economies that depend on exchange rate. Factor mobility would then play a crucial role in mitigating the problem. It is therefore important that factors that experience higher mobility factor get into currency union.

Degree of commodity diversification: an economy that is diversified has better protection against any market shocks hence not very dependent on exchange rate as factor to reduce the impact of the shock. Therefore, it is clear that countries that have diversified products are better place to get into currency unions.

Simillarity of production structure: when countries have simmilar production structure they are more likely to have simmilarv shocks. The exchange rate in this case may not be used as a major factor in an attempt to corect the situation. This would make such countries better placed to form currency unions. When for example the country is producing wheat, and others are producing simillar crops, it easier for them to relate, compared to those that do not have simillar production structures.

Price and wage flexibility: price and wage flexibility do not need exchange rate to be altered in a case of shock. Those countries that have flexible prices and wages will usually prefer to have common currency to clear the issues outstanding. If in one country the wages are high and in another the wages are very low, it becomes very difficult to synchronise them. Someone from one country school be in a position form to move from her country to another.

Simillarity of inflation rates: similarity of fluctuation rates is an indication of economic structures and policies. If countries want to coordinate their economic activities, it would be naccesary for them to get in to an agreement so as to attain common currency. This would make it easier for coordination of their economic activities.

Degree of policy integration: similarity of policies with countries may point the need for an economic integration. Countries that don’t have any similarity will tend to be less interested in forming economic integration in relation to those that have closer policies. It would be easier for them to join hands and work together.

Political factors: political plays an important role in ensuring sucess in the resolution of countries to have similar currency. Economic factors play a role in currency union, but experience shows that political factors play a major role in attainment of the same. Without political will, nothing of essence will be attained.

Source: Emerson (1992)

EUROPEAN UNION

In an attempt to look into GCC desire to have a common currency, comparison with other success stories is vital. In this regard, it is worth looking at European Union as a model to learn from. Baldwin, Bertola and Seabright (2003) states that in attempt to unite the European countries, a lot has been achieved. This has to the formation of a single currency across Europe. The creation of the Eurpean Union has come with so many advantages to the citizens of these countries. However at times, the advantages are not understood by many. The creation of common currency is welcomed by many though some people are still not happy about it. Critics believe that the single currency is responsible for increasing inflation and that it has caused the economy to weaken (Emerson, 1992). However, closer study of the markets indicate that inflation has not occurred in the region and as much as there are weak economies, strong economies exist within the same area. The main advantages enjoyed by the citizens is the easy with which citizens easily move within the euro region. The other advantage accrued is the low inflation rates. Citizens take up this low rates inform of mortgages. This means that if one had a debt, it is cheaper to service it (Emerson, 1992). E-commerce has been another area that citizens have been able to enjoy. This is because, they are able to shop across the european zone without fearing that exchange rates may change hence affecting them negatively. The only problem that the citizens may face is the cost of transferring money across the member states.

One other success factor of the European Monetary Union (EMU) is that it prevents war (Baldwin et al., 2003). From the start, EMU has been a political project. With its founding, there has been relative peace with the region. It is common knowledge that when countries trade with one another, it is normally difficult for them to attack each other, this would then let peace to prevail. If EMU brings trade, it therefore means, it will bring more understanding in the region. One of the main advantage of EMU is increased transparency and efficiency of financial markets: the prices and returns of financial instruments dominated in the same currency can can reflect their future payoffs, rather than market participants’ valuation of exchange rate changes (Baldwin et al.,2003)

The transaction cost will be wholly eliminated. An example is where a UK firm wants to trade with Europen Members. This implies that they would have to buy foreign currency before they can buy goods. But for firms that operate the EU it is very cheap for them because the would not have to incur any cost when change currencies.

Price differentials are normally highlighted by single currency (Emerson, 1992). Proper improvements and focus on competition, will at the end of the day ensure that the economy is more proficient and prices of commodities are gradually brought down. This will be aimed at ending market discrimination. The EMU will aim to ensure that there is price stability, which can be achieved by not politicking the European central Bank (Baldwin et al., 2003).

In emergence of free trade, the European Union is set to benefit fully. In situations where by the EU wants to form business partnerships with other trading blocks, it would be very nice for and of advantage to european union countries, because they have higher bargaining power.

UAE’s RESISTANCE

The UAE does not seem to fully support the whole idea of currency unification. This is believed to be because of GCC’s to move the central bank in Saudi Arabia and not UAE (Fasano and Iqbal, 2003). This is because in 2004, UAE was the first country that undertook to ask to be given permission to host the central bank. At the most, GCC does not have any establishments in UAE.

Close scrutiny will also reveal that the UAE did not have faith in the whole union. They believed that by adopting common currency, their economies can easily be got into by other parties. This is because it can be collectively assesed. With such mistrust, it normally very difficult to form a formidable union. It would require the intervention of GCC, to make things understood, otherwise, nothing would be achieved. Failure to clarify things would be like chasing a wild goose. It would remain a piped dream.

METHODOLOGY

The research on the currency union among GCC states is like any other project. This therefore means that a methodoly has to be developed to properly carry out the research for better results. Mothodologies for projects need to be relevant to the project. Wrong choice of methodology would lead to failure. Failure to put method in place will normally result in poor deliverables at the end of project. All projects require the following:

Planning

Organization

Implementation

Assesment and following up.

Figure (1): project management cycle

Project initiation is the stage which objectives are areas to be covered are identified by studying the current situation. At this stage, the assumptions of the project would be outline as both advantages and disadvantages every one involved in the project should clearly understand their role in the process. Organisation vision is important to be developed well in advance before any changes that may occur. Without a clear vision, it would become very difficult for the organisation to attain its goals because of the numerous problems associated with them. This may be because of lack of clear vision from the onset. With feasibility of the project asserted, it would then require that the organization leader plays a role in making happen. Feasibility study will be used to ascertain if the projects would have any economic sense in them. Those projects that are not feasible are better left out of the scope. Pursuing them would prove to be expensive for the company.

Planing and organization is the second stage. At this point, action plans and activities to be carried out by each participants are clearly laid out. It is of importance to plan well in advance to avert any problem. Failure to plan well will eventually cause a crisis in the later stages because at the end of the day, goals are not met. People undertaking this may work together as team, or as individual, depending on what is necessary at the moment. More requirements are identified, this will assist in preparation for the implementation stage. Procudures and policies involved should be reviewed and endorsed before progressing to the next stage. It is important that stockholders are actively involved at every stage. Ignoring all stockholders may make the project to be denounced when it is finally delivered.

The implementation stage involves real execution of activities that had been outlined in the previous stages. Resources that were set aside are then directed at making sure that the desired goals are attained at all cost. The teams would normally work together to gain common goals. Implemetation is done according to predetermined schedule that has been set up by the organisers. Failure to implement the program well would lead to failure in many aspects.

After the completion of the implementation stage, it is important to review the outcome. This would be done to determine if what has been developed is in line with what was desired before the start of the project. They are intended to find out if there are any variations. It is important to ensure that all the objectives are fulfilled. Whenever risk is identified, something has to be done to avert the problem.

After the project is accepted by the commissioning authority, it would be necessary to release all the resources involved. All those involved are thanked for their valuable experience. There are times when the original goals may not be captured, these means that the entire process will need to be done all together or correct those areas that were not done right. After ensuring that all is done, it would be wise to stop the process.

DATA

The data below is used to show the relationship between many variables in the GCC market. The interrelation among the variables is important in ensuring that those factors are put in place to realise the goals required. This factors include:

Openness: the GCC countries are believed to be the most open countries in the entire arab region. In essence, openness is formulated by comparing the ration of trade over gross domestic product (GDP). In table 1 below, we attempt to give the openness of GCC nations.

Figure 2: Benefits of Monetary Union in an Open Economy from Emerson, M. (1992, p.107)

Factor mobility: the freedom to move capital and individual movement across the GCC countries has been allowed in an agreement of the GCC countries. The free movement comes together with the freedom to conduct economic activities within any of the countries without any restrictions available. However with all this in place, there are still restrictions on the activities that can be done by the nationals of the GCC. The regulation in some institutions are not very similar. This posses a very big challenge.

Degree of commodity diversification: there is an attempt by the GCC countries to diversify their economies, but this is still not successful, because they are still very dependant on oil. The oil contributes about 80 % the GCC economy.Table 2 gives export indices (World Bank, 2000).

Table 2: Export Concentration Indices for GCC Countries

In the non-oil sector, activities are very slow and do not attract so much attention. Because of much dependency on oil, these economies have always been victims of fluctuation of world oil prices.

Policy integration: the inflation rates in the GCC countries are not very correlated inspite of the fact that they have monetary, exchange rate and fiscal policies. The variations in inflation may be created by the various factors that are responsible for creation of inflation. Factors that are responsible for inflation are, supply and demands of commodities (goods and services). With common currency, the GCC countries intend to withstand market shocks using their simillar policies.

Other factors: the GCC leaders have a strong commitment amongst them to ensure that their goal is achieved. This GCC countries have so much in common. This may be politically, socially and in terms of social structures. It is an added advantage to the GCC member states because all are muslim nations. There are economic differences among the GCC countries.

Source: Fasano and Iqbal, 2003

This however does not stop the leaders to forge together and plan to have an economic integration. This being muslim states, there are some practices that could hinder the realisation of this union. People in these areas have very close family ties and would not want to move far away from their homes.

CONCLUSSION

In conclusion, it not very clear when the common market would start operation. There were people who said that it would be operational in 2010, but it is yet to be realised. There are however some countries that have been sceptical about the whole union. GCC needs to move round member countries trying convince the citizens. They should also make them realise its importance. There are factors that need to be addressed before this dream can be finally realised. Factor mobility is an aspect that cannot be just ignored. It would normally require that people are able to move from one country to another without getting any problem while in transit. The policies are also not fully put in place to ensure that the goals are realised. All these may not be realised if political will is not there. It is therefore important tat the political rulers in this ares support this so as to attain monetary union soonest.