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GCC member states need to decide on common currency

When the GCC was established on May 25th 1981, members agreed on two main issues: first, they set up the objectives, rules and functions of the GCC and its structure; second, they decided on implementing gradually a unified economic agreement towards establishing a Single Market (SM).

According to the a report in the DCCI Economic Bulletin, the GCC members began building a single market by establishing the Free Trade Area (FTA) in 1983, under which tariffs on goods of national origins are eliminated. Since early 80's to early 90's efforts were channeled toward reaching unified external tariffs in order to constitute the GCC Custom Union (CU). In January 2003, the CU was actually implemented and member states agreed on that common customs tariff shall be 5 per cent on all foreign goods imported from outside.

All this paved the way to start building the foundations of the GCC SM. Article three in the new economic agreement specifies several areas where complete equality must be achieved in order to implement the SM. These areas are: residence and movement of GCC nationals and granting them equal treatment in any of the GCC member states; work in private and government sectors; social insurance and pension schemes; education, health and social services; exercise of all professions and crafts; exercise of all economic, investment and services activities; real estate ownership; movement of capital; tax treatment; and incorporation and purchase and sale of shares.

In fact, actual implementation differs from one area of economic activity to another. Up to now, many gradual steps were taken to apply these equalities and further steps will be taken till the GCC SM is fully implemented no later than 2007. Benefits of a SM are expressed by the comparative advantage generated by changes in relative prices when barriers are removed, benefits due to reduction in monopoly rents, xinefficiency and reaping of scale economies.

The formation of the monetary union (MU) itself has both benefits and costs. On the one hand, benefits are mainly presented by the attractive characteristics of the new unified GCC market. The MU would result in a reduction in foreign exchange transaction costs, eliminate exchange rate risk, promote pricing transparency and, consequently, increase competition, thus fostering trade, investment and growth. At micro level, the single currency would have a long-term impact on major regional banks by encouraging more efficient use of cash. The costs of hedging against exchange rate volatility would be reduced.

The GCC MU would lead to the formation of the largest and most liquid capital market in the Middle East. Portfolio managers and private investors would be able to invest in the region without any fear of additional currency risk. On the other hand, costs of the GCC MU are expressed by the loss of national sovereignty due to relinquishing of independent control over domestic monetary, fiscal and exchange rate policies. There also might be possible net loss in income due to lack of ability to pursue expansionary monetary and fiscal policy during periods of falling oil prices.

Furthermore, the GCC MU would involve arbitrary restrictions on national budgetary policies, which could be interpreted as a breach on member countries' control over their individual taxation and public spending programs. Nevertheless, such costs are not of much significance when considering the benefits generated by the formation of MU. The GCC countries decided to take necessary actions to form a Gulf Monetary Union (GMU) by 2010. They already have similarities that reinforce this union.

From the economic side, oil exports are the major source of government revenue for these countries. GCC governments emphasize the importance of the diversification of their economies to spur economic performance. Unfortunately, despite members' efforts to align their economic policies over the past years, a large gap still exists among members, mainly in public debt and budget deficits. In addition to what mentioned above, the six countries are neighbors with common borders. More important, the majority of their citizens has the same religion, language and traditions.

An important issue is addressing to which currency is the GMU going to peg its new currency given that all GCC currencies are pegged to the dollar. The single Gulf currency is argued to either be pegged to the dollar or to a basket of world's leading currencies including dollar and euro.

Another possibility could be not pegging the currency to any other currencies at all, thus making it float. This last option might be the best choice to reflect market values and be independent in policy making and to avoid being highly affected by the negative performance of other currencies.