On paper, a monetary union comprising the Arabian Gulf’s six countries seems like a sound idea, with obvious financial benefits: It would help integrate their economies and attract liquidity into the region’s bourses; eliminate exchange costs from intraregional trade and create new jobs throughout; and create the world’s second major monetary union after the European Union, providing Gulf countries with a collective level of clout to influence fiscal policy organizations, such as the International Monetary Fund.
But the Gulf common currency, informally known as the ‘khaleeji,’ is nowhere close to being minted. Of the six countries in the Gulf Cooperation Council (GCC) only four support the creation of a regional monetary union: Saudi Arabia, Bahrain, Kuwait and Qatar. Oman and the United Arab Emirates, two countries representing almost a third of the region’s entire gross domestic product, are not involved. The UAE was part of the union’s discussions until last year, when political disputes led to its exit. Its departure from the union doomed an announced 2010 deadline for the launch of the common currency. Giving further pause to the effort has been the cascade of trouble for the eurozone as it wrangles with bad sovereign debt. Expressing caution, government officials in the Gulf estimate it could be another five years before a Gulf common currency is issued.
Skeptics wonder if the effort is still a sound idea, given the numerous delays and the EU’s troubles. Government officials backing the Gulf common currency, though, insist it will become a reality, pointing out that their economies are comparatively securer than Europe’s. Analysts and academics agree, but say the real challenges facing a Gulf monetary union are not economically driven, but rather involve providing the institutional basis for such a union; quelling political concerns the Gulf’s smaller, prosperous counties have about being dominated by Saudi Arabia; and collectively keeping momentum on the project.
Taking a confident stand, Rasheed M. Al Maraj, Bahrain’s Central Bank governor and the deputy chairman of the GCC monetary council, the precursor to a regional central bank, says the goal of a Gulf common currency will be achieved, despite the challenges. "We need a monetary union that will support the maturing process of our economies, as [Gulf countries] seek to diversify away from oil, in an integrated fashion," Al Maraj says. "In order for this to be achieved, the right structure and rules must be clearly in place from the outset, and all of the members must take equal responsibility for its success. "
Advantages for A Union
A single currency for the region has been a goal since its countries agreed to organize themselves as the Gulf Cooperation Council in 1981. An economic unification agreement signed by all members the following year stated that their financial policies and institutions would be coordinated, "including an endeavor to establish a common currency." Little movement was made on the issue, though, until the Euro was adopted as a currency in 1999. Observing Europe’s success, the Gulf countries met in 2001 to sign a second economic agreement, and press forward. Some aspects of that agreement have already moved beyond paperwork: Two years ago, a GCC common market was established, and allows for citizens of any of the six countries to travel and trade freely within the region, while a GCC customs union was created in 2003, though it has been hobbled by disputes over tariff revenues. The countries also form a security bloc. Reacting to the violent Iraq-Iran war, in 1984 the GCC created the "Peninsula Shield," a joint intervention force based in Saudi Arabia.
Simon Williams, chief Middle East economist at HSBC Holding, estimates that as a bloc, the Gulf’s GDP would be about $1.2 billion. Indeed, the lack of agreement on a single currency isn’t due to economic conditions within the Gulf countries, says Garbis Iradian, senior economist on Africa and the Middle East for the Institute of International Finance. Unlike Europe, the Gulf region has largely managed to stay above the ravages of the global recession, thanks to its oil reserves. Even Dubai has managed a small rebound from its well-publicized crash in real estate prices, because of a generous rescue from its wealthy neighbor, Abu Dhabi.
Iradian and Williams, like other analysts, agree the problems currently facing the EU would not be issues for a Gulf monetary union. According to a recent economic study of the Gulf that Iradian co-authored, most of the technical and policy convergence criteria needed for a Gulf monetary union are already in place, such as public debt among the countries being no more than 60% of the GDP. And with the exception of Kuwait, the Gulf countries have all pegged their currencies to the U.S. dollar, making convergence of exchange rates easier. "They don’t have debt, their fiscal situations are almost similar, either small surpluses or small deficits," Iradian says. "Their economies are more homogenous than the EU, they share a same culture, and the language among them is the same. There are a lot of advantages for the union."
A Multitude of Issues
Where the Gulf lags behind Europe, analysts say, is in its institutions. In recognition of the effort needed to build an institutional framework for a monetary union, the GCC has sought the technical advice of the EU. But according to a recent analysis by Dubai bank Emirates NBD, much work remains. "There are a multitude of procedural, institutional and logistical issues to be overcome before the GCC can convert its current monetary management systems to a single entity with a common currency," according to the bank’s report.
One problem to be addressed, the report notes, is the coordination of financial laws across the region, particularly concerning financial regulation, disclosure, contracts and for banking regulation. As a researcher, Iradian says the sharing of economic data in the region has also been poor, and that would also need to change.
In order to avoid a EU-style crisis in a Gulf monetary union, the GCC will also need to establish a regional monetary fund, says Jarmo Kotilane, the chief economist of NCB Capital, the investment arm of Saudi Arabia’s biggest lender by assets. "One lesson from Europe is that you need to adopt a long-term view, and have mechanisms sufficiently well-defined, so that when you are hit, you don’t have to start inventing things," he says. "And you must have a mechanism that allows these problems to be treated as union-wide problems." Al Maraj agrees: "We need much clearer central policies for addressing issues and a mechanism for taking swift action when issues arise."
Kotilane says efforts to bring about a Gulf monetary union should also heed Europe’s failure to enforce fiscal standards among its weaker members. The rules set to govern the monetary union should also be removed from politics, he says, and follow technical application instead. "It is important to state that the rules are for long-term economic strategy, and can’t be interfered with, so that people can see it as a regulatory framework for their benefit," he says.
With the eurozone sovereign debt crisis still in the news, Gulf government officials are keen to state they are watching and learning from Europe’s regulatory mistakes. Addressing reporters at a recent conference in Bahrain, Kuwait’s foreign minister Mohammed Sabah al Sabah said, "For a unified currency to be successful, a sound monetary and fiscal policy must first be in place. You cannot just have a strong monetary policy agreement and relatively loose fiscal agreement."
Domination, Not Cooperation?
But Williams, the chief Middle East economist at HSBC Holdings, says the biggest stumbling block before the union has not been addressed publicly. "It’s difficult for Saudi Arabia to show leadership without others fearing its dominance," he says. "It cannot be a domination council; it has to be a cooperation council."
As the region’s most populous country, with the largest economy and oil production, Saudi Arabia has positioned itself as the de facto leader of the GCC. In addition to being the only Arab member of the G20, and home to most Gulf organizations, Saudi Arabia was chosen to host the regional central bank for the proposed monetary union. The UAE, wanting the bank to be based in Abu Dhabi, exited the union after the decision. Saudi control over the proposed monetary union only extended, however, because the governor of the Saudi Arabian Monetary Agency, Muhammed Al-Jasser, was elected the chairman of the GCC monetary council.
The move to leave the union by the UAE, the Gulf’s second-largest economy, spoke to greater concerns that the smaller Gulf countries have about Saudi Arabia’s dominance, says Kristian Ulrichsen, a Gulf scholar at the London School of Economics and Political Science. "Qatar and Abu Dhabi have much more assets, and are carving out a global role for themselves," he says. "This union goes against that, and provides support for the regional hegemon."
Analysts say without the UAE or Oman, the monetary union is left with a large hole. The responsibility of bringing the union together rests with Saudi Arabia, says Christopher Davidson, Gulf historian and author. "If the GCC is to function, the most populous and resource-rich member state must take a leading role in co-opting its smaller neighbors," he says. "Without these smaller neighbors on board, the GCC will be left with security and fiscal control concerns in its own back yard."
In order for Saudi Arabia to successfully woo back the UAE, and with it Oman, Davidson says it will have to concede the bank’s location, and also resolve recent tensions over its shared border with the UAE. "These need to be solved as a matter of emergency, even if Saudi Arabia has to accept some minor losses," he says. The ultimate GCC-wide gains should outweigh these petty concerns. If Saudi Arabia adopts such a conciliatory stance it will send out a message that it is serious about cooperation."
Until then, both countries remain out, despite official entreaties for them to return. Saudi Arabia has the most to gain from the monetary union, analysts note. Though it has the largest economy, it is also is the poorest — unemployment is estimated at 10.5%, and GDP per capita is US$19,800, while Qatar’s is US$85,600. Williams said if oil prices were to fall to US$50 a barrel again, it would result in Saudi Arabia likely seeking the aid of its wealthy, smaller partners in a monetary union.
Asked about the UAE’s decision to pull out of the monetary union, Al Maraj comments: "I think it is the responsibility of the supporters of the monetary union to demonstrate the benefits of the single currency to the other GCC countries, and I believe that in due course this will be achieved and we’ll see a consensus around the subject."
Correct Rather Than Quick
As time passes, skepticism of the GCC monetary union grows. One of the most critical evaluations of the progress recently came from Jadwa Investments, a Saudi Arabia-based investment firm. Far from holding optimism for the union, it questioned any outcome. "We are doubtful that the project will go ahead, and not expect any form of regional currency to be launched over the next few years," Jadwa’s report stated.
Ulrichsen echoes that skepticism, saying he doesn’t expect a Gulf common currency for another decade. Maturity is one reason why, he says, as most Gulf countries were formed in the 1970s, with the exception of Saudi Arabia. "Europe went through hundreds of years before it got to the point of shared governments," he says. "The Gulf countries are still establishing their national identities. It’s too early."
But Davidson remains optimistic, and says as long as the EU remains functional, there will be continued support for a monetary union. If it manages to launch, he adds, it is likely to bring the UAE into the union again.
Kotilane says progress has in fact been made on resolving the technical details that are essential to building the framework for such a monetary union, though they aren’t as compelling as a single currency announcement. "They are tackling the tough parts now, and will be better positioned for success."
Al Maraj reiterates the opinion of his colleagues in the proposed monetary union that there is no rush now to produce a single currency. "The economies of the GCC countries have performed relatively well during the recent global financial crisis," he says, "but it has also inevitably illustrated potential issues and pitfalls, and so it is clearly prudent to carry out the exercise correctly rather than quickly."