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Towards a
Common GCC
Currency
Are the GCC Countries Ready?
This paper focuses on the GCC countries macroeconomics factors to
determine wether they are ready for such integration or not. The paper
measures the ability of these countries through many factors that where
concluded from an interview with the Kuwaiti representative in the
Monetary Union. The paper concluded that GCC countries needs more
time extension to become fully integrated.
Aisha Al-Omran
American University f Kuwait
25-May-10
GCC COMMON CURRENCY
Index
1. Introduction…………………………………………………… 3
2. Objective………………...…………………………………….. 4
3. Literary Review………...…………………………………….. 4
4. Methodology………………………… ………………………. 6
5. Analysis………………...…………………………………….. 7
6. Results………………………………. ………………………. 12
7. Conclusion……………………………………………………. 17
8. References……………………………………………………. 18
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Introduction
On May 25, 1981, six countries in the Arabian Gulf, Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab Emirates, established the
Cooperation Council for the Arab States of the Gulf (GCC countries
hereafter). In a top level meeting held in November 1981, the GCC leaders
chose an Economic Agreement (EA) providing the stage for a full economic
market and economic union. In 2000 at Bahrain the leaders agreed to adopt a
preliminary step toward adopting a single currency, which is one of the key
During the December 2001, GCC summit in Muscat, the six GCC
countries planned for introduction of a single currency in the year 2010. The
choice of the type of exchange rate regime is one of the key issues to be
discussed by the GCC. They also agreed in the interim stage to keep the
American dollar as a common peg. Should the GCC peg the new currency to
the US dollar or have a basket of currencies where the dollar, euro and yen
have a high share or let the new currency float on its own? These are some of
believes that complete integration of product and factor markets should take
place which requires the elimination of the transaction costs and uncertainties
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Objective
currency, its efficiency for the region, whether the region is ready for such a
measurement and factors that would lead us to know if the GCC region is
Literary review
Peg in the GCC Area: The Optimal Choice of Exchange Rate Regime” that
the best choice of exchange rate method for the region of GCC and testing
the exogenous factors that cause external shocks on the region. The paper
deals with the region as a single bloc. The research shows that in the region
the output in this area is mostly affected by domestic impacts in the short and
long run. However, foreign currencies such as the US Dollar or the Euro do
not affect the output movement as much. From this we can conclude that as
long as the correlation is not strong and does not affect the output movement
in the region, the GCC common currency should peg to a basket of currencies
other than the US Dollar, and adopt a more flexible regime. The paper
concluded that the findings from the estimations of the US Dollar and the Euro
show that GCC economies are mostly driven by the terms-of-trade and
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domestic shocks other than the foreign currencies such as the US Dollar and
the Euro. This means, GCC region must adopt more flexible exchange rate
regime. However, they must focus in the beginning on the credibility and
optimal to construct a basket of currencies where the U.S. dollar and the euro
currencies is more flexible than that of a rigid exchange rate regime, and this
will help the economy to work towards a more flexible exchange rate regime.
Another paper was found which is “Are GCC countries ready for
currency union?” written by Belkacem Laabas and Imed Limam. This paper is
evaluating how ready the GCC countries are for being one economic bloc; the
analysis shows that in spite of that there are steps forward achieved by GCC
currency union. The economy of the GCC region relays mainly on the oil
sector with narrow intra-regional trade, in addition to that there isn’t any proof
their business cycles. The main factors that are favorable for the
integration.
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Caramazza and Jahangir Aziz. The paper investigates the shift that was taken
by many countries from the fixed exchange rate regime –whether to peg the
that is to determine the value of the currency by the factors of supply and
demand. The paper recommends that the best exchange rate regime is
achieved by the strong dedication to it; in addition, it shows that the exchange
with pegged currencies benefits from relatively until recently when he inflation
rates in developing countries has been shrinking until it reaches the rates of
inflation in countries with pegged currencies that means lower inflation rates.
However, the study recommends that countries suffering from high inflation
rates should consider the fixed exchange rate mechanism at least for the
short term as the choice of exchange rate regime could be different over time
Methodology
analysis of information and data collected, and then articulating them in order
to reach the best conclusion, that is whether to float or to peg the new GCC
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graphs. I have tried to collect data from many different sources, such as
books, online, and from the ministry of finance of Kuwait in order to have the
ability to look at the problem from more than one perspective and I have read
through the literature on the topic of the GCC’s common currency. I have
relied on the previous researches and references that focused on this topic,
that was taken in the department of the Arab, and Gulf Cooperation in the
Analysis
Union. This means the area or the region that uses the same currency. For a
create single monetary policies. The availability of such a union needs some
work. Political integration is one of the most important factors in the region;
also economics relationships among countries of the OCA should show a high
correlation with the same shock expectations among the region (Aleisa et al.
2007). The monetary union reduces transaction costs within the region of the OCA
and the exchange rate insecurity. In an OCA economies of scale can be achieved by
affect prices and disrupt the accomplishment of monetary policy. It can also make use
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inflation affected countries an OCA can also discipline and make the monetary policy
credible. Also, there are countries that adopt a common currency and peg it to a
credible currency in order to get the trust (Chabrier, 2002). An OCA does not allow
a country to follow independent and exchange rate policies. Exchange rates are
compulsorily fixed, interest rates are tied to foreign interest rates, and any increase in
money stock will result in balance of payment deficits (Aleisa et al. 2007). The main
benefits of CU are from the expansion of bilateral trade among the countries of the
Union (Rose, 2000) found that trade among the countries of a CU could rise three-
fold once the union started. However this may too optimistic due to some inherent
upward bias in the estimation due to the common decision to join a CU (Tenreyro,
2001).
After discussing the GCC Monetary Union with the head of the Arab, and
determinants to weight the possibility of creation an OCA within the region (Ministry
protection against terms of trade, and other, shocks. Hence it might not use the
exchange rate to lessen the impact of the shock. Therefore, countries with
large portion of its goods is traded. McKinnon (1969) argues that the exchange
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price level in the economy to the extent that any exchange rate variation leads
improve competitiveness. Ishiyama (1975) also states that for a small open
economy where most of the consumed goods are imported, the exchange rate
becomes an ineffective corrective tool given the inelastic demand for imports.
union.
The above graph shows the benefits of a monetary union and the openness of a
country. The more open an economy is the more welfare gains it will receive
from a monetary union. The horizontal axis is a scale of the openness of the
country in relation with other countries within the union. And the benefits are
shown as a % of GDP on the other axis. The gains from a monetary union
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within the union without restraints. This leads to lesser use of exchange rate as
corrective tool in case of shocks. Therefore, factor mobility would play the
monetary union boosts economic growth. This can be seen using the
The horizontal axis shows the capital stock per worker and the vertical
axis shows the output per worker. The line f(k) is the production
function f (k). In this model growth can only occur if population grows or
Finance, 2010).
of the exchange risk reduces the systemic risk. This will lower the real
classical model the reduction of the interest rate due to the currency
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Finance,2010).
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important factors is the political will and resolve of countries within the
union to achieve the goal of currency union. It has been seen through
factors. In addition to that, social factors also plays a major role in this
region specifically, as families here prefers to live near each other are
Results
Do the GCC countries qualify for OCA on the basis of the above criteria? We
will check it out against the criteria already given to check if the GCC region is
ready for a monetary union or should they postpone it further more according
to the classifications were discussed with the head of the Arab, Gulf
Factor Mobility, Policies Integration, and some other factors) we are going
now to test these characteristics and apply them to the GCC region:
Diversified Economy: GCC exports are mainly consists on Oil, yet they are
trying to diversify their economies, but still, oil has the biggest share of their
correlation between the oil prices and the economies of the GCC region.
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expenditures.
Therefore, it imported most of the products from abroad to satisfy the need of
evidenced by the high ratios of imports and exports to GDP (Aleisa et al.
2007).
inadequate. Except for Saudi Arabia, the intra-trade between other members
is mainly unseen. I addition, the same table shows that the exports were
concentrated in Asia, except for Saudi Arabia. However, the imports were
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and work force across the region and gives them the freedom to exercise
would not like to go to other GCC countries far away from their families for
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GCC COMMON CURRENCY
cultural and social reasons. Also, for women it would be more restrictions, as
correlated in spite of the similar fiscal, monetary and exchange rate policies.
in the determinants of inflation (i.e. affecting the supply of and demand for
goods and services) notably, the inelasticity of price. In addition, GCC policies
domestic and foreign interest rates so as to stabilize the exchange rate and
stem capital outflows. (Tenreyro, 2001). However, GCC countries are primed
policies.
Other factors: There exists a strong commitment to the GCC between the
GCC leaders. This comes from the fact that many common traits are shared
ahead with the economic integration. GCC countries have been praised for
there are some social and cultural powers that could affect the effectiveness
of such a union, which are the cultural and traditional restrictions. Such as the
restrictions on females not to travel alone and the cultural factors that people
in this region would prefer to live close to their families not so far away from
them.
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Conclusion
will be launched. At present it looks like the GCC could miss the initial 2010
deadline by at least two years. The GCC countries are not yet very ready for
the integration as they should consider some factors to go across which is the
factor mobility as for workers and the cultural and social reasons. In addition
to that, many policies are not fully implied, so further policy integration
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GCC COMMON CURRENCY
References
Aleisa, Eisa, and Shawkat Hammoudeh. “A Common Currency Peg in the GCC Area:
The Optimal Choice of Exchange Rate Regime.” GCC Economies. 34.112
(2010): 93. Print.
Caramazza, Francesco, and Jahangir Aziz. Fixed or flexible?. 13. Washington, D.C.:
International Monetary Fund, 1998. 3-1. Print.
Fisk, Robert. "The demise of the dollar: In a graphic illustration of the new world
order, Arab states have launched secret moves with China, Russia and
France to stop using the US currency for oil trading." The Independent 6
October 2009: 16. Web. 9 April 2010.
<http://www.independent.co.uk/news/business/news/the-demise-of-the-
%20%20%20%20%20dollar-1798175.html>.
Florian, Jeff. "GCC common market: boon or bust for Gulf?." ultimate Middle East
business resource (2008): 4. Web. 19 April 2010.
<http://www.ameinfo.com/143185.html>.
“GCC Common Currency ‘pegged’ to a basket: A DIFC analysis suggests the GCC
Common Currency should be pegged to a basket of currencies, including
the US dollar, the euro, the Japanese yen and the British pound” CPI
Financial 110.103 (2010): n. pag. Web. 17 April 2010.
<http://www.cpifinancial.net/v2/print.aspx?pg=magazine&aid=1851>.
Grauwe, Paul. Economics of monetary union. 7th. Oxford, NY: Oxford University
Press, USA, 2007. 80. Print.
Kenen, P. B. (1969), .The Theory of Optimum Currency Areas: An Eclectic View. in
R.A.Mundel and A. K. Swoboda, Monetary Problems of the International
Economy, University of Chicago Press, pp. 41-60.
"Kuwait to keep currency basket peg: CBK ." Arab Times (2010): 3. Web. 25 May
2010.<http://www.arabtimesonline.com/NewsDetails/tabid/96/smid/414/Ar
ticleID/152131/reftab/96/Default.aspx>.
Laabas, Belkacem, and Imed Limam. Kuwait. Are GCC Countries Ready for
Currency Union?. , 2002. Print.
McKinnon, R.I. (1963), .Optimum Currency Areas., American Economic Review,
Vol. 53,pp. 717-725.
Mundell, R.A. (1961), .A Theory of Optimum Currency Areas., American Economic
Review, Vol. 51, pp. 657-665.
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Rose, A.K. and E. van Wincoop (2001), .National Money as a Barrier to International
Trade: The Real Case for Currency Union., American Economic Review,
Vol. 91, No.2, pp.386-390.
Tenreyro, S. , (2001), .On the Causes and Consequences of Currency Unions.,
unpublished manuscript, Department of Economics, Harvard University,
U.S.A.
“Will a Basket of Currencies Replace the Dollar?” Truth is Contagious (2009): 1.
Web. 4 May 2010. <http://truthiscontagious.com/2009/10/07/will-a-basket-
of-currencies-replace-the-dollar>.
Yoshihide, Ishiyama (1975), .The Theory of Optimum Currency Areas: A Survey.,
IMF Staff Papers, Vol. XXII No.2, July, pp.344-383.
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