GCC Currency Union: Precursors and Prospects

Monetary and Fiscal Institutions in Resource-rich Arab Economies

Arab Fund for Economic and Social Development, Kuwait City, Kuwait, 4th–5th November, 2015

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Outline

» Rationale

» Progress and setbacks to date

» Convergence criteria ‘targets’

» Institutional precursors

» Prospects: realpolitik…

• A successful and sustainable single currency requires some ceding of national sovereignty: considerations which are beyond mere economics… any decision then, will be driven by political, not economic calculations

» The option of a parallel “Gulf Dinar”

• A parallel currency (distinct from full monetary union) may potentially be considered as beneficial per se and a transitional stepping stone

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The rationale for a single GCC currency

» Optimal Currency Areas can only manifest within a single market

• Where labour and capital are mobile

• Where fiscal budgetary decisions and banking operations are accountable, transparent and subject to intra-regional institutional regulation and oversight

» Participating GCC countries would first need to complete a single market and devolve some executive decision making powers concerning monetary and macroeconomic affairs to pan-GCC institutions

• This would result in a larger and deeper market that would be considerably more attractive to domestic and foreign investors alike

• Greater collective bargaining power; potential for “Gulf Dinar” denominated bonds

» Arguably however, it is the preparation measures themselves that constitute some of the key economic benefits:

• Greater accountability, institutional soundness, transparency and dissemination of economic data

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Progress and setbacks to date

» Focus areas as set out in the New GCC Economic Agreement of 2001

• Customs Union – launched in 2003

• All GCC currencies are pegged to the US$ in 2003

• Common Market – launched in 2008

• Gulf Monetary Council (GMC)-precursor to the GCB - began operation in 2010

Setbacks

• Bahrain (2004) and Oman (2006) both sign FTAs with the US

• Kuwait returns to a basket peg in 2007

• Oman leaves the MU project citing ‘lack of progress in 2006 and the UAE in 2009 following the announcement that the GMC would be located in Riyadh

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GCC convergence criteria ‘targets’

» In 2005, the following criteria (termed ‘targets’) were set out:

Notes: a This is based on OPEC basket prices. If prices fall below $25pb, the maximum deficit is based on the formula: Deficit(t) = 3 + 3[ (25 – Price(t – 1)) / 25 ].

Criterion GCC Eurozone equivalent1. Foreign reserves Foreign reserves to cover 4 months of

imports…

2. Interest rates Short term interest rates must not exceed more than 2% of the three best performing countries

Similar to Maastricht, which stated long term interests…

3. Inflation rates Inflation rates must not exceed more than 2% above the average

Similar to Maastricht, which stated 1.5%....

4. Fiscal deficits Must not exceed 3% of GDP when oil prices are $25pb or above a

Similar to Maastricht, which stated government deficits must not exceed 3% of GDP

5. Fiscal debt Must not exceed 60% of GDP for the general government and 70% for the central government

Similar to Maastricht, which stated government debt must not exceed 60% of GDP

Source: Khan (2009), Rutledge(2009)

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Foreign reserves to import cover, 2000–2013:

2000

Convergence target: indicates four month’s worth of imports for the given year.

Bahrain

Kuwait

Qatar

Oman

Saudi Arabia

UAE

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

GCC Reserves to Import Cover

0

6

4

8

10

2

12

16

18

14

Month

s of Im

port

Cove

r

Notes: a From 2008 to the end of the period, Saudi Arabia reported over 20 months worth of coverageSource: AMF Unified Economic Reports (multiple years), IMF (2015), World Bank (2015); author calculations

a

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Interest rates & Inflation rates, 2000–2013:

Short term interest rates must not exceed more than 2% of the three best performing countries

Bahrain Kuwait QatarOman Saudi Arabia UAE

Inflation rates must not exceed more than 2% of the average

GCC Inflation RatesGCC Interest Rates

Source: DataStream (2015); author calculations Source: IMF (2015); author calculations

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-10

5

0

10

-5

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

3

2

4

5

1

8

7

6

8

Government deficits & debts, 2000–2013:

Must not exceed 60% of GDP for the general government and 70% for the central government

Must not exceed 3% of GDP when oil prices are $25pb or above

Bahrain Kuwait QatarOman Saudi Arabia UAE

Source: IMF (2015), World Bank (2015); author calculationsSource: IMF (2015), World Bank (2015); author calculations

GCC Fiscal Deficits/Surplus GCC Government Debt/GDP Ratios

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-10

20

10

30

0

40

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

3020

4050

10

60

9080

100

70

Debt

as a

% of

GDP

% of

GDP

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Convergence track record, 2000–2013:

• The relevance of pre-union convergence to post-union economic performance is open to question.

• What is not, is the importance of timely, consistent and standardised data.

BahrainKuwait Qatar

Oman Saudi ArabiaUAE

GCC Nominal Convergence BreachesGCC Breaches of Nominal Convergence Criteria

0%

15%

10%

20%

25%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

3

2

4

5

1

6

7

Conv

erge

nce

Crite

ria B

reac

hes

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Precursors, Prospects and the “Parallel Currency” option

» Precursors; institutional in nature› A GCC central bank and ‘Gulfstat’

» Prospects: CU, even among 4 of the 6 states, is unlikely in the short-term

» Parallel Currency› A parallel currency—a “Gulf Dinar”—remains an option and has some merit

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Institutional precursors

» A GCC Central Bank (CB), along the lines of the ECB

• The Riyadh-based “Gulf Monetary Council” est. 2010 is slated as a precursor to a GCC CB.

• Outstanding issues include: the mandate, organisational structure, voting structure of the future monetary policy committee, seigniorage distribution, accountable to which pan-GCC body?

» A Eurostat equivalent has yet to be created

• A pan-GCC statistical agency—“Gulf Stat”—is required and should be tasked with developing a common methodology for collecting, standardising and harmonising data across the GCC

» Location of pan-GCC institutions, more than symbolic significance?

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Prospects: realpolitik…

» At present, CU à la EMU does not appear to be a short-term prospect

• A successful and sustainable single currency requires some ceding of national sovereignty

• EMU was driven by political motivations and it received the necessary political commitment

• Setbacks to the GCC CU clearly indicate such political commitment is lacking

» An OCA can only become operational if, inter alia, there is a:

• Common market

• A general acceptance and actualisation of deeper monetary (and economic) policy coordination

• Supporting institutions are created and provided with necessary oversight and timely data

» However, if the leaderships in a number of GCC countries see political dividends from a closer union—and share similar economic visions (diversification strategies) —other monetary integration options are available…

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The option of a parallel “Gulf Dinar”

» A parallel currency would bring about some advantages and does not require the degree of sovereignty ceding that a full CU would necessitate

• A Gulf Dinar could be created and allowed to circulate alongside national currencies

• The market would dictate the extent of integration as producers and consumers adopt it

• It would have the advantage of encouraging intra-regional trade and investment

• Government debt issues in the parallel currency could help develop regional bond markets

• Such a parallel currency would still require increased coordination of policies and regulations and would still necessitate the collation of pan-GCC statistics for policy evaluation at the GCC wide level

• Could be seen as a ‘stepping stone’ towards CU at some future point in time if the political appetite for deeper integration materialises

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Thank you