Very famous are the tales of One Thousand and One Nights,
recounted repeatedly since their compilation during the Islamic Golden
Age. Composed of interweaved stories collected over the centuries, the
epic tale never ceased to introduce new episodes as it progressed.
Throughout the plotline, the storyteller, Scheherazade, would every dawn
leave her King tantalized with yet another cliff-hanger, postponing
what seemed to be the tale's finale to the following night.
Nowadays,
a saga of multiple twists and turns is strikingly similar to these
ancient Arab folk tales. The Gulf dream to create a unified currency
among its states stands as a story of numerous chapters linked together
by cliffhangers that leave spectators wondering why this dream has not
yet been achieved.
The idea of a unified Gulf currency initially
surfaced with the establishment of the Gulf Cooperation Council (GCC) in
1981 as one of the group's primary future goals. Based on the notion of
a strong economic bloc, in 1982, the six-member group ratified an
agreement "to coordinate their financial, monetary and banking policies
and enhance cooperation between monetary agencies and central banks,
including an endeavor to establish a joint currency." Apart from
establishing a free trade zone in 1983, progress was modest. As time
went by, the goals of the past did not seem in any way foreseeable in
the near future.
It was not until 20 years later that the idea was
put to a second and significantly more serious discussion. Inspired by
the success of the third stage of the European Economic and Monetary
Union (EMU) through which 11 European nations adopted the Euro as their
unified currency in 1999, the GCC members decided to resurrect their
reverie. In January 2001, the members agreed to draw up legislation that
would unify their monetary policies as a primary step towards currency
unification. A timetable for the synchronization of Gulf monetary and
banking policies was formed whereby the creation of monetary union
legislation was scheduled for 2005 followed by a monetary and currency
union in 2010. This in turn entailed an agreement to peg GCC country
currencies to the US dollar until the new currency took effect.
Gradually,
the currency unification plan gained momentum triggered by the GCC's
establishment of a customs union in addition to an external tariff in
2003 at which point all members had collectively pegged their currencies
to the US dollar.
The agenda promised splendid remuneration for
Gulf neighbors, potentially making the GCC bloc the largest economic
region outside the Euro zone if all went according to plan. The region's
control over 45 percent of the world's oil resources has forced its
countries to depend heavily on oil revenues. And there is nothing that
the GCC countries would appreciate more than to alleviate pressure off
their stocks of black gold and jumpstart other sectors of their
economies. The currency union was expected to enhance policy
coordination and transparency in the region, which would in turn lead to
increased cross border investment and boost trade as a result of the
elimination of transactions costs.
Theoretically, the path towards
full economic integration was a sure thing. Realistically however,
there were numerous deficiencies in planning, coordination of efforts
and the implementation of pre-arranged schemes. Not to mention that
international turbulences had a big say in preserving Gulf currency
unification as a mirage during the second half of the past decade.
To Peg or not to Peg?
Initially,
the six members announced that the currency would be pegged to the US
dollar as soon as it sees light. Based on that, an agreement was reached
to peg the GCC currencies to the US dollar in hopes of achieving
monetary union prior to coining the new currency. The first half of the
past decade saw the six states peg their currencies to the American
dollar based on the stability of its high value at the time.
With
the emergence of the economic crunch the value of the dollar
depreciated, losing its attractiveness and leading to a debate
concerning the usage of the dollar as an anchor. Accordingly, Gulf
nations began considering the option of pegging their currency to a
selected basket of currencies including the Euro, or furthermore, a
floating exchange regime.
Some nations have gone as far as to demand that the unified currency be anchored to gold to eradicate the forbidden riba (usury) from the Gulf Islamic financial systems. At the end of the day, the issue remains uncertain.
The British Syndrome
But
the hearsay doesn't end there. Amidst striking inconsistencies among
GCC members, in 2007, Kuwait removed its dollar peg, hitting the GCC
monetary union where it hurts most. This was followed by the agreement
among Gulf Arab central bankers to develop separate policies in dealing
with rising inflation.
When the UK willingly abandoned the Euro,
it had reservations concerning the economic, financial and consequently,
political commitments it would have to abide by. Likewise, Oman in
2008, took the decision to withdraw from the monetary union based on its
"monetary immaturity" and inability to meet the pre-requisites for a
monetary union in 2010.
To save face and try regaining lost
ground, in 2008 the Gulf central bankers drafted a final monetary union
agreement and agreed to establish a monetary council in order to pave
the way to a common central bank in 2008. That however did not prevent
the Emirati withdrawal in 2009.
At first glance, the UAE's
withdrawal may have been explained by the GCC's decision to locate the
common central bank in Saudi Arabia and not UAE. Parochial as the
reasoning may be, it made sense bearing in mind that the UAE was the
first country to submit an application to host the GCC Central Bank in
2004, in addition to the fact that it does not currently host any GCC
establishments.
Nonetheless, further scrutiny shows that the UAE
had reservations concerning the union as well. Taking the EU as an
example, the UAE believed that "a gradual adoption of a unit of account
by the GCC countries for a reasonable period was necessary to test their
collective monetary policy and assess what can be amended before moving
it into the economy, and its impact on the GCC banking systems."
Clearly, this did not happen, and the UAE, to avert risk like Oman,
booked a ticket back home.
A Broken Brick
The
establishment of the Gulf Monetary Council in 2008 may have marked the
beginning of the institutionalization of the unified currency. Even so,
this belated step still suffers from several shortcomings. The council
should play the same role the European Monetary Institute had before
being replaced by the European Central Bank.
Being the first brick
in the awaited Central Bank, the monetary council was meant to
coordinate the policies of the four states and plan the gradual
introduction of the Central Bank. Ever since its establishment in 2008
however, the council has spent more time conducting research than
building an institutional framework for the monetary union. The council
has not yet decided the pegging policies of the union, nor has it
defined common monetary tools or a financial crises system.
The
unanimous election of the Saudi Arabian Monetary Agency governor as the
first chairman of the Gulf Monetary Council last monthhas conversely
come to renew aspirations for the future of the council and in turn, the
monetary union. Muhammad Al-Jasser, the new chairman announced that the
council's priority will be to "draw up the legal and organizational
framework for the Central Bank in coordination with the central banks or
monetary agencies of the member countries."
With the European tale in mind
Having
taken one blow after the other, the GCC's decision to delay the
monetary union to 2013 came as no surprise. But why hasn't the Arabian
tale had a European ending?
If preparation was silver, execution
would be gold. And this is where the European experiment excelled,
unlike its Gulf counterpart thus far. Supposedly modeled on the EU
example, the GCC fell short of implementing many of its plans due to
ineffective coordination among its members and their inability to move
from the planning phase to the action phase. Part of the EU's success
can be seen in its well thought-out plan to coin its currency, which was
divided into a number of phases to which its members abided. Not
surprisingly, GCC states are still trailing behind on their agenda,
having only established a semi-functional monetary council as a primary
step.
The EU's incorporation of a large number of economically
stable states has also made it immune to the absence of the UK, whereas
the Emirati and Omani withdrawals have taken a lot of economic heave out
of the Gulf mass.
Before its initiation, the European currency
unification agenda was criticized for prioritizing the monetary union
over the political one. The EU was also subject to criticism pertaining
to an expected failure in moderating the discrepancy in unemployment
rates due to the inflexibility of its labor markets and the difficulty
of migration between regions. When directed towards the Gulf monetary
union, this critique is somewhat accurate. Gulf countries have indeed
been unable to establish a coherent political agenda among them, which
was a reason for the withdrawal of two member states and the delay of
the union as a whole.
Additionally, discussing the fiscal and
monetary policies that will be used to regulate unemployment rates,
along with other secondary issues, is premature, considering the members
have yet to fulfill the prerequisites for an optimum currency area.
That is not to mean that the regulation of unemployment rates among Gulf
countries is impossible; on the contrary. Gulf countries do not suffer
from the migration problems, and the diversity of customs and languages
that European countries experience. For that reason, as soon as the
monetary union takes effect, handling unemployment should be far easier
for the Gulf than it has been for the EU.
Ironically, where the EU
took time to adapt, the GCC wanted to jump in headfirst. The EU used a
unit of account to test drive its monetary policy until eventually
reaching the point of implementing a floating exchange rate. The GCC,
however, still stands confused between pegging its currency to the
dollar, a currency basket or opting for a floating exchange rate,
without considering a transition phase. The indecision has augmented
speculation among the GCC nations, who seem to be-up to this
moment-tentative in their actions.
The road to a unified Gulf
currency may have been paved with European-like intentions, but the
continuous battle against inconsistency and the current economic
disarray have postponed what should have been a happy ending. The
upcoming phase should see the four remaining states undertake
considerable changes in coordination among them. If not, the tale of the
unified Gulf currency would remain endless like the Arabian nights.
First published: Friday 16 April 2010.
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