Gulf states must revive plans for a common currency

All of the Gulf states except Kuwait have the US anchor, which should be maintained in the initial phase of any future unified Gulf currency.
Image Credit: Gulf News Archive

Over the past 40 years, the Gulf States have made significant progress in economic cooperation, starting with the removal of duties on locally produced products through to the unification of tariffs. There was also the electricity grid and the CCG rail network.

However, progress towards issuing a Gulf-wide currency has stalled. The GCC states only agreed on the exchange margin for their currency transfers to the region, in addition to establishing a seat for the Central Bank of the Gulf.

Realistically speaking, monetary union is one of the most difficult stages in unifying the GCC economies and establishing a common market. In the European Union, the euro was issued decades after its formation. Yet it took less than 40 years for EU states to bring about the common currency. The thing brings us to an important question about the reasons behind all of the complexities hampering an agreement on a unified GCC currency.

Strengthening monetary cooperation is one of the most complex issues due to the ramification of several policies, which directly and significantly affect the overall economic, financial and investment conditions in the countries of the bloc. This question is even more complicated in cases where there are frequent interventions in monetary decisions, which explains the collapse of the Turkish currency and bringing the dollar exchange rate to 18 lire last week, down from 2.5 seven years ago, and with expectations of reaching 20 lire.

Who is in charge?

The process of issuing a unified GCC currency faces several obstacles, although there are real possibilities for future success if it does occur. There is the already established convergence of the economic structure of the Gulf where all member states currencies except the Kuwaiti dinar are pegged to the US dollar. The biggest obstacle to a unified GCC currency is the surveillance aspect.

The US Federal Reserve, for example, enjoys complete independence from the government, and even the US President has no right to interfere in its decisions or affairs. The European Central Bank, although headquartered in Frankfurt, has never been run by a German official, and Germany, the Union’s largest economy, has no right to interfere in its decisions. In addition, the president of the central bank is elected after consultation with all member states.

Only by taking such a thoughtful approach can a unified Gulf currency emerge. This begins by ensuring the full independence of the Central Bank of the Gulf, free from any interference, with its president and board of directors elected and endowed with full powers to formulate monetary policies adapted to the Gulf economy in his outfit.

Move cautiously

A unified Gulf currency, if agreed upon, must initially be tied to the dollar as well, especially since GCC states lack the skills to develop unified monetary policies. This is an issue that should be treated with caution.

The peg to the dollar over the past 40 years has undoubtedly helped stabilize monetary conditions in GCC countries, although in some cases US Fed policy has never been adapted to GCC economic conditions and affected states. Therefore, as soon as a unified GCC currency is pegged to the dollar, it is necessary to lay solid legislative and technical bases to subsequently break this anchoring and put the Gulf’s monetary policies at the service of the region’s development approaches.

The Central Bank of the Gulf must enjoy full independence to refrain from any interference from any party or country. This will prove to all Member States that they are adopting the right monetary policies and give them an equal chance to participate in the management of the bank, regardless of their local affiliations.

In doing so, the Gulf Central Bank will exercise its powers independently and away from the so-called national sovereignty which hinders many aspects of cooperation.

The writer is an energy and economic affairs specialist in the Gulf.

– Mohammed Al Asoomi

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