Trade and economic trends in the 21st century world has become so interdependent that no nation or region can survive on its own, at least economically. This evident from the 2008 financial crisis in the US that nearly led to the collapse of the world economy and the ongoing Euro zone crisis that may possible lead to the collapse of some European economies such as Greece and Spain.
Because of the developments in world commerce, more states are coming together to form regional trade blocs with the aim of encouraging free movement of goods and services as well as capital and labor (Shammari 2007, p. 6). The above are the fundamental ingredients necessary for economic growth. However, uniqueness associated with these countries whether politically and/or economically coupled with bureaucracies and different monetary and fiscal policies make it rather difficult for these countries to realize the above objectives.
Hence, most economists agree that besides a customs union and common market, trade blocs like the Gulf Cooperation Council, East African Community or European Union need a common currency that makes it easier for business transactions to take place within these blocs. So far, the EU is the most successful single currency bloc that has recorded tangible success and progress though the current crisis has injected some bit of regression on the trade bloc. Despite the recent setbacks however, many economists agree that the Euro zone is far better with a common currency that it was with individual currencies. Other trade blocs where the common currency route has been mooted include the East African community, ASEAN and the GCC.
Adoption of Common Currency in GCC
In this discussion, the focus will be on GCC states’ proposal to form a monetary union and especially on the benefits of adoption of a common currency, the constraints on the adoption of a common currency, the suitability of a common currency for the GCC, and the positive and negative consequences of common currency for the GCC.
Benefits of a common currency for the GCC
Generally, the benefits of the adoption of a single currency for a regional trade bloc are similar across the board with variations arising from the uniqueness of the bloc itself (Shammari 2007, p. 8). For instance, while the EU and the GCC may experience the same benefits, it’s important to acknowledge that the EU economies are more manufacturing and service oriented compared to the GCC economies where oil business plays an important role.
In a nutshell, benefits of a common currency for GCC will include elimination of transaction costs, easier management of commodity prices, increased certainty in the exchange rate within the GCC countries, easier management of interest rates and possible standardization of interest rates and faster economic growth (Ramady 2010, p.464).
If the GCC adopts a common currency, transaction costs will come down mainly due to the fact that people will require only one currency when conducting business across the Gulf States effectively eliminating conversion charges. In the current setting, for instance in Europe, UK businesses spend billions of pounds buying and selling foreign currencies in order for them to do business in the Euro zone.
There will be increased transparency in pricing across the GCC because commodities will be priced using only one currency. In situations where different countries have different national currencies, both consumers and business people are likely to lose money due to the currency differences. In most cases, commodities are either over priced or under priced and because of the lack of common currency, authorities have little capability to take corrective measures.
One of the most important aspects in international commerce in the world today is the exchange rate of different currencies that enable cross border trade. Adoption of a common currency for the GCC will eliminate the uncertainly that is mainly brought by currency fluctuation within GCC member countries.
In any trade bloc such as the GCC, access to credit is mainly the driver of economic growth because it enables spending and investment. However, access to credit in most cases is hampered by interest rates which are unique to every currency in GCC. A common currency will enable the Central Bank of the trade bloc to set uniform rates that apply across the countries of the union for easier credit access and control.
Constraints on the adoption of a common GCC currency
While the adoption of a common currency across a trade bloc like the GCC is beneficial, there are many intricacies that control the system for success to be realized (MacDonald & Alfaris 2010, p. 30). Single currency regions like the EU have become mired in economic crises that threaten the fall of the entire system and with it, years of growth and investments that may never be recovered.
Some of the constraints associated with a common currency include lack of stability for the system, minimal benefits in the short-term, inflationary tendencies and loss of sovereignty (Espinoza & Williams 2010, p. 5).
There are ma y factors that can cause instability of a common currency system like that of GCC. However, studies shows discontent with bloc members is the biggest threat to stability of the common currency system. All countries must agree to join the exchange rate mechanism that will govern the common currency. Failure to which, there is bound to be instability to the bloc and its currency.
Loss of sovereignty is also cited as common constraint in the achievement of a common currency. Many countries have a history attached to their systems whether political, social or economic. Abandoning these systems like currency in favor of a new one may not be popular among the public hindering the total uptake of the common currency as in the case of the UK.
In cases where a common currency is adopted, there is a likelihood of inflationary tendencies taking place. For instance, economically weaker countries in a trade bloc that wants to adopt a common currency will experience a number of negative effects. Such countries have low wages and prices. A common currency setting where these economically weak and stronger countries are forced to the system may lead to a rise in wages in the stronger economy or a rise in hiring in the weaker economy, a situation that could trigger unemployment in the stronger economy and inflation in the weaker economy.
Suitability of a common currency for the GCC
Currently, there is only general agreement among Gulf Cooperation Council states that there is a need for the adoption of a common currency in the GCC. In fact, of the six countries that form the GCC, only four support a full adoption of a common currency at the moment (Mohamed 2012, p. 291).
Given the successful launch of the Euro a few years ago, there is need for the GCC to also follow suit with a proper implementation of currency union that will increase the economic competitiveness of the gulf region, increase integration among members states and promote growth of the non-oil economy.
There is never a right time to launch a common currency. However, such a process is normally very dependent on political, social and commercial trends of a region. Therefore, it’s the reason why GCC countries must adopt a common currency as part of a wider integration approach. Success of the currency will largely depend on the willingness of individual states to remove trade barriers that hinder intra-regional trade and investment, crafting of policy frameworks acceptable by all members for eventual macro and microeconomic stability.
For the GCC to be ready for a common currency, it needs to settle the issue of the exchange rate. Currently, most GCC countries peg their currencies to the dollar. However, there have been suggestions for the GCC peg the currency on other global currencies such as the Euro and the Yen. Other suggestions include letting the GCC currency fluctuate against other world currencies so that the region can effectively formulate and implement monetary policies that will help the non-oil economy.
Despite the above issues though, there is sufficient infrastructure and political will in the GCC member countries for the adoption of a common currency for the region. The fact that the economies mainly depend on oil and the region is united by one language, gives impetus to the idea that the GCC is ripe for a monetary union.
The positive and negative consequences of common currency for the GCC
Section two above deals with the general benefits of a monetary union. As mentioned earlier, these benefits apply across regions where monetary union policies have been implemented. The GCC case is not different either.
The biggest benefit that the GCC will gain from a monetary union will be reduction of foreign exchange controls effectively bringing down the cost of doing cross-border business in the GCC countries. The ultimate benefit will be enhanced economic growth brought by the ease in participating in the economic activities by firms and household (Jovanivic 2011, p. 509).
On the other hand however, GCC countries may have to contend with the fact that a currency union may bring some macroeconomic costs such as ceding to the union the sovereign authority of each nation to formulate and implement monetary policy.
Also there is risk that once the region gets intertwined economically, individual member states will rely on the prudent economic management of their fellow members for effective functioning of the system. There will always be the treat of imminent collapse of the currency and the trade bloc should there be any failure to follow the laid down fiscal and monetary policies.
Adoption of a common currency among members of a trade bloc takes more effort especially political will and sound planning and management. The GCC already has been in existence for long and member states have achieved some level of economic and social integration. Therefore, it suffices to say that with few reforms and resolution of pending matters like the currency exchange rate, the region is ripe for a currency Union.
Espinoza, R & Williams, O 2010, Regional Financial Integration in the GCC, New Cengage Learning, New York.
Jovanivic, M 2011, International Handbook on the Economics of Integration, Routledge,
MacDonald, R & Alfaris, A 2010, Currency Union and Exchange Rate Issues: Lessons for the Gulf States, Cengage Learning, New York.
Mohamed, A 2012, The GCC Economies: Stepping Up to Future Challenges, Thomson Learning, London.
Ramady, M 2010, The Saudi Arabian Economy: Policies, Achievements, and Challenges, Routledge, New York.
Shammari, N 2007, Exchange Rate Policy and International Trade Linkages and Impacts, Oxford University Press, Oxford.