The planned unified currency of the six-nation Gulf Cooperation Council
(GCC) should be pegged to the US dollar. The GCC states plan to issue the
currency at an unspecified future date as part of implementing their
monetary union by 2010.
While the date for carrying out the ambitious monetary union is several
years away, still, debate rages over whether to link the planned currency
to the US dollar or a basket of currencies including the dollar, the euro
and the yen.
Yet, another option calls for floating the currency in the future,
suggested as five years following its circulation.
I argue for linking the unified currency to the greenback as the
practice would give investors the confidence in dealing with regional
economies.
Small investors, who are the majority, tend to seek instability. In
other words, the link allows the GCC countries to avoid unnecessary
volatility associated with floating currencies.
The GCC economies would possibly not be able to absorb the sort of
consequences connected with the short experience of the euro. The euro has
appreciated in value by nearly a quarter since its formal launch in 2002.
In fact, a line can be drawn from upheavals experienced in regional
stock markets over the past year or so. The rise and subsequent decline of
performance indexes caused losses to investors throughout the region.
There were also reported cases of deaths amongst few investors, who
were traumatised on hearing news of a substantial plunge in values of
their investments.
In addition to the stability factor, the link uniquely fits the nature
of GCC exports, which are priced in the US dollar. GCC merchandise exports
primarily comprise crude oil, petroleum products such as diesel,
petrochemicals, aluminum goods and textiles.
Needless to say, oil receipts are the major contributor to treasury
income in all the GCC states including Bahrain, which is the least
dependent on the hydrocarbons sector.
The petroleum sector contributed 76 per cent of actual budgetary income
of Bahrain in 2005, as opposed to 71 per cent from the projected, on the
back of strong rise in oil prices.
Also, services such as financial services are likewise priced in the
dollar. Additionally, a sizable amount of imports are priced in the
dollar, notably products from the US and China, to name a few.
The GCC states must complete two arrangements prior to implementing a
monetary union. At the moment, member states are bound to carry out
details related to the customs union. The GCC commenced customs union
status at the start of 2003 hoping to complete the requirements by
2005.
However, implementation has been delayed until 2007 due to numerous
obstacles, such as finding solutions to matters related to fair
distribution of customs revenues amongst member countries.
The common external trade policy with non-members remains a concern,
though it was resolved during the Abu Dhabi summit in 2005 with the
adoption of a document calling for a standard external trade policy.
In addition, the GCC aims to become a common market by the end of 2007.
The common market notion requires free movement of factors of production.
In this respect, the GCC countries have a long way to go to remove all
sorts of restrictions. Last year, member states agreed to extend the
economic scope of activities. The three additions are: recruitment
offices, car rentals and most cultural activities.
In many respects, the talk of monetary union is somehow premature, as
the GCC states have yet to complete requirements of customs union and a
common market.
Nevertheless, officials should avoid sending mixed signals about the
nature of unified currency, if only to avoid confusing investors. The
experience of pegging regional currencies to the US dollar has a proven
record of success.
The writer is head of the Economic Research Unit, University of
Bahrain.
