Central Bank for GCC (Gulf Cooperation Council) - Research Paper Example

? THE CENTRAL BANK OF GULF COOPERATION COUNCIL SUMMARY This paper looks into the formation of the central bank of GCC. Central Bank of GCC is yet to be formed officially, even though member countries have already met to discuss its structure, functions, and the qualifications of its membership. It also looks into the structure of the bank. Similarities and differences between the central bank of GCC and the European central bank are also covered. Functions of central bank of GCC and arguments in support of and against the formation of central bank of GCC are clearly spelt out. INTRODUCTION The General Cooperation Council formed in May 25, 1981, according to Nuge?e and subacchi (2008). It is a union concerned more of political and economic objectives. It is composed of six Arab states situated along the Persian Gulf. These states include Bahrain, Kuwait, Oman, Saudi Arabia, United Arab Emirates (UAE) and Qatar. This union was formed with the mind of achieving a myriad of objectives among them the establishment of a common currency. This meant that the states of the union had to decide on the currency to use, which had to be the only currency in circulation in the states. Hence, that objective of having a common currency resulted in a suggestion of the formation of the Central Bank of Gulf Cooperation Council (Nuge?e & subacchi, 2008). The central bank of GCC was to be formed by the six states but unfortunately two states, in particular, Oman and United Arab Emirates, did not join in the central bank formation. Those two states had reasons for not joining in the council. Therefore, the central bank of GCC is a composition of Bahrain, Qatar, Saudi Arabia and Kuwait. The four states formed the common monetary union and a precursor to a Gulf Central Bank, in the march of 2010 (Nuge?e & subacchi, 2008). The headquarters to the central bank of GCC was suggested to be located in Riyadh in Saudi Arabia. Riyadh is where the Gulf Central Bank for the single currency is to be hosted. This capital controls a large percentage of world’s oil reserves. However, the United Arab Emirates was not in agreement with it and chose to back out of the union. The United Arab Emirates was not in agreement with the headquarters being in Saudi Arabia as it stated that most of the GCC institutions headquartered in the country. In short, it was up to achieving equality. The common currency adopted by the union was called Khaleeji. The currency was turned down by the sates that then resorted to one called Dinar (Muslemani, 1996). Qualification criterion However, for the states to qualify as member of the union, it was paramount that certain qualifications were met by the countries. The qualifications were six, and failure by any state to meet even one qualification rendered it not qualified as member of the union. The first one was that the inflation rate of any of the countries was not to exceed 2%. Banks (2006) argues that the 2% was the weighted average of inflation in Gulf Cooperation Council. According to Banks (2006) it was agreed that the inflation rate was not to exceed 8.91% for countries willing to participate in the union. Unfortunately, countries like Qatar and UAE exceeded the limit. Secondly, it was a requirement that the average short run rates of interest were to be maintained at an average of at least three rates of interest added to 2% in every member of the union (Banks, 2006). The third element was that preserves of across border exchange were to account for goods to be imported for a time of not less than four months. This qualification was met by all the countries of the unification. This could be attributed to the large oil preserves present in the member countries. The fourth requirement was that it was compulsory for the countries to meet the public debt criterion. According to Filho and Filho, (2003) it was evident that all the member countries qualified, where no country’s ratios were above 60% of the Gross Domestic Product for the common state and 70% of gross domestic product for central state. The sixth and final criterion was that each of the member countries had to peg its currencies on the dollar. All member nations apart from Kuwait, which had its currency pegged to a basket of currencies, met the qualification (Abe, 1987). Discussion Structure of the suggested Central Bank for GCC The structure of the central bank of GCC will resemble that of European Central Bank (ECB). It will have its budget. It will also have a headquarters that is of its own plus permanent personnel. Its management will be in the hands of an executive board constituting the president and his vice, chief economist, together with national central bank’s governors and fiscal authorities coming together with the executive, forming the fiscal policy committee. This structure will facilitate the central bank gain international reliability and autonomy (Filho & Filho, 2003). Similarities and differences between central bank for GCC and European central bank The suggested Central Bank for GCC has some similarities with the European central bank in that they both have the same structure of governance of the central bank; they both have their budget, permanent personnel, headquarters and are both governed by the executive board. The Central Bank for GCC is also founded on Maastricht criteria, just like European monetary union. Furthermore, both were inspired by political and economic objectives. Furthermore, the GCC which led to the formation of central bank for GCC was formed using same criterion as that of the European monetary union (Scheller, 2004). One difference is that the number of member states that formed the Central Bank for GCC is less than that of the European Central Bank. The other difference is that the countries forming the Central Bank for GCC are largely endowed with oil reserves unlike those forming the European Central Bank. Another difference is that before the formation of the Central Bank for GCC, there was a monetary union already in existence, unlike the European monetary union (Scheller, 2004). Arguments for GCC central bank The formation of the monetary union by these countries will be of great importance to the member countries. First of all, the union of the currency will aid in promoting trade across the region. The member countries will be in a position of developing trade through the union, as the member states will trade freely across borders. Using one currency will mean that the purchasing power parity will be at equilibrium in all markets across the countries. Business people will borrow money from any bank in the region as the interest rate will have to be standardized across the region because of the use of a single currency (Sturm & Siegfried, 2004). Furthermore, the development of a single currency by these Arab states will attract investments from all over the world. By multinational companies investing in these Arab states, the economies of these states will grow and expand tremendously. Furthermore, by the six countries agreeing on the formation of the union, it made them one. Thus, as a unity the countries will respect each other. In this sense, the union was formed mainly for political reasons. Thus, through the union, peace will be enhanced among the states and the union members will work together and wars and social unrests of any kind will be eliminated. Another reason why it is good for the union to have a central bank is that, it will be easier for the union to run. It will have very minute challenges in its establishment as all the member countries of GCC have quite some similarities. For example, the member countries have a common culture and language. They also experience similar economic and political difficulties (Vaidya, 2006). Argument against the GCC central bank One reason it would not be prudent for the central bank of GCC to be formed is that, the Arab countries are deficient of proper research infrastructure. The formation of the central bank requires in-depth research so as to ensure its stability and continuous use of one currency. Thus, with the lack of proper structures, the formation of the central bank may be a huge blow on the union when the single currency fails to operate. Another reason why the central bank should not be formed is that, it will only be formed by four countries. UAE and Oman are not a part of it and this may prove to be a challenge, since the single currency will be pegged on the dollar. The strength of the currency will be determined by the number of states using it. Therefore, the absence of UAE and Oman will mean the single currency will be weak against the dollar and may collapse (Nakhleh, 1986). Objectives and functions for GCC central Bank The bank will have a responsibility of processing and issuing money, be it paper money or coins. The bank will also oversee the foreign exchange reserves, by supervising the transfer of money between domestic citizens and the foreigners. Furthermore, the bank will also supervise deposit taking and credit banks to ensure security of creditor’s and depositor’s money. It will also work to guarantee the soundness of the monetary sector. The bank will be the banker’s bank in that it receives deposits and lends money to the commercial banks. The bank will also be the savior in times of recession where it will be the last resort. This will be in times where the commercial banks have no other sources of money (Nuge?e & subacchi, 2008). Conclusion It will be wise for the GCC central Bank to be formed since it will be of great benefit to the whole region at large. The development of a single currency by these Arab states will attract investments from all over the world and promote trade across the region. Peace will be enhanced among the states and the union members will work together and wars and social unrests of any kind will be eliminated. GCC central Bank share a lot of similarities with the European Central Bank, but it would be wise for it to learn from the mistakes of it that have led to the depreciation of the euro. References Abe, H. (1987). Regional integration in the Gulf: the background to the formation of the Gulf Cooperation Council. Yamato-machi, Niigata-ken, Japan: Kokusai Daigaku, Chu?to Kenkyu?jo. Banks, A. S. (2006). Political handbook of the world 2007. Washington, D.C.: CQ ;. Filho, U., & Filho, U. (2003). Monetary Union Among Member Countries of the Gulf Cooperation Council. Washington, D.C.: International Monetary Fund. Muslemani, A. A. (1996). The legal aspects of the Gulf Cooperation Council. Doha, Qatar: New Printing Co.. Nakhleh, E. A. (1986). The Gulf Cooperation Council: policies, problems, and prospects. New York: Praeger. Nuge?e, J., & Subacchi, P. (2008). The Gulf region: a new hub of global financial power. London: Chatham House ;. Scheller, H. K. (2004). The European Central Bank: history, role and functions. Frankfurt am Main: European Central Bank. Sturm, M., & Siegfried, N. (2005). Regional monetary integration in the member states of the gulf cooperation council. Frankfurtam am Main: European Central Bank. The monetary policy of the ECB, 2011 ([3rd ed.). (2011). Frankfurt am Main: European Central Bank. Vaidya, A. K. (2006). Globalization: encyclopedia of trade, labor, and politics. Santa Barbara, Calif.: ABC-CLIO. Read More