Central Bank for GCC - Case Study Example

Central Bank for GCC EXECUTIVE SUMMARY The essay intends to evaluate about the various aspects of incorporating CentralBank for GCC. The incorporation of Central Bank will be beneficial for the economic development and lead to prosperity. However, there are various arguments regarding the establishment of Central Bank for GCC. It is evident that the implementation of Central Bank with proper structure, objectives and functions will be beneficial to maintain the monetary policies and stringent guidelines for the betterment of the economy at large. The Central bank for GCC will be based upon the European Central bank, which will benefit the people as well as the industries of the Gulf countries. Therefore, it is evident that Central bank for GCC is of significance for the development of economy and to have proper monetary policies and procedures. INTRODUCTION Gulf Cooperation Council (GCC) is a governing body engaged in cooperating and integrating the member states of the Gulf region. It was formed on 4th February, 1981 and the member countries of GCC include ‘Saudi Arabia’, ‘Oman’, ‘Kuwait’, ‘Qatar’ and ‘Bahrain’. The council is responsible for devising varied regulations in the field of administration, legislation, trade, finance and tourism. It is also responsible for coordination and integration in various fields, amongst its member states. It is also responsible for promoting technological advancement in mining, industry and animal resources. GCC comprises of the Supreme Council, Ministerial Council and the Secretariat General. Among them, the Supreme council holds the highest position of authority, which is created by the heads of each member states (fatf-gafi, “Co-operation Council for the Arab States of the Gulf”). Like most of the countries of the world, the gulf countries are also planning to have their own Central Bank, which would be considered as a great milestone in achieving the Monetary Union and having a common currency for all the GCC States. Based on an agreement with a group of sovereign countries, the Gulf Monetary Union would be established for a better economic prosperity. However, some member countries may make an attempt to decentralize the monetary control at National Level, which may weaken the stability of the Central Bank. So, it is important to resolve this issue for setting up a Central Bank in Gulf Countries for proper functioning (AlKholifey and Alreshan 40). THESIS STATEMENT This thesis aims to develop a structure of a Central bank for GCC, along with finding out its similarities and dissimilarities with the European Central Bank. The essay argues in favor and against the bank and provides the functions as well as objectives that GCC Central bank would need to incorporate in its practice. STRUCTURE OF THE CENTRAL BANK FOR GCC The GCC Central Bank should be modeled on the basis of European Central Bank. It should be built on its own budget, having its own headquarter and permanent staffs. It should be managed by an executive board consisting of the president, vice president, the governors of the national Central Banks and chief economists along with the monetary authorities forming the monetary policy. The city where the bank will be set up should have a good financial market with a well-established banking network and there should be a facility for international transport and communication along with good telecommunication system for easy expansion and growth (Qatar Financial Centre Authority, “GCC Central Bank and Monetary Convergence”). The structure of the Central Bank to be set up in Gulf countries, should depend upon various factors like political situation of the member countries, desired location for setting up the bank, economic system of the country, financial support from the Government and currency system to be adopted. The importance of fiscal discipline and competitiveness for GCC member states of the Monetary Union is also a major concern. Apart from this, emphasis should also be given to implement strict rules and regulations for fiscal and economic policies in the member states. Even though there are some euro countries that are facing severe challenges, but on aggregate the fiscal accounts of those countries are much stronger than other advanced countries. They must overcome the prevailing challenges and make stronger their institutional framework of Economic and Monetary Union by implementing the measures of reform. There is a need for implementing macro-prudential approach to make the financial system stronger. Macro-prudential Approach is a method of analyzing the economy for evaluating the health and soundness of a financial system. There should also be some policies that should be perused for the improvement of financial stability and banking administration in the GCC, European Union as well as in the international level (ecb.europa.eu, “Press Release”). Expansion of the emerging market during the past decades has resulted in the structural shifts in the global economy. For setting up the Central Bank for GCC, emphasis should be given on the policy challenges that are related to global imbalances, global governance and international capital flows. The bank should be independent from the national government, in order to fulfill its objectives. If the monetary policy is removed from the political field, the long run objectives of the central bank can be obtained easily. There should be a degree of freedom to decide on its objectives of monetary policy and tools to implement these objectives. The financial independence and personal independence should also be taken into concern, thus the members of the board should not be feared to terminate from their job or put under pressure. Moreover, GCC central bank should not rely on the national government for its operations and continue generating its own revenue. Moreover, it should also be independent from any obligations to finance government deficits (ecb.europa.eu, “Press Release”; AlKholifey and Alreshan 40). DIFFERENCE FROM THE EUROPEAN CENTRAL BANK The European Central Bank (ECB) is one of the most important Central bank in the world, which was established in June 1988 in Frankfurt, Germany. The bank administers the European Monetary policy and it comprises of the European Union member states. The main function of the European Central Bank is to maintain the purchasing power of Euro as well as maintaining the stability of price in the Eurozone. The ECB regulates the supply of money and the rate of interest for the area of Eurozone. It also manages the foreign currency reserves of Eurozone and is also responsible for buying and selling of currency to maintain balance in exchange rates. The ECB ensures that the financial institutions and markets are supervised properly by the national authorities for smooth functioning of the payment system. ECB also authorizes the Central Banks in issuing euro bank notes in the eurozone countries. The ECB comprises of three vital bodies for decision making which are – the Governing Council, Executive Board and the General Council. The governing council’s main role is to follow the guidelines and make decisions that ensure a continuous performance of the tasks related with the Euro system and fix the rate of interest at which, the commercial banks lend money from Central banks. The role of executive board is to look after the day to day business of the ECB and implementation of the monetary policy. The role of general council is to take part in the coordination and advisory work of ECB, reporting its activities and statistical data collection for effectiveness in the process (Europa.eu, “European Central Bank”). In comparison to the ECB, the Central Bank for GCC will be expecting to face a new level of business imperative, as the financial and demographic alteration are emerging continuously in the gulf countries. The shifting away of oil based government enterprise to different industries like finance, tourism and telecommunication is playing a major role for the economic development. As these industries are growing rapidly, the Central Bank can target a varied segment of customers including the large, medium and small scale industries. The main target audience of the Central Bank for GCC should be the youth and women as both these segments are progressing to a considerable extent. Hence, the policies by the central bank of GCC should be redesigned the policies for safeguarding the needs of these segments. Moreover, due to the advanced development in technologies, the customers will be benefited as it will be more convenient for the Central Bank to reach the customers (ecb.europa.eu, “Press Release”). ARGUMENTS FOR AND AGAINST GCC CENTRAL BANK The plan for establishing the Central Bank for the Gulf countries may be a fruitful decision. The Central bank will undertake the responsibility of economic growth along with economic stabilities of the GCC member states. The bank will play an important role to improve the banking and financial system of the country. The monopoly power of the Central bank will help to maintain a uniform monetary system and monetary management of the paper currency will also become easier among the member states. The Central bank will also help in the economic growth as it will be able to provide sufficient funds to the government for initiating investments in the public sector. The stability of the price will be maintained by controlling inflation, which can be possible done by adopting suitable monetary policies. Moreover, the growth of the emerging market during the past few decades has resulted to structural shifts in the global economy. Therefore, the Central bank will have to put emphasis on the policy challenges that are related to global imbalances, global governance and international capital flows for a better economic environment. By using various credit control instruments like bank rate and variable cash reserve ratio, the Central bank can exercise its control over the workings of the commercial banks. The Central bank will also help to fix a suitable structure for interest rates in order to influence the direction of investment in the GCC member states (Buiter 1-4). On contrary, incorporation of Central Bank for GCC might lead to several issues such as the policies changes affecting the consumer and the industries, which may lead to an economic downturn. Moreover, in case of stringent policies the GCC member states may face several problems under the guidance of Central bank. OBJECTIVES AND FUNCTIONS OF GCC CENTRAL BANK The Central bank has the sole monopoly to issue bank notes for which, the currency notes printed and issued by the Central bank is considered as legal tender money. Thus, the bank will be responsible for issuing paper money as well as circulation of coins amid its member states. This monopoly power of the Central Bank for GCC will help to bring uniformity in the monetary system and exercise better control over the supply of money among the states. The monetary management of the paper currency will also become easier as the Central Bank will have complete information regarding the monetary requirements of the country and thus, will change accordingly, the quantity of currency. This monopoly right will also enable the Central bank to exercise its control on the credit creation system of the commercial banks as well as avoid any political interference in the issuance of notes among the GCC member states (PreserveArticles.com, “What are the functions of Central Bank”). The Central bank can also function as a banker, agent as well as a financial advisor to the government. As a banker, the Central bank for GCC will perform the same functions that a commercial bank performs to its customers. The bank will be responsible for maintaining the accounts of both Central and State government as well as receiving deposits from them. The bank will also be responsible for collecting cheques and drafts that are deposited in the government account. As an agent to the government, the Central bank will involve itself in collecting taxes and other payments in behalf of the government. By raising loans from the public, it will manage public debt as well. As a financial Advisor, the central bank will advise the government on financial, economic, monetary and fiscal matters (PreserveArticles.com, “What are the functions of Central Bank”). The Central Bank also acts or functions as a banker’s bank in three aspects. Firstly, it will act as a custodian of the cash reserves of the commercial banks of all GCC member states. Every commercial bank will keep a certain percentage of their cash balance as reserve with the Central bank, which can be used later by the commercial banks in times of emergency. Secondly, the bank will act as a ‘lender of last resort’. If in any circumstance the commercial banks are unable to meet their financial requirements from their sources, they can approach the Central bank as their last resort for financial adjustment. Finally, the Central bank will act as a clearing house for the commercial banks. Since, all the commercial banks have their account with the Central banks it will be easy to settle their claims with other banks with a minimum usage of cash (PreserveArticles.com, “What are the functions of Central Bank”). CONCLUSION Thus from the above discussion it can be comprehended that there is a need for the establishment of Central Bank for GCC, which will help to improve the financial and economic system of the member states. The Central bank for GCC should be structured in such a way so that it can represent the European Central Bank. The Central Bank for GCC will face a new level of business imperative, due to the economic and demographic changes in the gulf countries. The growing of the emerging market during the past few decades has resulted to structural shifts in the global economy. Central banks will have to put emphasis on the challenges that are related to global imbalances, governance and international capital flows. Hence, the establishment of Central Bank is highly considered for the improvement of overall economy of the GCC member states. Works Cited Alkholifey, Ahmed and Ali Alreshan. “GCC Monetary Union.” IFC Bulletin No 32 (n.d.): 17-51. Print. Buiter, Willem. “Economic, Political, and Institutional Prerequisites for Monetary Union among the members of the Gulf Cooperation Council.” Accountability of the GCC Monetary Authority Following Monetary Union. (2007): 1-57. Print. “Press Release”. ecb.europa.eu, 2014. Web. 10 Nov. 2014. “Co-operation Council for the Arab States of the Gulf”. Fatf-gafi, 2014. Web. 10 Nov. 2014. “What are the functions of Central Bank.” PreserveArticles.com, 2012. Web. 11 Nov. 2014. “GCC Central Bank and Monetary Convergence.” Qatar Financial Centre Authority, 2014. Web. 10 Nov. 2014. Read More