Central Bank Formation in the GCC Region - Term Paper Example

Central bank Executive Summary The current report discusses the prospect of formation of a central bank for the GCC region. The discussion centers on several sub-issues surrounding the central issue of the formation of a central bank for GCC region. The sub-issues surrounding the central issues that has been covered in the gamut are structure for the new bank, point of similarities and dissimilarities with the ECB, arguments in favor of and against of the formation of the new central bank and the objectives to be followed by the proposed central bank. Introduction Since long countries in the GCC region are raising their voices for the creation of central bank. The highly potential and naturally gifted part of the world does not have any central bank. Here in this essay a suitable structure for the proposed central bank will be provided in detailed fashion. The study will also analyze the point of similarities and dissimilarities between the proposed central bank of GCC and European central bank. The essay will also incorporate various arguments for supporting and opposing the proposed central bank. It means the essay will follow a critical analysis. The study will describe the various functions and objectives of the proposed central bank in GCC region. The essay will encourage significant detailed analysis in every section of the essay. The essay will follow a step by step approach which will be highly suitable with the topic of the study. At the end of the essay a suitable conclusion will be drawn. Discussion Structure suggested for the new central bank The first step after the decision to form a central bank is taken is to decide on the organizational structure of the central bank. To decide on the proposed structure of the new central bank the organization structure of the central bank of the member nations of the GCC can be taken as an example. If we look at the structure of the central bank of other banks belonging to some member nations of GCC, we find that the central banks of different countries follow central organization structure. All the organizations are headed by board of directors. Under the board of directors come the governor and deputy governor. The deputy governor is helped in his duties by a team of directors who look after different functions and departments of the bank. The figure below shows the structure of the central bank of Qatar as a particular example. Figure 1: Organizational structure of Central Bank of Qatar (Source: QCB, 2008) While designing the structure of the central bank for the GCC the structure of ECB can serve as a good model. ECB as an organization is made up of three major decision making bodies 1. Governing council: The apex decision making body comprising of the governors of all the member countries. 2. Security council: This is the implementing authority. Their function is to implement the decisions of governing council. 3. Executive board: The function of this board is to implement monetary policies and looking after the daily workings of the bank (ECB, 2014). The GCC as an organization also follows a similar structure and is comprised of supreme council who is the main decision making authority and ministerial council who is there to implement the decisions taken by the Supreme Council (GCC, 2012). The organization structure of the proposed central bank of the GCC would comprise of a fundamental council which will be the main decision making authority. The Fundamental council will be comprised of members elected from each of the member countries of the GCC. Each member countries should have equal voting rights and equal nomination. The fundamental council will function under a chairman who will be elected by voting of the fundamental council members. The chairman assisted by the members of the fundamental council will meet 2-3times a year to make major policy related decisions. For implementation of the decisions taken by the fundamental council a second council may be instituted. The third council will be used to supervise day to day operations. Changes in interest rates and other monetary policies will be taken by the third council will be under the broad guidelines of fundamental and second council. Point of similarities and differences with European Central Bank The GCC was originally formed with the view to achieve corporation between its member countries on the basis of security concerns (Davies& Green, 2010). However although the GCC was formed on the basis of cooperation on security issues the organizations agenda soon changed to incorporate and facilitate cooperation on economic issues and ultimately achieve monetary union. The conditions and objectives that led to the formation of ECB were quite different from that which led to the formation of GCC and ultimately leading to the formation of Central bank for the GCC. In fact GCC is the only example in the world where countries have come together for security concern (Low & Salazar, 2011). The member countries of the European Union differ from each other in many respects such as mentality, sources of income, economic condition etc. For example people of Germany do not like to live on loans. They spend what they earn; whereas people from Italy like to live a lavish life by taking loans. However the member countries of the GCC are very similar to each other in terms of governance, language spoken, laws followed, social customs, religion, sources of income etc. As the conditions of the member countries and the objective that is leading to the formation of the central bank for GCC is quite different from that of ECB, so it is quite evident that there will be lot of dissimilarities between the two banks. On the flipside however both the banks are being instituted to achieve the ultimate objective of greater economic cooperation among the members of the constituent countries. So there ought to similarities on the basis of objectives and functionalities as well as on the basis of structure. Arguments in favor of and against new Central Bank To facilitate cooperation on economic lines among member countries of the GCC trade barriers between the countries have been relaxed and a central bank for the region in the lines of European central bank has been planned (Filho &.Schaechter 2003). The GCC countries have also proposed a common currency for the member countries like Euro that is being used by the countries of European Union. Arguments that have been put forward in the formation of a central bank for the GCC region are as follows It is said that it is always better to stay in a pack than to stay alone. By staying together under the umbrella of one central bank it will be easier for the GCC member countries to tide over global periods of economic downturn. A single central bank for the member countries would facilitate the coming together of the best minds in the field of economics from the member countries. If a member country of the central bank falls in economic recession then the other countries can come together to help the particular country tide over the difficult period. Forming a central bank is the first step to the formation of a unified currency for the region. Arguments against the formation of a central bank for GCC The countries will no longer have the independence of choosing and following their own economic policies. Being monarchies the countries would not like to have guidelines on internal economic issued to them especially if they are in financial distress by the central bank. If one of the member countries falls in economic distress then it is quite likely that the other entire member countries will be affected. Functions and Objectives of the new central bank The proposed central bank of GCC has significant and definite functions and objectives. All those functions and objectives will be suitable for the interests of the associated countries. The central bank of GCC region will control and supervise the business operations of the various commercial banks. It means the central bank will create a clear cut operating guidelines for the banks present in the GCC region. The central bank will act as the parent banker for the all commercial banks in the region. In the modern world of globalization monitory policies are highly dependent upon the various external forces. The central bank of GCC will give significant focuses towards the globalization dynamics. The central bank will monitor the whole financial situation on a regular basis. After the recession of 2008, global fraternities have come across the high level of inflation. The GCC region also has faced the impacts of recession. The central bank will check the inflation into the region. Uniform currency is also an important objective of the GCC central bank. The central bank will try to implement single currency that is Khaleeji. To simplify import and export in the region the central bank will play an important role. Central bank of the GCC region will encourage efficiency in the overseas payment processes. The central bank will assist the associated countries to come up with suitable monetary policies. The central bank will fix credit policy into the region. The proposed central bank of GCC region will provide financial helps to the big organizations belong to the region. To achieve economic stability and productivity in the region the central bank will play an important role. Due to ineffective monitory policies and business operations many banks across the world have been defaulted. So safeguarding all the commercial banks in the region is also an important objective for the proposed central bank. The proposed central bank in the GCC region will act as a financial bridge between the region and the developed world. Conclusion The central bank for the GCC should be structurally and functionally similar to that of ECB. But the conditions and precursors that led to the formation of ECB and now will lead to the formation of central bank for the GCC are quite different. The member countries of the GCC are similar to each other on the lines of economy, religion, language, social customs, governance system (all are monarchies), etc. But formation of a central bank for so many countries with different administration and different rulers requires lots of thought and the mere fact that the countries are similar in several respects does not guarantee the success of the central bank. It is therefore concluded through the discussion that although it is a good idea to form a central bank, there are several surrounding issues that requires careful deliberations around the formation of the central bank. References Central Bank of Qatar (2008). Structure. Retrieved from: http://www.qcb.gov.qa/English/AboutQCB/Pages/Structure.aspx. Davies, H. & Green, D., (2010). Banking on the future: the fall and rise of central banking. NJ: Princeton University Press European Central Bank., (2014). Organization chart of the ECB. Retrieved from: https://www.ecb.europa.eu/ecb/orga/orgachart/html/index.en.html. Filho, U. F. &.Schaechter, A., (2003). Monetary union among member countries of the gulf cooperation council. Washington DC: International Monetary Fund. Low, L. & Salazar, L. C., (2011). The gulf cooperation council: a rising power and lessons for asean. Singapore: Institute of Southeast Asian Studies The corporation council for the Arab States of Gulf (GCC), (2008). The Organizational Structure. Retrieved from: http://www.gcc-sg.org/eng/index2beb.html. Read More