A monetary union between the six Gulf Cooperation Council (GCC) states of Qatar, Kuwait, Oman, Saudi Arabia, Bahrain and the UAE was intended to begin in 2010, but has been delayed. Two countries have pulled out of the initial union, which if implemented, will have a sizable impact on governments, businesses and consumers in the region.
- In 2005 the GCC countries agreed on requirements to create a monetary union and single currency, including budget deficits, inflation and interest rates. The grouping had already established a customs union and free-trade agreements. The GCC countries have a common theme in being based mainly on energy exports, with Saudi Arabia the world’s largest crude oil producer at 10.8 million barrels per day in 2009;
- However, Oman and the UAE have announced that they will not participate in the initial launch of the currency. This was partly due to political factors and disagreements, and also because Oman would not meet the entry criteria in time;
- Global currency volatility and the financial crisis over 2008-2009 also delayed plans, particularly as inflation reached high levels in all GCC countries in 2008 (for example 15.0% in Qatar and 12.3% in the UAE) except in Bahrain (3.5% in 2008), where there were fewer pressures on food and housing prices. Inflation subdued in 2009 amid the economic downturn.
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- The benefits of a monetary union would be having a stronger single financial and commercial bloc to negotiate in global economic affairs and also providing a better means of combating problems such as high inflation. However, it may remove independence from individual countries, which will not be able to implement their own fiscal policy when needed, as is the case with the eurozone;
- The withdrawal of Oman and the UAE has weakened the importance of any single currency. However, the presence of Saudi Arabia, the largest GCC economy and the host of the future GCC Central Bank, will create a significance;
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- Governments will need closer fiscal integration. Saudi Arabia, Qatar and Bahrain all peg their currencies to the US dollar, for instance, but Kuwait removed the dollar peg in 2007, highlighting the lack of policy coordination between GCC states;
- A GCC currency may have an impact on how oil exports from the region are priced. This has global implications because Saudi Arabia and the UAE are amongst the largest global oil exporters, and in 2009 exported US$340 billion of petroleum and petroleum products. Crude oil exports are currently priced in US dollars but switching them to a GCC currency may have some impact on pricing, although this remains to be seen;
- There will also be impacts for businesses, particularly exporters and importers. Firms may relocate depending on how the former local currency is revalued against the new single currency;
- The real cost of living for consumers may rise or fall depending on the value of the new currency. Moreover, it should theoretically provide a more effective cushion against inflation.
It is unlikely that a GCC currency will be active before 2012. Inflation in the region is set to be less volatile in 2010-2015 than in 2004-2009, which should provide a more stable background to the implementation of a single currency. In 2011 inflation is projected to be 3.7% in the UAE and 4.4% in Saudi Arabia, for instance. The UAE and Oman could also rejoin the monetary union.
On the whole a monetary union is likely to be positive as it will create greater flexibility for the authorities to offset inflationary pressures. It is also likely to encourage some relocation of companies and consumers, although this will depend on how the currency is linked to international currencies.