A US strategic study has presented an optimistic outlook for a landmark customs union launched by GCC states early this year and their push towards an ambitious monetary union, saying their benefits outsized their disadvantages.
The study by Robert Looney of the Centre for Contemporary Conflict, an affiliate of the US Department of Defence, said both projects would entail the GCC countries to give concessions in terms of fiscal sovereignty and economic and financial policies.
It said that on the benefit side, the monetary union would result in a reduction in foreign exchange transactions costs, promote pricing transparency, and, consequently, increase competition, thus reinforcing the positive aspects associated with the customs union.
But it noted benefits from the monetary union would come with a cost as is the case in the customs union, which was launched on January 1 after several years of negotiations.
"Specifically, those costs are associated with the loss of national sovereignty stemming from the relinquishing of independent control over domestic monetary, fiscal and exchange rate policy? here, the costs are of two types: first, the psychological cost of not having your own currency, and, second, a possible net loss in income due to the lack of ability to pursue expansionary monetary and fiscal policy during periods of falling oil prices. Of these, the second would seem to represent the most serious impediment to economic integration," said the study, obtained by Gulf News yesterday.
It said that like in the EU, the formation of a GCC monetary union would involve somewhat arbitrary restrictions on national budgetary policies.
It considered this a " serious infringement" on member countries' control over their individual taxation and public spending programmes.
Greater leverage
"In short, the tide of pluses and minuses associated with the formation of a customs/monetary union has shifted to the plus side? at the present time, a customs union would give the Gulf states greater leverage to attract foreign investors and accelerate economic reforms in the region to diversify and further stimulate their economies away from oil revenues," Looney said.
"An added impetus for the formation of a customs union has come from the EU.... as part of its policy to encourage the formation of regional trade blocs in the developing world, the EU has urged the GCC to implement a unified external tariff, making a comprehensive trade agreement with member states contingent on this action."
While losses associated with the the GCC's economic and financial integration remain a reality, they are unlikely to offset those benefits, the study noted.
"If this interpretation is correct, the push for economic union should be strong enough to overcome any remaining impediments."
After two days of talks in Oman last year, the GCC central bank governors agreed on a deadline in 2005 to bridge the gap in their economic and fiscal systems before setting off towards the historic monetary union in 2010.
Officials said the agreement covered common standards for economic and fiscal performance in the 22-year-old Gulf group, including a maximum level of the budget and current account deficit, public debt, interest rates, and inflation.
In the EU monetary union, the public debt in any member state must not exceed 60 percent of the GDP while the budget deficit should be kept under control to avoid monetary intervention and subsequently, pressure on the currency.
Although they have sought to align their economic policies over the past years, a large gap still exists among members, mainly in public debt and budget deficits.
For example, Saudi Arabia's public debt of around 700 billion Saudi riyals ($186 billion) at the end of 2002 was almost equivalent to its GDP while the ratio has remained negligible in the UAE as it rarely resorts to domestic borrowing to finance budget shortfalls given its massive ove
Another problem is that some members, namely Saudi Arabia, has failed to control its budget deficit in most years given its heavy reliance on crude sales and its reluctance to cut spending and risk economic or social upheavals.
The six members, with a combined GDP of more than $300 billion in 2002, have already agreed on aligning their exchange rates by pegging their currencies to the US dollar, the official price of their crude oil sales. Kuwait, whose dinar is the only GCC currency that is linked to a basket of currencies instead of the dollar, has announced it would end that link in line with the agreement.
Strict rules
"The system would likely impose strict budgetary rules and constraints because an excessive fiscal deficit in one individual member country could undermine exchange rate stability throughout the while currency area," Looney said.
He said Saudi Arabia, for instance, might find that it could not expand expenditures during a recession to the extent it might prefer, because of the adverse effect it might have on, say, Bahrain and Oman.
"In short, as the EU countries have found, a common currency requires fairly close economic similarities among the member states? this uniformity does not really exist in the GCC?. the question here is that: are the differences between Saudi Arabia, and, say, Bahrain so great that a common set of macro-economic constraints on both countries might not be in their economic interests?"
The flip side
Benefits from union will come at a price- Loss of national sovereignty stemming from the relinquishing of independent control over domestic monetary, fiscal and exchange rate policy.
- The psychological cost of not having your own currency.
- Possible net loss in income due to lack of ability to pursue expansionary monetary and fiscal policy during periods of falling oil prices.
- Arbitrary restrictions on national budgetary policies.
Gulf News
