READINESS OF GCC MEMBER STATES FOR CURRENCY UNION Policies and arrangements have a long way to go, while political factors seem to be a topic with mixed emotions. On the whole, there seems to be a commitment by GCC member states to achieve a union, however there is reluctance in some political matters.
READINESS OF GCC MEMBER STATES FOR CURRENCY UNION
Supervisor: Jean-Yves Pitarakis
Master Dissertation
Sultan Alshammari
23648546
Economic Department
Social Science School
Southampton University
1
Contents
Introduction ............................................................................................pg 4
Economic over view of GCC...................................................................... pg 6
Benefits and Cost of Gulf Currency Union ...............................................pg 10
Optimum Currency Area (OCA): Definition and Criteria ..........................pg 12
GCC Countries and the Optimality Criteria for OCA................................. pg 12
- Openness............................................................................................. pg 13
- Factor mobility..................................................................................... pg14
- Product diversification......................................................................... pg14
Similarity of Production Structure ..........................................................pg14
Price and Wage Flexibility ......................................................................pg 15
Degree of Policy Integration ..................................................................pg 15
Political factors..................................................................................... pg 15
GCC Countries and the Optimality Criteria for OCA (analysis)................pg 15
Results...................................................................................................pg 30
Conclusion ............................................................................................pg31
Bibliography......................................................................................... pg 33
2
Abstract
In 1981 Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab
Emirates (UAE) Formed the Gulf Corporation Council (GCC); one of the
objectives is to cooperate to achieve better economic conditions in GCC
member states. Under the umbrella of United Economic Agreement of 1981, a
quest toward a single unified currency was started, 2010 is the target year but
the target has been changed to 2014. Much has been achieved to reach that
goal and much have still to be done. One thing for certain is for the GCC, strong
political commitment, high degree of economic coordination and a strong will
to go forgo a substantial portion of nation sovereignty are all needed for the
currency union to see the light in 2014. This paper looks at GCC as an Optimum
Currency Area (OCA), looking at the criteria of an OCA; it looks that a Currency
Union will not to be by 2014
Key words: Gulf Cooperation Council (GCC), Currency Union, Oil,
Optimum Currency Area (OCA).
3
1. Introduction
The countries within the Arab Gulf Region, namely, Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab Emirates, had ratified the
charter establishing the Cooperation Council, for the Arab States of the Gulf
(GCC countries hereafter).The latter took place in the year 1981 (21st May), and
a secondary Supreme Council meeting was held in November 1981. The GCC
leaders had adopted an Economic Agreement (EA) which set the stage for a full
economic integration. The agreement had set out broad lines for the
realization of coordination, integration and cooperation in various aspects of
economic affairs. The Council had taken the necessary steps toward realizing
the different stages of a full economic integration. Most importantly,
important steps such as a free trade area, customs union, common market and
economic union. The intensification of cooperation in the relevant areas had
been achieved through the formation of various specialized committees. The
goal for these committees was to implement the guidelines of the main
constituent bodies of the GCC (the Supreme Council, Ministerial Council and
the Secretariat General).
As a first step towards economic integration among the countries of the
region, a free Trade Zone was established in 1983. A decision to move ahead
with the next phase of integration, through the establishment of a Customs
4
Union, came at the Riyadh Summit of the Leaders of GCC countries in 1999. A
timetable was approved to establish a Customs Union by the year 2005.
The Bahrain summit which was held in the year 2000 already consisted of GCC
leaders agreeing to adopt a common peg for the different currencies of the
member states. This was seen as a preliminary step towards adopting a single
currency and was considered a cornerstone for achieving full economic
integration.
The previous GCC summit set out on 30th December 2001 in Muscat,
discussed that the six countries had agreed to a form a coalition with regards
to joint customs. Their outlook was to have a tariff of five percent by the year
2003 – two years earlier than what they had originally had anticipated. In
addition all six countries decided to vote for a single currency to be established
by the year 2010 or 2014. Furthermore, the American dollar was to be used as
an example for the transitional stages of their plans in establishing a single
currency and using is as a common peg for their currencies before the end of
the year 2002.
In order for the GCC countries to strive towards monetary integration
and a common currency, the common belief amongst all the countries involved
was that GCC the complete integration of product and factor markets requires
the elimination of the transaction costs. Furthermore, this meant that
uncertainties associated with the existence of separate currencies would need
to be observed. However, the value of establishing a common currency had
been traditionally tested against several benchmarks – these were established
by the theory of Optimum Currency Areas (OCA) and developed by Mundell
(1961), McKinnon (1963) and Kenen (1969). Many refinements of the theory of
OCA and the development of more sophisticated and formal verification of
5
Currency Union (CU) experiences have enabled a deeper analysis and
evaluation of such experiences.
This paper will discuss readiness of GCC member states for currency
union. Section two will provide an overview of economic conditions of GCC
member states. Section three discusses the benefits and costs for currency
union. Section four looks at methodology that is optimum currency area and
criteria of currency union. Section five will analyse these criteria in the GCC
member states. Final section will discuss the results of analysis.
2. Economic over view of GCC
The GCC countries are significantly different in terms of population and
in terms of Gross Domestic Product (GDP). Saudi Arabia is the greatest of the
six countries that comprises about 26.680 million inhabitants - this is about
two thirds of GCC’s total population, with a nominal GDP of about 475.987
billion, which is around half of total GDP of GCC member states. The second
greatest country, both in terms of population and nominal GDP is UAE (United
Arab Emirates). The latter consists of 5.207 inhabitants and a nominal GDP of
around 255.082 billion, the UAE has a share of around a quarter of total GDP of
GCC countries. Kuwait comprises about 3.678 million inhabitants, with GDP of
127.803 billion. In addition, Oman has 3.803 inhabitants and has around
58.999 billion of the nominal GDP. Furthermore, Qatar and Bahrain have
6
population of 1.768 and 1.129 million respectively, they have a GDP of 157.919
and 24.384 billion respectively [1].
population in million (total : 42.256 million
Saudi Arabia
UAE
Kuwait
Oman
Qatar
Bahrain
Source: IMF (Note: Data are for 2011)
GDP in USD billion ( total :USD 1.099 billion
Saudi Arabia
UAE
Kuwait
Oman
Qatar
Bahrain
Source: IMF (Note: Data are for 2011)
In recent economic research, Sturm et al., 2008, has shown that the oil
sector in most GCC countries is almost completely dominant while real GDP
growth of GCC countries has been buoyant, with non-oil sectors expanding
faster than oil GDP. Moreover, they hold about 40% of global oil reserves, and
they own about 23% of the global natural gas reserves. Qatar has a share of
7
14% of global natural gas, Saudi Arabia and UAE account for another7.2%.
Bahrain, Kuwait and Oman together have a share of less than 2%.
Therefore, the GCC countries play a crucial role in global energy market.
Furthermore, they are being an integral part of international policy debates on
global challenges. In addition, their role enhances in the global economy as
investors and trade partners with other countries. The GCC countries’ share in
world trade rose to 2.7% in 2006. The total exports good at the end of 1900s
were 110 billion USD and rose to 422 billion USD in 2006. Imports of GCC
countries were 82 billion USD at the end of 1900s and reached to 238 USD in
2006, (Sturm et al., 2008).
Table 1, demonstrates that in 2006, the major trade partners of GCC are
Asia and other countries in terms of exporting. With regards to importing, the
major trade partners are EU, Asia (except Japan) and the USA which hold more
than 10% for import trading.
Table 1: trade partners of GCC (exports and imports) 2006
Trade
partner
EU Other
Asia
Japan USA Other
GCC
Other
EXPORT 10% 33% 21% 9% 5% 19%
IMPORT 31% 25% 7% 11% 7% 15%
Source: IMF Direction of Trade Statistics 2006
According to Sturm et al., 2008, the GCC member states are trying to
move towards economic diversification. There are many different ways and
directions in which this is trying to be achieved, especially with the UAE and
Bahrain who are attempting to be more advanced in processes than others.
The latter is due to the fact that in some countries of GCC, oil /gas reserves are
8
diminishing relatively quickly for the foreseeable future relatively; however,
diversification of production is a big challenge. There is cause for concern,
especially for Bahrain and Oman which have the lowest production of oil and
gas; estimates predict that they will run out of oil and gas within 20 years. On
the other hand, other members of GCC have a long way for reserves to run
out. In addition, in a recent study (Alawadi, 2006), diversification is important
even to countries having high reserves of oil and gas - this due to the fact that
more diversification would ease the ever increasing value of oil /gas prices.
However, lack of diversification can lead to economic integration between GCC
members much more difficult. This is because the structure of their economics
would be less similar. Privatization is a big challenge for GCC members because
the non- oil sectors within these countries remain largely driven by
government expenditure (Sturm et al., 2008). The latter can be combated by
privatization, as it would help on reducing government expenditure and
integrating the growing national force on the private sector.
Although articles eight and nine of the Unified Economic Agreement
have allowed free movement of capital between GCC countries, intra- GCC
investment remains low due to restrictions on types of ownerships and
different financial regulations across GCC countries. (laabas and limam, 2002)
In addition, financial markets in GCC countries are underdeveloped; this is the
case for bond markets especially. Sturm et al., (2008) argues that oil- exporting
countries in general and GCC countries in particular, play a crucial role in
financial markets and they are alleged to exert some effects on asset prices
especially on the US long –term interest rate, emerging market yields and US
dollar exchange rate. However, there are no empirical studies which
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successfully are able to identify a significant impact for oil revenue investment
- this is due to data constraints. Therefore, the GCC members have effects on
global financial stability and this is expected to be positive move for them as
these GCC countries contribute to diversifying the global investor base and
their assets allocations.
3. Benefits and Cost of Gulf Currency Union:
Eliminating national currencies of GCC member states and moving to
one common currency can be expected to bring in benefits in terms of
economic efficiency. These benefits are mostly effective at a microeconomic
level; however, adoption of a single currency might inflict some costs on
member states. This section will discuss the significant benefits of adopting a
single currency in the GCC region. Furthermore, observations on the most
significant costs of currency union on GCC member states will also be
discussed.
The most significant benefit of currency union is that there is the
possibility of direct gains from the elimination of transaction costs. These
transaction costs can be seen whenever we exchange currency. According to
Drauwe, P.D. (2000, p 58), these costs disappear when moving to a single
currency, and the transaction costs that are involved in exchanging money are
deadweight loss. By eliminating the transaction costs by adopting a single
currency, effects such as high output and consumption gains can possibly take
place. (Alkholifey, A. and Alreshan, A. 2008)
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In addition, the elimination of transaction costs will have indirect gains;
this can help to reduce the scope for price discrimination between national
markets. For example, these transaction costs exist when the consumer
purchases goods from other countries - if these transaction costs did not exist,
the consumer would not hesitate to buy goods in the countries where they are
cheap. (Drauwe, P.D. 2000, p 58)
Subsequently, having a common currency facilitates and increases intra-
regional trade between members. Furthermore, currency union allows
exchange rates to be fixed, so that it helps to reduce uncertainty of exchange
rates and minimize uncertainty in trade and investment (laabas and limam,
2002).
Whereas the benefits of a common currency are situated at the
microeconomic level, the costs have much to do with the macroeconomic
management. The cost of relinquishing one’s national currency lies in the fact
that a country loses independence in monetary and exchange rates policy.
Therefore, that country cannot change its exchange rate any more to attempt
to correct itself for differential developments, in cost or in prices. (Alawadi,
2006).
Moreover, according to Laabas and Limam, 2002, the countries which
join in one common currency are at a disadvantage as they lose the use of
monetary policy instruments used in the stabilization of output, employment
and inflation. Besides, countries lose seignior age as a method of financing
government expenditure after adopting a single currency, where the monetary
policy would be conducted according to overall economic conditions of all
members (Laabas and Limam, 2002).
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To sum up, currency union of GCC member states do have advantages as
well as disadvantages. The advantages can be seen at a microeconomic level,
where elimination of transaction costs (direct or indirect), allowing exchange
rates to be fixed and reducing uncertainty are all beneficial. However,
disadvantages of a common currency occur at the macroeconomic level and
this involves the loss of independence in exchange rates, loss of use of
monetary policy instruments and loss of seigniorage. Therefore, countries
must weigh the benefits and costs when thinking of joining a currency union.
4. Optimum Currency Area (OCA): Definition and Criteria (methodology)
Firstly, it is very important to clarify some concepts often used in the
literature of optimum currency area (OCA). OCA is “the geographic area in
which a single currency would create the greatest economic benefit. While
traditionally each country has maintained its own separate currency, work by
Robert Mundell in the 1960s theorizes that this may not be the most efficient
economic arrangement. In particular, countries which share strong economic
ties may benefit from a common currency. This allows for closer integration of
capital markets and facilitates trade. However, a common currency results in a
loss of each country's ability to direct fiscal and monetary policy interventions,
to stabilize their economies. Thus, optimum currency area can be mentioned
by OCA and Currency Union (CU) as it involves monetary integration, a single
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currency and a common central bank which controls pool of foreign exchange
reserves and administrating monetary policy for union. An OCA allows
exchange rates (ER) to be fixed and therefore reduces ER uncertainty. In the
present paper, we assume that GCC member states are trying to achieve
currency union (CU) by the year 2014.
A question that comes to mind is that is a country an optimal currency
area? The answer is no, there are some criteria or conditions that must be
fulfilled in order to achieve a successful currency union. According to Laabas
and Limam (2002), these criteria or conditions, which are called OCA Criteria or
OCA factors, are:
I. Openness: openness is determined by the ratio of trade (exports +
imports of goods) to GDP, and it is defined by McKinnon (1963) as the
ratio of tradable to non-tradable. If a small country depends on
international trade, it is more likely to be affected by exchange rate
fluctuation and uncertainty because a large number of goods are
tradable. In the case of a small open-economy, McKinnon (1969)
basically argues, that the exchange rate is not an appropriate instrument
of macroeconomic policy. It is ineffective in correcting external
imbalances, as it endangers the stability of the price level. In addition,
according to McKinnon (1969), flexible exchange rates become less
effective. This is because of the attempt to correct the trade balance in
the case of a highly open economy. Ishiyama (1975), states that the ER is
not an effective tool, given that the inelastic demand for imports is
13
extremely small for an open economy. Therefore, it is easier for a small
open economy to enter into a currency union (UC). [2]
II. Factor Mobility: factor mobility is the degree to which a factor
production (labour or capital) is able to move, either among industries or
among countries, in response to differences in its factor price. [3]
In the case of a shock, if the two countries are highly integrated in the
sense that labour and capital can freely move from one country to
another, there will be lesser need for the country affected by the shock
to use the ER as a corrective tool, therefore factor mobility plays the role
of a substitute to ER. Mundell (1961), stresses that a high degree of
factor mobility indicates the optimum currency area and it is important
to distinguish between capital and labour mobility. Capital flows are
crucial for optimum currency area and can play a vital role in balance for
payment adjustment, (Ingram, 1959). Labour mobility according to
Corden, 1972, is generally low and it is not desirable. Therefore,
countries with high mobile factor of production are more likely to be
candidates for currency union.
III. Product diversification: this is where the diversity in a nation's product
mixes and the number of single-product regions contained in a single
country, may be more relevant than labour mobility (Kenen, 1967). A
country which consists of a diversified economy has a good chance to be
immune to an economic downfall. Therefore it does not use the ER to
hedge from the shocks. Thus, countries with diversified economies are
better candidates for UC.
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IV. Similarity of Production Structure: if countries share common
production structure, they are more likely to experience symmetric
shocks and to exhibit high co variation in economic activities. In addition,
they are less likely to use their exchange rates as adjustment tools. Thus,
these countries are better candidates for CU.
V. Price and Wage Flexibility: in the case of shock, the flexibility of prices
reduces as well as salaries being decreased, which result in a reduction
in the use of the exchange rate as an adjustment tool. Hence, countries
with flexible prices and wages are more inclined to engage into CU
arrangement.
VI. Degree of Policy Inflation Rates: similar inflation rates signal similarity in
structure and in the conduct of economic policies. This would be
desirable for countries that would like to coordinate their policies to
achieve the requirements of a UC.
VII. Degree of Policy Integration: the similarity of policy attitude is an
important indicator, as it allows for the potential success of policy
coordination that will be required to achieve full monetary integration.
VIII. Political factors: the success of CU would depend to a great deal on the
political will and resolve of the number of countries to achieve the aim
of CU. Experience has shown that political factors might be more
important than economic criteria.
5.GCC Countries and the Optimality Criteria for OCA (analysis)
15
The purpose of this section is to verify whether the previous criteria qualify the
GCC countries for OCA.
1. Openness:
Openness of country is basically determined by the ratio of trade to
Gross Domestic Product (GDP) that equals (exports + imports)/GDP*100.
Table 1, gives the openness measures for GCC countries and shows that
GCC member states are considered among the most open economies in
the Arab region. Furthermore, it is clear to observe that the ratio varies
from one country to other. High ratios observed for GCC members,
indicates that the members of GCC produce competitive products rather
than complementary products, because they are primarily oil exporting
countries. This fact is a reasonable cause that explains why they look for
markets outside the GCC rather than trade among themselves. It also
reflects the heavy reliance of GCC member states on imported consumer
and capital goods, due to the limited availability of domestic substitutes.
Therefore, these results combined; state that exchange rate (EX) is less
effective as a tool to improve competitiveness among sectors.
Therefore, the latter results in GCC member states having the most open
economies comparing with other Arab states.
Table 1: Openness of GCC Countries (2001- 2008)
Year BAHRAIN KUWAIT OMAN QATAR SAUDI UAE
2001 142 87 93 95 64 134
2002 148 82 77 88 65 137
16
2003 146 86 83 90 70 144
2004 165 89 91 92 73 166
2005 176 92 90 100 89 164
2006 172 90 89 99 95 159
2007 162 91 86 90 103 151
2008 171 92 97 82 105 ------*
Average(2001-08) 160.25 88.652 88.25 92 83.75 150.71
Source: World Bank, World Development Indicators 2011
2. Factor Mobility:
Concerning factor mobility, articles eight and nine of the Unified
Economic Agreement, November (1981), {1} between the GCC member
states indicates that members of GCC countries, shall cooperate among
themselves for coordinating their commercial policies and relations with
different states. Moreover, these articles have permitted for the free
movement of the individuals and the capital across GCC member states
and further goes on to state that they are allowed to practice business
and trade. In reality, although articles eight and nine stipulate very clear
procedures for facilitating mobility of individuals and capital across GCC
member states, the factor mobility cannot be considered as an
alternative adjustment mechanism to the exchange rates (ER). Kuwait,
Oman, Saudi Arabia and UAE considered that the percentage of
immigrant workers are too high and would like these numbers to be
lowered; Bahrain and Qatar considered it to be satisfactory (UN, 2004).
In GCC countries the number of non - nationals within the GCC countries
17
accounted for about 34% of the population and actually constituted
about 70% of the work force - 95% of these non - nationals that were in
employment were working within the private sector. (Alawadhi,A. 2006).
Table 2, gives a brief overview of the population and labour force in GCC.
Table 2: Population and Labour force 2004
Population Labour force
Country Total Expatriates% Total Expatriates%
BAHRAIN 652 40 272 61.9
Kuwait 2,645 64.3 1,551 81.3
Oman 2,442 22.7 859 64.3
Qatar 580 73.7 120 81.6
Saudi Arabia 20,279 25.4 7,176 55.8
UAE 2,890 75.7 1,356 89.8
TOTAL 29,322 34.9 11,103 About 70.0
Source: Shah, Nasra, Restrictive Labour Immigration Policies in the Oil –Rich Gulf
“United Nations May 2006
There are restrictions on ownership and limited types of activities
exercised by nationals of GCC member states. Furthermore, there are
differences in rules of labour market and differences in conditions of
institutions among GCC member states, but there is no restriction on
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movement of capital either in or out of GCC member states. Table 3
shows some law concerning FDI in GCC countries.
There have been some reforms recently in GCC member states.
The first reform is to permit nationals of GCC to own land with
restriction, this may vary from one member of GCC to another member.
The second reform is to grant equal investment treatment for GCC
investors in selected fields, yet capital mobility is still low, although it
might be more mobile than labour. Table 4 gives some recent reforms in
GCC member states in financial / investment sector. Table 5 and 6 shows
some indication of low capital mobility across GCC member states.
Therefore, factor mobility is considered as an unfavourable element for
enhancing the currency union of GCC.
Table 3: FDI Regulation in GCC member states
Regulation Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Limitations on the share of foreign investor
Nationals have majority share in selected Industries. Offshore
banks can have 100% share
Nationals have to hold 51% in selected activities ; foreigners can
have more than 51% with special approval
Foreigners can have up to 100% only in selected
projects
Nationals have to hold 51% of the shares in JVs.
Foreign investors can have up to 100% in selected sectors
Foreign investors can have up to 100% share in
many sectors; a negative
list will include sectors prohibited
for FDI.
In free zones foreigners can have 100% shares as
well as in some projects.
Generally nationals should hold 51% or
more Of the shares.
Managemen
t No
governmen t
regulations
No
governmen t
regulations
No
governmen t
regulations
No
governmen t
regulations
The general
manager must
be national
No
government regulations
19
Local
Content
No regulations but local value-added should not be less than 40% to enjoy
100% tax exemption. Repatriatio n
Foreign investors in all GCC countries can remit abroad all profits as well as all funds received
Foreign Investment Law
Legislative Decree No13
of 1991
Law No.15 of 1990 and
No.68 of 1980
Royal decree No. 104/94
Foreign Investment Law
Foreign Investmen t
Law No.13 of 2000
Foreign Investmen t
Law of April 2000
Commercial Companies Law,
Federal law 8, 1984 and amendment s JAFZA Dubai Law 9, 1992
Legal
System
In all the GCC states, the Sharia Islamic Law) constitute the prime law.
However, most of the laws relevant to foreign investment are contained in legislation enacted by the legislative authority. Most of this legislation is based on the European models, often French, Patterned after the Egyptian
legislation. Sharia principles are generally applied only in matters affecting the personal status of Muslims. The GCC states introduced judicial and legal system to deal with business disputes outside the Sharia court system.
Source: Mekkahi, K. Guermat, G. and Albortamani, H. 2003
Table 4 A: Recent Reforms in Financial sector
Country Key structural reforms
Bahrain Issued the first Islamic government bills to complement the working of the Islamic
financial institutions; took steps toward improving prudential regulations for Islamic
banking; ratified anti-money laundering legislation in 2001; and enforced Bahrain
Stock Exchange rules and regulations.
Kuwait Adopted a foreign investment law allowing foreigners to own and trade shares of
joint-stock companies listed on the Kuwait Stock Exchange, subject to specific limits.
Oman Expanded repossession facilities to the interbank market; implemented a capital
market law to restructure the Muscat Securities Market into three separate bodies
dealing with regulations, trading and exchange, and depository registration; and
20
adopted a new banking law in 2000. The central bank has reactivated the issuance of
certificates of deposits to manage liquidity, and implemented measures to reduce
the risk of over-lending to individuals, corporations, and their related parties. Oman
has taken steps toward full compliance with the Financial Action Task Force (FATF)
recommendations on money laundering and combating the financing of terrorism.
The central bank is also strengthening risk-management assessment.
Qatar Removed interest ceilings on local currency deposits in February 2001; strengthened
bank supervision, resulting in tightening of nonperforming loan criteria; and
introduced a new scheme to enhance liquidity management. Under this scheme,
commercial banks can deposit their excess liquidity with, or borrow from, the central
bank at rates determined by the central bank, which are fixed on a daily basis.
Saudi Arabia Allowed foreigners to trade on the stock market through open-ended mutual funds
and approved a new capital markets law to deepen the financial markets and
strengthen the stock market. Enforced recommendations in line with FATF guidelines
relating to the prevention of money laundering
UAE Established the National Human Resource Development and Employment Authority
to help improve skills of U.A.E nationals looking for jobs; and established a national
labour market database to facilitate nationals' job searches.
Source: Ugo Fasano and Zubair Iqbal, IMF 2003
Table 4 B: Recent Reforms in Direct foreign Investment sector
Country Key structural reforms
Bahrain Eased rules on non-GCC firms to own buildings and lease land; established a one-stop
shop to facilitate licensing procedures; and permitted foreign ownership to increase
from 49 to 100 present of businesses in all but a few strategic sectors (e.g., oil and
aluminium).
Kuwait Passed a law allowing foreigners to own 100 percent of Kuwaiti companies and
reduced corporate taxes from 55 percent to 25 percent. Established Foreign
Investment Capital Office to process foreign direct investment applications.
Oman Allowed 100 percent foreign ownership of companies in most sectors; reduced
income tax disparity between Omani and foreign companies by raising the single rate
21
for the former from 7.5 percent to 12 percent and lowering the rates for the latter
from 15–50 percent to 5–30 percent; redefined "foreign" company as one with more
than 70 percent foreign ownership instead of currently 49 percent; and allowed
foreign, non-GCC, firms to own buildings and lease land. Opening up the service
sector to full foreign ownership in line with WTO agreements, starting in 2003 with
the information technology sector.
Qatar Allowed 100 percent foreign ownership in agriculture, industry, health, education,
and tourism sectors, and streamlined investment approval procedures. Reduced
maximum corporate tax from 35 percent to 30 percent.
Saudi Arabia Enacted a new Investment Law and established the associated investment authority
(SAGIA) to facilitate foreign direct investment processing, including the
establishment of a one-stop shop. Allowed for 100 percent foreign ownership of
business in most sectors, including gas, power generation, water desalination, and
petrochemicals. Cut the highest corporate income tax on foreign investment from 45
percent to 30 percent. Permitted non-Saudis to own real estate for their business or
residence, except in the two holy cities.
UAE Launched several new free trade zones intended to establish the emirate as a global
centre for trade in gold bullion, research and development of technology, and
financial activities. Relaxed restrictions for foreign investment in specific real estate
projects.
Source: Ugo Fasano and Zubair Iqbal, IMF 2003
Table 4 C : Recent Reforms in Labor Markets
Country Key structural reforms
Bahrain Recently developed a new National Employment Strategy that includes providing fiscal
subsidies for training nationals in the private sector and financial aid for the
unemployed. Introduced measures to improve general education standards, and
vocational and technical training programs, and increased employment quota of
Bahrainis in small and medium-sized companies while abolishing the "free visa" system
to expatriate labour force.
Kuwait Established Manpower and Government Restructuring Program (MGRP) in July 2001 to
implement the labour law, provide unemployment benefits to unemployed Kuwaiti
nationals, and provide training and facilitate employment of Kuwaiti nationals in the
22
private sector. Approved, in September 2002, quotas for the proportion of Kuwaitis
those private companies must employ; companies that fail to meet this target would
be subject to a fine and sanctions such as exclusion from bidding for government
contracts.
Oman Introduced measures to improve vocational and technical training programs, and set a
uniform minimum wage for Omanis at RO 100 (plus RO 20 as transportation
allowance) instead of the previous two-tiered (skilled/unskilled) minimum wage. The
authorities are also modernizing the educational system at all levels. A new ministry of
manpower was created in 2002 and a new labour law adopted in May 2003.
Qatar Formally ended the policy of automatic employment for Qatari graduates. Now assists
job seekers by maintaining information on job openings and by counselling and
training. Established a department in the ministry of civil service with responsibility for
this function.
Saudi Arabia Created the Human Resources Development Fund (HRDF)—with financial participation
of the private sector—to provide training of Saudi labour force in skills required by the
private sector, and development of a database for matching and placement of Saudi
workers in the private sector.
UAE Established the National Human Resource Development and Employment Authority to
help improve skills of U.A.E nationals looking for jobs; and established a national
labour market database to facilitate nationals' job searches.
Source: Ugo Fasano and Zubair Iqbal, IMF 2003
Table 5: Economic Activity Licenses given to other GCC citizens
Country 1992 1995 1998 2001
Bahrain 233 206 260 220
Kuwait 372 649 770 983
Oman 107 91 159 244
Qatar 208 274 261 303
Saudi Arabia 740 786 936 960
UAE 2531 2754 3384 3384
23
Total 4191 4760 5770 6094
Source: GCC Secretariat General: Achievements in Figure 2011
Table 6: Other GCC Citizens Real estate ownership
Citizenship/country Bahrain Kuwait Oman Qatar KSA UAE Total
Bahraini ------ 35 40 105 79 841 1100
Kuwaiti 4733 ------ 565 71 2129 8857 16355
Omani 70 3 ------ 27 70 969 1095
Qatari 116 16 17 ------- 43 1164 1356
Saudi 2077 1578 18 92 ------- 1088 4853
Emirati 139 37 1096 93 39 ------- 1404
Total 7135 1669 1736 388 2316 12919 26163
Source: GCC Secretariat General: Achievements in Figure 2011
3. Product diversification:
Although the GCC member states have recently tried to diversify their
economies, GCC member states still mainly depend on oil /gas. The oil
business represents more than 80% of exports and income revenues in GCC
member states (Alkhadhari, A.2010). Table 7 shows that Hirschman export
concentration index {1} for GCC countries where a value of index closer to
zero. This means more export diversification and vice versa. It is clear to see
that the GCC member states have higher level of export concentration.
Therefore these countries are limited to diversification and higher
vulnerability of GCC countries to external shocks. Most GCC member states
24
have improved since 1995, yet they are very far from the world average.
Therefore, this puts GCC member states economies subjects to risks from
oil price fluctuation.
Table 7: Export Concentration Indices for GCC counties
Year Bahrain Kuwait Oman Qatar KSA UAE World
1995 0.479 0.94 0.765 0.642 0.736 0.479 .0134
2000 0.531 0.634 0.792 0.591 0.786 0.573 0.164
2001 0.656 0.635 0.681 0.626 0.75 0.494 0.155
2002 0.678 0.635 0.655 0.55 0.855 0.494 0.157
2003 0.7 0.635 0.672 0.588 0.737 0.494 0.158
Source: UNTCAD, 2011
4. Similarity of Production Structure
It is seen that GCC countries have the same production structure where
oil is the major product. Non-oil products are limited and dominated by
financial and business services that completely depend on the
performance of the oil sector. Looking at table 8, it is clear to see that
production structures are very similar in GCC member states. The similar
structures could be in favour of GCC member states in the case of a
symmetric shock that would call for common policy reaction among
countries (Laabas and Limam, 2002). Although owing to different ways
of diversification in each country of GCC member states, this may cause
a policy reaction problem among GCC countries (Sturm and Siegfried,
2005).
If we exclude oil from these discussions as shown in table 9, it can
be seen clearly that production structures are different except for the
large share of government services that are in place across the GCC
25
member states. Other than government services, production structure
differs, which in Bahrain the concentration is on finance, in Kuwait,
Qatar, UAE and Saudi Arabia it is manufacturing and in Oman it is
wholesale /hotels and manufacturing. This shows the different
diversification ways that demonstrate low coordination and might
reflect a problem especially for Oman and Bahrain. Moreover, this
leaves GCC member states exposed to asymmetric shocks in the future
as oil dependence decreases. Table 8: Sectoral Composition of GDP (%)
Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Activity/year 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003
Agriculture 0.7% 0.6% 0.6% 0.5% 2.1% 2.0% 0.3% 0.3% 5.1& 4.5% 3.5% 2.8%
Petroleum &
Mining 24.7% 25.2% 41.2% 46.6% 41.9% 41.4% 56.8% 57.6% 33.5% 36.6% 27.8% 28.9%
Manufacturin
g 11.8% 11.2% 7.0% 7.2% 11.1% 12.1% 7.1% 6.9% 10.3% 10.7% 13.9% 13.0&
Electrical Gas
& water 1.4% 1.4% 2.6% 2.4% 1.0% 1.3% 1.3% 1.35 1.3% 1.2% 2.0% 1.8%
Construction 4.2% 3.8% 2.5% 2.3% 2.1% 2.3% 5.0% 4.8% 6.3% 5.8% 6.8% 8.0%
Wholesale & Retail , Hotels
11.2% 10.2% 7.1% 6.4% 12.6% 12.6% 5.4% 5.4% 7.3% 6.7% 11.5% 12.9
Transport,
common 7.8% 7.3% 5.8% 5.1% 6.9% 6.9% 3.5% 3.4% 4.5% 4.13% 8.3% 7.6%
Finance & insurance
17.6% 19.7% 6.8% 6.1% 4.1% 4.1% 4.6% 4.5% 5.2% 5.0% 4.4% 4.1%
Real Estate Services
9.5% 8.9% 6.3% 5.5% 5.7% 5.4% 3.3% 3.2% 6.4% 5.7% 7.7% 7.8%
Gov’t Services 16.0% 15.4% 23.8% 21.6% 16.3% 16.3% 13.3% 12.9% 17.6% 17.4% 10.8% 9.4%
Other Services -4.9% -3.7% -3.7% -3.7% 1.6% 1.5% -0.6% -0.4% 1.3% 1.2% 2.4% 2.6%
GDP at Cost
price 96.6% 97.4% ----- ----- 99.2% 99.2% ----- ------ 99.0% 99.0% 99.2% 99.0%
GDP at
Market Price 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: computed by author using GCC statistical bulletin 2004
26
Table 9: Sectoral Composition after excluding petroleum and mining
Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Activity/year 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003
Agriculture 0.009 0.008 0.010 0.009 0.036 0.034 0.007 0.007 0.077 0.071 0.048 .0039
Manufacturing 0.157 0.150 0.119 0.135 0.191 0.206 0.164 0.163 0.155 0.169 0.193 0.183
Electrical Gas
& water 0.019 0.019 0.044 0.045 0.017 0.022 0.030 0.031 0.020 0.019 0.028 0.025
Construction 0.056 0.051 0.043 0.043 0.036 0.039 0.116 0.113 0.095 0.091 0.094 0.113
Wholesale &
Retail , Hotels 0.149 0.136 0.121 0.120 0.217 0.215 0.125 0.127 0.110 0.106 0.159 0.181
Transport,
common 0.104 0.098 0.099 0.096 0.119 0.118 0.081 0.080 0.068 0.065 0.115 0.107
Finance &
insurance 0.234 0.263 0.116 0.114 0.071 0.070 0.106 0.106 0.078 0.079 0.061 0.058
Real Estate Services
0.126 0.119 0.107 0.103 0.098 0.092 0.076 0.075 0.096 0.090 0.107 0.110
Gov’t Services 0.212 0.206 0.405 0.404 0.281 0.278 0.308 0.304 0.265 0.274 0.150 0.132
Other Services -0.065 - 0.046
-0.063 -0.069 0.028 0.026 -0.014 -0.009 0.020 0.019 0.033 0.037
Source: computed by author using GCC statistical bulletin 2004
27
5. Price and Wage Flexibility:
Prices and wages do not adjust systematically to accommodate frequent
oil shocks (Laabas and Limam, 2002). This therefore makes prices and
wages non-eligible. This is because of an alternative adjustment
mechanism in case of a shock limiting the tools of adjustment for the
economies of GCC member states. One reason might be due to high
national employment in the public sector with above market prices and
great difficulties to vary wages in the case of crisis. Because the
government sector dominates production and the private sector in GCC
member states offers internationally competitive wages to non-
nationals and as a result gives rise to inflexible wages. For prices the
reasons where there are fixed exchange rates and government
subsidies, is in different areas such as utilities, food stuffs and some
agricultural products.
6. Degree of Policy Inflation Rates:
The high degree of inflation convergence of the GCC member states at
low level of inflation over the past 20 years is remarkable (Alawadhi,
A.2006). The GCC member states therefore are not inflation prone
countries, however, inflation rates seem to be pro- cyclical, picking up at
periods of oil price hikes and deceasing during periods of oil price
slumps. The GCC member state’s choice of an external anchor for
monetary policy has obviously been credible and served them well in the
past to anchor inflation expectation. Furthermore, the latter has helped
to import monetary stability from the anchor economy. Therefore,
inflation rates of GCC member states are not high, and inflation
28
differentials among GCC countries reflect a difference in the
microeconomic determinants of inflation - notably, the presence of price
inertia.
7. Degree of Policy Integration:
All GCC member states are pegged to the US dollar. Many
attempts have been deployed by GCC member states to reinforce
commonalities. According to Sturm et al.(2008), monetary and structural
convergence are remarkable, whereas fiscal has yet a long way to go .
On general basic policy is integrated and adherent to the GCC economic
agreement, although when it comes to labour and investment
/ownership, policies are still rigid, however these policies have improved
recently.
8. Political factors:
Political factors might be the most significant factors for a currency
union in GCC member states. The agreements between the GCC member
states show that a strong commitment, with deadlines met for exchange
rate peg and the custom union. This, however, is not enough, yet the
members have not agreed on a supervisory institution at the supra-
national level, that would coordinate and conduct monetary policy. The
member states still exhibit land and marine border issue, some of them
have elected parliaments while others have appointed advisory councils,
free movement of nationals and national goods still examine rigidities in
the form of having to go through border security point. In general, it
seems that the GCC member states are still redundant to which extent
29
they are willing to forego national sovereignty in favour of common
interest.
6. Results
From the above it is clear to be seen that the GCC member states do not
satisfy all criteria for a currency union. They meet openness, Similarity of
Production Structure, similarity of inflation rates and degree of policy
integration. However, GCC member states fail to meet criterion of: factor
mobility, commodity diversification and price and wage flexibility; political
factors are good but not strong enough to assure stability of a currency
union.
OCA Criteria Favourable Unfavourable
Openness
Factor Mobility
Commodity Diversification
Production Structure
Price and Wage Flexibility
Similarity of Inflation
Rates
30
Degree of Policy
Integration
Political Factor
Conclusion
As we can see, the GCC member GCC member states have many
aspects which are alike; examples of these are the similarities between
their culture, history, backgrounds, economies, political, religion and
language. In 1981 the GCC was formed with an objective to use these
similarities towards the prosperity and welfare of GCC member states.
From the economic point of view, various steps were taken to create this
uniformity, the initiation to standardize the economic agreement along
with recent objectives of creating a monetary union and single currency
by 2014, re enforces this idea.
In order to achieve a single currency union by the year 2014, many
steps have been taken to achieve this objective, The fact that plans are
in place for pegging GCC currencies to the US dollar and creating a
custom union with lifting customs on national products shows the
success of objectives being met. Furthermore, other steps involving a
standard tariff on non-GCC commodities and producing a common
market has also been achieved. Consequently, it is evident that GCC
member states have shown the capability for a currency and monetary
31
union. With regards to future plans, the union should look to increase
intra-regional trade and investment among countries - this might help to
develop non- oil industries in countries and eliminate exchange rate risk
and transaction cost. GCC member states have gone a long way in the
case of monetary and structural arrangement, there seems to be a
convergence towards a currency union. However, Fiscal convergence,
policies and arrangements have a long way to go, while political factors
seem to be a topic with mixed emotions. On the whole, there seems to
be a commitment by GCC member states to achieve a union, however
there is reluctance in some political matters. Political matters such as
sovereignty seem to be a problem, as it can be seen at least from an
economic perspective, that there is the absence of an arrangement for a
supra- national institution, to conduct monetary policy. Furthermore,
this attributes to a lack of integration in conducting fiscal policy and the
different policies to diversify member economies. These areas of
limitations, especially in the political aspect must be dealt with
sufficiently in order for a currency union to be possible by 2014.
This paper has portrayed that GCC member states are unlikely to
complete the monetary union and adopt a single unified currency by the
year 2014.
32
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