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29 March 2024

Rifts threaten GCC monetary union

The other four members Saudi Arabia, Kuwait, Qatar and Bahrain decided early this year to go ahead with the scheme by creating a Gulf monetary council, the precursor to the GCC Central Bank, to be based in the Saudi capital Riyadh. (EB FILE)

Published
By Nadim Kawach

Persistent rifts among Gulf oil producers about their monetary and economic merger could discourage them from pursuing such plans and cause the collapse of the world’s second major currency union, the Saudi Chambers have said.

In a study published in the Gulf Kingdom newspapers Thursday, the Saudi Chambers’ Council (SCC) said Gulf Cooperation Council (GCC) countries should work for eliminating those rifts and closely watch the repercussions of the eurozone crisis to push ahead with their own currency union.

While the crisis is expected to have an adverse impact on the GCC economies, regional countries do not suffer from a large gap in their individual fiscal and economic systems as is the case in the European Union, SCC said.

“GCC countries are now called upon to benefit from the eurozone crisis in pursuing their own currency union plans and getting closer together since they have achieved substantial progress in fiscal convergence,” it said.

“These fiscal convergence requirements will guarantee economic and financial stability in the GCC currency zone…but the present circumstances require efforts by member states to tackle all differences about their monetary and economic integration process no matter how small and simple those differences are…the persistence of such divisions will only discourage member states and push them back to that situation where they would give priority to their own sovereignty and national interests at the expense of their collective interests…this means they could no longer be interested in integration.”

The report did not elaborate on those rifts but two GCC members UAE and Oman have quit the monetary union for different reasons.

The other four members Saudi Arabia, Kuwait, Qatar and Bahrain decided early this year to go ahead with the scheme by creating a Gulf monetary council, the precursor to the GCC Central Bank, to be based in the Saudi capital Riyadh.

GCC nations, which control over 40 per cent of the world’s recoverable oil deposits, have also reported obstacles in the enforcement of another landmark project, the customs union, because of differences on the distribution of foreign import tariff revenue and the persistence of border customs barriers.

“The eurozone crisis will negatively affect the GCC economies and this should prompt member states to deal with this crisis seriously right now,” SCC said.

“This is also because the crisis will increase doubts about the success of the planned GCC single currency since member countries have sought assistance from the EU and based their currency plan on the euro experience.”

The study noted that there is a difference between the GCC and the EU economic systems, adding that the Gulf currency union will be based on what it described as oil-reliant economies with “semi-stable” earnings.

“There is a gap in the economic systems within the GCC but not as big as that within the EU…the GCC currency union will represent an economy which is based on semi-stable and semi-guaranteed income albeit volatile…this factor will allow the GCC countries to face an EU-like crisis in the future,” it said.

“But it is important for the GCC nations to closely watch what is going on in the EU to derive lessons from the crisis and build their own merger on a strong base...they are now closer than ever to achieving full fiscal convergence required for a successful monetary union.”

In a recent comment, a major Saudi bank urged Gulf countries to keep an eye on Greece’s fiscal woes and how its partners in the European Union will tackle the problem so they will benefit from that experience in their monetary plan.

“The Gulf nations will have to watch EU crisis management techniques, which could have implications for its own beleaguered monetary union plan… the Gulf would look to assess the institutional mechanisms needed to support members who run into fiscal and liquidity problems,” Banque Saudi Fransi said.

BSF cautioned that Saudi Arabia, the world’s oil powerhouse, and its partners in the GCC should not be complacent towards that problem.

“Saudi Arabia and its Gulf neighbours will need to be vigilant in facing what is increasingly becoming clear is a fragile global recovery that is holding ground only on the grace of hefty state stimulus intervention... investors will continue to be anxious as they contend with Europe’s serious fiscal problems, poised to hit Middle Eastern countries with varying degrees of intensity,” it said.

“How well the EU defends its single currency and the success of efforts to fend off a global sovereign debt crisis that would drag the world back into recession will underpin policy responses in the coming months.”