A LOOK AT THE GCC CREATING THE LONG AWAITED COMMON CURRENCY COMMON CURRENCY. WELL HERE WE ARE AGAIN LOOKING AT THE GCC AND THE POSSIBILITY OF THE CREATION OF A COMMON CURRENCY. SO FOR STARTERS LETS LOOK AT WHO THE GCC IS ONCE AGAIN. GCC STANDS FOR GULF COMMUNITY COUNCIL AND IS MADE UP OF SAUDI ARABIA, QATAR, OMAN, BAHRAIN, UNITED ARAB EMIRATES AND KUWAIT.
THERE HAVE BEEN SO MANY WHITE PAPERS WRITTEN ON THIS TOPIC SPANNING DECADES AND NOW IT’S BACK AGAIN. THIS TIME THE TALK IS A BIT LOUDER AND BIT STRONGER.
THE EURO IS A COMMON CURRENCY AND IS USED WIDELY BY THE EUROPEAN UNION WHICH IS A COUPLING OF 28 COUNTRIES AND THE SUCCESS OF THAT PROJECT IS OFTEN CRITICIZED. SO WHY NOW DOES THE GCC WANT TO REVISIT THE COMMON CURRENCY TOPIC AGAIN?? HERE IS PAPER PUBLISHED IN THE BIS PUBLICATIONS THAT SHOWS THE PROS AND CONS OF A UNIFIED CURRENCY.
Costs and benefits of a monetary union
Adoption of a single currency brings in benefits and inflicts costs on member countries. In general benefits emanate from the following:
1.The elimination of transactions costs and accounting costs. Most of these costs are associated with bid-ask spreads and commissions on foreign exchange
transactions. For small and open economies with unsophisticated financial markets, direct savings in transactions after adopting a single currency are probably larger. Lowering transactions costs might lead to higher output and consumption gains.
2. A removal of foreign exchange risk, which is considered a major obstacle to trade and cross border lending. It is argued that trade in goods and services especially among small firms will be enhanced, which would tend to intensify competition and increase allocative efficiency (Kenen, 1996). Rose (2000) contends that there is a
large positive effect of a common currency on trade and that effect is much larger than the effect of reducing exchange rate volatility to zero, through an irrevocably
fixed exchange rate arrangement (P.18).
3. Creation of more transparent pricing system, which makes international price
4. Gaining more credible monetary policy by adopting the strongest exchange rate commitment (Frankel, 1999).
5. Monetary union arrangements are less susceptible to speculative attacks (Frankel,1999). On the other hand the costs of adopting a single currency, besides the costs of forming the union, are mainly relinquishing monetary autonomy. These costs are more likely to increase the more dissimilar shocks to member economies are. By the same token, costs tend to increase the lower the flexibility of factor markets, as this implies a difficulty of adjustment to shocks.
Previous Empirical Studies on GCC Monetary Union
A number of studies have tried to determine whether the GCC countries are ready to establish a monetary union based on economic similarities, common social and cultural backgrounds. Some studies reached the conclusion that the GCC members are not ready to establish a monetary union and that the progress towards a monetary union is very slow compared to what it should be. While others found some support to the GCC monetary union.
ALRIGHT THESE ARE GOOD ARGUMENT BUT THIS PAPER WAS WRITTEN IN 2007 SO NEARLY 10 YEARS LATER WHAT HAS CHANGED, BESIDES EVERYTHING?
WELL LET’S HAVE A LOOK, ONE ARGUMENT FOR THE CURRENCY IS THE CLOSE CULTURAL BOND BETWEEN THE NATIONS WHICH IS ABSENT FROM THE EURO ZONE.
Economics 101: Cultural bonds make strong case for single GCC currency
What are the advantages and disadvantages of a single currency?
In 1999, the year in which the European single currency was launched, the Nobel Prize in Economics was awarded to Robert Mundell for his theory of the conditions under which it is desirable for multiple countries to use a unified currency rather than each having their own one. Today, due in part to the euro’s challenges, the GCC countries have decided to further review the best way to implement their own single currency.
So why would any country surrender its currency? The first reason is facilitating trade with currency partners: there are no transaction costs, and price comparisons become easier. Some types of market speculation can lead to volatility in exchange rates, which makes long-term investment riskier; currency unions eliminate that problem by eliminating exchange rates.
Second, the inflexibility of prices creates a dangerous temptation for the government: if it can surreptitiously print money faster than prices adjust, it can redistribute wealth in its favor in the short run, which it can use to pay off debt and fund programs. Ultimately, prices do catch up, and this creates cycles of high inflation and high interest rates. Some governments are forward-thinking enough to avoid the temptation to abuse the money supply, but for those that are not, joining the currency of a “credible” country is a quick way to impose restraint (like Odysseus tying himself to the mast).
Thus, countries which cannot resist the temptation to print money face a quandary: high inflation and interest rates outside the currency union or bouts of high unemployment inside it. Mr Mundell outlined an escape route: if workers can relocate across the political boundaries of single currency countries, then when unemployment rises the excess workers can simply move to the country with more jobs. That is why the EU implemented free labour mobility as a precursor to the euro’s launch.
The problem for the EU, however, is that there exist many non-legal impediments to labour mobility, such as language and cultural differences (imagine a Finn moving to Portugal). While GCC citizens tend to prefer living in their home country, potential mobility is much higher than in the euro zone, so the foundations of a single currency are arguably preferable
ALRIGHT SO THERE A FEW GOOD REASONS LET LOOK A LITTLE DEEPER BECAUSE IT SEEMS TO ME THIS COMMON CURRENCY HAS ALREADY BEEN DECIDED.
Gulf single currency inevitable: Oman central bank chief quoted
DUBAI: The creation of a single currency in the Gulf Arab region has become inevitable and is only a matter of time, the executive president of Oman’s central bank was quoted as saying.
Oman is not one of the countries pushing for a common currency, but “serious measures” are being studied to achieve it, the Saudi Arabian-owned Al Sharq al-Awsat newspaper quoted Hamood Sangour al-Zadjali as saying in a statement.
Omani officials were not immediately available on Monday to comment on the report, and it was not clear whether Zadjali’s remarks signaled any new momentum for the region’s single currency project.
The creation of monetary union became a primary objective of the six members of the Gulf Cooperation Council in the early 1980s. Four of them – Qatar, Saudi Arabia, Kuwait and Bahrain – formed a joint monetary council and a forerunner to a Gulf central bank in March 2010.
But the euro crisis and a lack of political will have slowed the project. Oman withdrew from the plan in 2006 and the United Arab Emirates pulled out in 2009.
Many bankers in the region say privately that introduction of a single currency remains unlikely for the foreseeable future, given technical difficulties and the fact that GCC states are struggling with low oil prices, which are having varying impacts on their economies.
Saudi Arabia has slowed sharply and has been forced into painful fiscal reforms, while Qatar and Kuwait, with relatively strong state finances, have come under less pressure.
JUST FOR OUR UNDERSTANDING YOU CAN READ MORE ABOUT THE GULF MONETARY UNION AND THEIR OBJECTIVES HERE http://www.en.gmco.int/about/objectives
IN 2008 THE MONETARY UNION FOR A MEMORANDUM OF UNDERSTANDING WITH REGARD TO A COMMON CURRENCY WHICH YOU CAN READ ABOUT HERE
NOW YOU HAVE ALL THE BASICS OF WHAT THE PLAN WAS AND WE SEE IT HAS BEEN TALKED ABOUT FOR A LONG TIME SO WHY IT THIS SUBJECT COMING UP AGAIN?
WE CAN SPECULATE AND LOOK AT THIS THROUGH A DIFFERENT LENS, OF THE 6 NATIONS 5 OF THEM HAS CURRENCIES PEGGED TO THE DOLLAR, KUWAIT IS THE ONLY COUNTRY PEGGED TO A BASKET OF CURRENCIES WHICH INCLUDE THE DOLLAR AND THE EURO AND THE REST OF THE BASKET HAS NOT BEEN DISCLOSED.
WE ARE SEEING THE DOLLAR PEG COUNTRIES COMING UNDER EXTREME PRESSURE BUT THE NATIONS ARE SAYING THEY WILL MAINTAIN THEIR PEGS DESPITE RUMORS THAT THEY WILL BE FORCED TO ABANDON THEIR PEGS.
WELL ONE NEEDS TO WONDER IF FORMING A COMMON CURRENCY WOULD ALSO OPEN THE DOOR FOR A COLLECTIVE ABANDONING OF THE DOLLAR PEG AND THE COMMON CURRENCY BEING PEGGED TO A BASKET AS WELL WITH OUT DISRUPTING POLITICAL TIES.
THE IMF HAS BEEN TALKING ABOUT USING THE SDR BASKET MORE AND WHEN I COME BACK I WILL SHOW YOU SOMETHING THAT THE IMF HAS JUST APPROVED FOR COLLECTING EXCHANGE RATES FOR THE CALCULATION OF THE VALUATION OF THE SDR BASKET.
ALL OF THIS GIVES US SOMETHING TO THINK ABOUT AND WATCH FOR SIGNS THAT THE COMMON CURRENCY WILL ACTUALLY COME TO PASS IN 2017.
I’LL BE BACK THIS AFTERNOON WITH THE IMF UNTIL THAN THANK YOU ALL FOR BEING HERE…
LOVE TO ALL ML
P.S. I REALLY NEED TO SEND OUT A SPECIAL THANK YOU TO TERRI AND MIKE AND JUDY AND THE REST OF MY LITTLE ROOM FOR HOLDING IT ALL TOGETHER IN MY ABSENCE. I RECENTLY ADDED AN 18 MONTH OLD TODDLER TO MY HOUSEHOLD AND HE HAS CERTAINLY KEPT ME DISTRACTED AND BUSY…LOL..