A single currency: Is this a good idea?

Talk of a single GCC currency is increasing — but what’s the rationale behind the idea and what does the business and financial community think?

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By  David Ingham Published  May 15, 2001

No easy undertaking|~||~||~|The Single European Currency was supposed to represent the crowning glory for the process of European integration. Following on from various agreements that brought Europe’s economies and political systems closer together, the single currency would represent the most significant and most glorious act ever in Europe’s fifty year process of post-war integration.

That’s what was supposed to happen. The reality was that the currency has plummeted in value ever since its 1999 launch against a background of political meddling in the affairs of the European Central Bank.

Given all the talk recently about creating a single currency for the six GCC member states, could the Gulf be heading down the same uncertain road as Europe?

What is certain is that the introduction of a single GCC currency won’t happen anytime soon. “Reaching a unified single currency for the GCC countries and implementing a practical programme to achieve that requires a long time and intensive work,” Jameel Al Hiujailan, secretary general of the GCC, said recently.

And before it could even happen at all, GCC governments would have to begin co-ordinating their policies on taxation, inflation, interest rates and budget deficits. Despite how it may appear to the outside world, that might not be as easy as it looks.

Some economies remain very much oil dependent and their public spending and surpluses/deficits fluctuate wildly as the oil price changes. Others are diversifying and are able to keep their spending levels and surpluses/deficits reasonably consistent.

The proposed currency would be linked to the US Dollar, and would represent part of a wider programme to boost joint economic and monetary policies. If it could be made to work, Dr. Randa Khoury, chief economist for National Bank of Kuwait, says that there could be benefits. “The main benefit is in the discipline it would impose in following monetary policies and regulatory policies.”

In practice, however, she isn’t so sure that will happen. “I don’t think it will work,” says Dr Khoury.

One of the main reasons, she believes, is that co-ordinating a single monetary agency with control over monetary policy for the GCC currency zone would be hugely difficult. “They’ve been battling for years to bring customs duties in line,” says Dr. Khoury. “It would be a bureaucratic nightmare having a single monetary agency.”

Then there is the need to integrate financial markets and loosen up labour markets. Rigid labour laws, which limit companies’ ability to hire and fire, have been one of the major factors undermining confidence in the Euro.

Don’t forget the banking sector too. At a time when the single currency is being talked about publicly, local banks can’t even operate in each other’s countries.

Whether regulatory policies could be uniformly followed and whether deregulation would go far enough is another of Dr. Khoury’s questions. “It makes no sense to move towards greater integration in one area and not in others,” says Dr Khoury. “Labour markets, for example, are a very sensitive issue.”
||**||The business perspective|~||~||~|
Abdulla Al Zamil, senior vice president at Zamil Air Conditioners, offers a businessman’s perspective on the idea. “I would love to have a single currency for the region here, but the big question though is ‘could it be done overnight?’” says Al Zamil. “It would be very detrimental for the business community here if we jumped into it too quickly.”

Al Zamil says that he could benefit from a single GCC currency in a number of ways. His KSA-based company operates outside the Kingdom and the fees involved in exchanging one Gulf currency to another would be eliminated.

Looking forward, Al Zamil thinks a single currency could be a boost for e-business. “In the next era of e-business, a single currency would, in my opinion, remove a big hurdle,” he enthuses.

“If we were to only show our product in three currencies [online] – the GCC currency, Euro and Dollar – we would be covering 80% of our markets. That would resolve a lot of problems for us,” he continues. Al Zamil is an enthusiastic advocate of e-business.

Like NBK’s Dr Khoury, Al Zamil fears that the structural reforms that need to accompany the currency would be half-baked. “There are prerequisites to a single currency. We need to thoroughly investigate those prerequisites before we dive into that single currency,” says Al Zamil.

He lists taxation rates and interest rate controls as factors that need to be co-ordinated between countries. “We have to have a single GCC Central Bank,” he says.

The message is loud and clear: structural reforms need to be thought about and policies co-ordinated between the various GCC countries before the plan can go ahead. In that case, the GCC is no different from Europe.

But in one, very positive sense, it might be. In Europe, the single currency has provoked a lot of nationalist chest beating, with politicians there trying to make political mileage out of the abolition of national currencies.

GCC currencies, however, have far less of the history and emotional baggage that the British Pound and the Deutschmark have. “I have the feeling that we don’t have so much sentimental connection with the currency,” says Abdulla Al Zamil.

There is one very radical solution that hasn’t been mentioned publicly. If GCC currencies are linked to the Dollar now and the proposed currency will be tied to it, why not therefore just ‘dollarise’ the GCC? Now that would be daring.||**||

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