More than a pipe dream?

Signs are growing that the Gulf Co-operation Council may be serious about economic and monetary union; experts say such moves are vital.

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By  David Cass Published  May 5, 2002

Moves towards economic unification|~||~||~|Transparency. Compliance. Privatisation.

In recent years these three words have become the rallying call for Gulf states wishing to integrate their economies with each other and into the global economy through membership of the World Trade Organisation. Now these words are being used more frequently as tentative moves are made – through the acceleration of the GCC Customs Union to start next year instead of 2005, and talk of a common currency by 2010 – towards a single market after the style of the European Economic Community and ASEAN.

The talk has seldom been stronger than at April’s Gulf Economic Forum in Bahrain. A raft of eminent economists and politicians from points East and West urged the region’s governments to get together for mutual benefit. The subtitle of the conference was, after all, ‘Strength through Diversity.’

In his opening address, Bahrain’s Finance Minister, Abdulla Hassan Saif, talked up the idea of plans for a single economic market and the proposed single currency, which would operate a dollar peg. “These will make the whole region more attractive to outside investors,” he said.

Bahrain, of course, is the region’s banking centre and has most recently signed up to compliance with the latest international laws against money laundering. The Governor of the Bahrain Monetary Authority, Shaikh Ahmed Bin Mohammed Al Khalifa, suggested “Freedom of economic activity is essential. We must encourage consolidation and merger activity to enable competition with the outside world.”

Putting the Gulf States in context, he said “An already brisk pace of globalisation can be expected to accelerate. We have to recognise and accept the pressure that the IT revolution is placing on individuals, institutions and regulators. Embracing the changes opens up glittering prizes. World markets are being revolutionized. Regional markets cannot escape the effect.”

Kuwait’s Finance Minister, Dr Yousef Al Ebrahim, identified three macro-economic issues that made the region vulnerable to being left behind: “Our lack of diversity and an over-exposure to oil price fluctuations; the government’s dominant position in providing employment and producing income; and the role of the private sector.”

He told Arabian Business: “At present only 25% of Kuwait’s GDP is generated by the private sector. Our target is for that to be 40% within the next five years. We need to make more privatisations in transport and telecomms, and a law is now in discussion in parliament along with labour and market reforms. The government must move away from its dominant role in the economy to become a facilitator and regulator for a more efficient private sector.”

There was plenty of similar talk. The advice was similar; the warnings about isolationism similar to warnings we had heard before. It was not a coincidence that the event was taking place in Bahrain, which, though physically small, boasts the most open and internationally recognised economy in the region. It is also not a coincidence that the United Nations Industrial Development Organisation (UNIDO) has its regional headquarters in Bahrain, the first of the Gulf States to become fully compliant with international financial and investment standards.
||**||The implications of failure|~||~||~|
The implications of failing to form a single economic zone were all around. Jacques Desponts of BNP Paribas and a former minister in the French government said: “Today we are at a critical crossroads. The way you choose will determine future relations between our countries. The GCC is improving a lot in terms of encouraging foreign investment, with fairer rules and greater transparency, but more needs to be done.”

Wafik Grais, from the World Bank added: “A common currency reduces tremendously the difficulty of creating transparency and accountability.”

All of this took place against a scathing criticism of Arab governments from the Arab League’s top monetary official, Dr Jassem Al Manai, chairman of the Arab Monetary Fund. A few days earlier, he had publicly blamed government policies for the flight of capital away from the region into international markets.

The AMF’s recent estimates put Arab funds abroad at nearly $2.4 trillion, though other officials believe there are no accurate figures for the funds in western bank deposits, bonds and real estate. Amr Gadallah of the Arab Banking Corporation estimated that Saudi nationals have $750 billion invested abroad, Kuwaitis $120 billion and UAE nationals $100 billion.

“If we want to attract this Arab capital back to the region we have to work on compliance and transparency,” he told Arabian Business. “IS-39 reporting standards, which apply in Bahrain, are now higher than in most US and UK banks and these are due to be implemented throughout the region. We have to develop the practices and products to make the Arab investor ask ‘why should I use an American bank? Why not manage my investments through an Arab bank?’”

Gadallah is scathing about the few stock markets in the region. “Very few are succeeding,” he says. “There is just not enough capital driving them. I believe it is time to think about integration of the Gulf’s capital and stock markets.”

Eric Chaney of Morgan Stanley agrees. “There must be an integration of capital resources throughout the region,” he says. “It is a waste of resources to have several bourses and you can’t have a successful capital market without a successful, risk-free bond market.” He suggested even thinking of a consolidated regional bond, which, of course, takes us back to the issue of a single trading block and the inevitable politics involved in that.

Is it all achievable? Not without massive inward investment, according to Jacques Desponts.

He says that won’t come without more barriers coming down in individual countries and in the GCC as a whole. Among his targets would be an end to the sponsorship rules for foreign corporations, an end to tax discrimination, liberalisation of communications and privatisation of government sectors.

One delegate, Wayne Andrews from Saudi Hollandi Bank, believes unity will not be very high on the agenda as long as oil remains a significant issue. “It becomes more important as economies become more diversified,” he says. “If they are putting the building blocks in place to make it happen then a single market could happen – but only if the political will is there.”

Willy Mishiki, from the Belgian firm Runtec Investments, says, “The Gulf states must unite. It will help inward and outward investments. There are too many small states to work with at present.”

As the conference closed, there was renewed evidence that the privatisation issue will remain a sticking point, with the release by the UAE telecommunications monopoly, Etisalat, of its annual report. It showed assets increasing almost 9% to Dhs16 billion and Minister for Communications, Ahmed Humaid Al Tayer, saying, yet again, a firm “No” to privatisation.||**||

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