Rutledge, E.J. (2009) (2012). Monetary Union in the Gulf: Prospects for a Single Currency in the Arabian Peninsula. London: Routledge
The future Gulf dinar is likely to seek a more independent monetary path (i.e. one not set by the Federal Reserve). Critically this book argues that the present dollar-peg exchange rate regimes are no longer optimal. The ramifications of this – a potential Islamic anchor currency and an alternative oil-invoicing currency – are also considered in some detail.
Although there will not be a single GCC currency by the original January 2010 deadline, the publication of Emilie Rutledge’s study is timely as there has been increasing discussion of its costs and benefits. At a meeting in December 2008 the GCC heads of state agreed that although a single currency cannot be issued by January 2010 due to the lack of time, the deadline should be retained for monetary union.
The key issue is, of course, what is meant by monetary union, which usually refers to the adoption of a single exchange rate, having identical interest rates and using common instruments of monetary policy. The six GCC states satisfy none of these conditions. Although five of them peg their currencies to the US dollar, Kuwait decided in 2008 to adopt a trade-weighted basket instead, and shows no sign of abandoning this. The interest rates at which the central banks are prepared to lend to commercial banks – a key determinant of monetary policy – also vary: despite coordinated interest rate cuts, most recently by 50 basis points in February 2008, as the global financial crisis worsened, GCC central banks resorted to unilateral action, with the UAE being more conservative in cutting rates than Saudi Arabia, partly reflecting the higher (though falling) rate of inflation in the UAE.
The merit of Emilie Rutledge’s study is that it provides a lasting framework to evaluate the on-going discussion of GCC monetary union and single currency issues. When analysing economic policy, it is often tempting to look only at the latest pronouncements and the most recent events rather than at the inherent benefits and costs and the longer term context in which decisions take place. That is why a focus on theory is appropriate in an academic study, and in this case Emilie Rutledge draws lessons from optimal currency theory, which has much relevance for the GCC in suggesting the key issues to address. The most important implication of optimal currency theory is that monetary unions are most likely to be successful if there is a high level of economic integration between the participating countries.
Emilie Rutledge examines the extent of intra-GCC non-oil trade as an indicator of economic integration and finds this is highest for Oman, given its close trading links with Dubai, and Bahrain given its connection across the causeway to Saudi Arabia. It is also interesting to note that between a fifth and a quarter of Saudi Arabia’s non-oil exports are to its GCC partners, reinforcing the case for a single currency from the perspective of Riyadh.
The GCC is not merely a free trade area and customs union, but a common market where local citizens can move freely and there are no controls over capital movements. In practice, although GCC citizens travel around the region for business and as tourists, virtually none want to work or settle outside their countries of origin, largely because of strong family ties. The substantial expatriate workforce, accounting for over 60 percent of the total, is more mobile, but they are not free to move between GCC member states for employment without returning first to their home countries. Ironically, as Emilie Rutledge points out, the policy of replacing expatriates by local nationals could actually reduce labour mobility and limit the gains from a monetary union.
Throughout the study Emilie Rutledge is meticulous in searching out and using data, but in many areas, notably capital movements, the available data is severely limited. Evidence on the extent of intra-regional portfolio investment is presented, but much of this is from Bahrain and the UAE, with little data from the other GCC states. There is increasing cross border activity by GCC banks, and a ‘GCC Net’ electronic payments system has been introduced for debit and credit card transactions. Overall the evidence presented supports Emilie Rutledge’s conclusion that as far as labour and capital markets are concerned, conditions are favourable for a successful monetary union, but the limited trade integration will restrict the benefits… [more…]
Wilson, R. (2009). Journal of Islamic Studies, 20(3), pp. 440—443.
Timothy Niblock, Professor, Institute of Arabic and Islamic Studies, Exeter University, UK
“The book is as excellent as it is timely…It is destined to become a classic and is required reading for all those interested in exchange rate issues in resource based economies, a category that is rather wider than the GCC.”
Willem H. Buiter, Professor of European Political Economy, European Institute, London School of Economics and Political Science, UK
Rutledge, E.J. (2009). GCC Monetary Union: A Cost-Benefit Analysis. Abu Dhabi: Emirates Center for Strategic Studies and Research
Paperback: 978-9948-14-097-9 (pp. 77) $7.00 [ go to bookstore ]
This work argues that it remains open to question whether or not the unfolding global economic slowdown will aid or abet the Gulf Cooperation Council’s (GCC) monetary union plans. In fact there are cogent arguments to suppose it could do either. On the one hand, the fate of the Icelandic Krona and the sharp fall of Sterling suggest that staying outside of a monetary union (MU) can be costly and by default Eurozone membership has thus far acted as a safety net. Yet the uncertainty brought about by the credit crunch and ensuing liquidity crisis has resulted in a precipitous fall in both the demand for and price of oil. So, on the other hand, it is now increasingly hard for GCC governments to determine their own revenue streams let alone those of their neighbors. Therefore, their ability to meet and monitor MU convergence targets between now and 2010 will now be that much harder to achieve.
This country by country cost-benefit analysis provides some initial guidance on the country-specific factors that may well influence decisions on whether or not a given country ultimately decides to join the MU. Despite the fact that as this paper goes to press, four of the six GCC states still officially intend to enter into a MU as scheduled next year; it is entirely possible that the launch date may be deferred. It is clear that this ambitious integration project is more than a pipe dream with concrete steps taken such as the launch of a GCC customs union in 2003 and a common market in 2008. Despite all six states signing up to the GCC Economic Agreement of 2001, which clearly set out the roadmap towards a single currency by 2010, Oman’s decision to opt out (citing ‘a lack of progress’ in 2006), the UAE’s concerns over the location of the central bank and Kuwait’s move away from the collective dollar peg (in order to tackle ‘imported inflation’ in 2007) can only be viewed as setbacks. However, these setbacks are not insurmountable, as shown by several European Union countries, notably the UK and Sweden, which decided not to go along with the European Monetary Union (EMU) process.
Rutledge, E.J. (2005). Establishing a Successful GCC Currency Union: Preparations and Future Policy Choices. Dubai: Gulf Research Center
Paperback: 9948-424-22-0 $8.00 [ go to bookstore ]