A former head of the International Monetary Fund (IMF) has said there needs to be greater political will before a common currency can be implemented in the GCC.
Rodrigo de Rato, who was managing director of the IMF between 2004-07 and the finance minister of Spain when the euro was established in the 1990s, said the Gulf would have to establish fiscal as well as monetary union, which could result in political representation for citizens, as in the Eurozone.
The six Gulf Cooperation Council member states – Saudia Arabia, the UAE, Qatar, Kuwait, Bahrain and Oman – have discussed creating a common currency for well over a decade but the talks stalled in 2010, after Oman and the UAE pulled out.
Since then, relations also have soured between Saudi Arabia, the UAE and Bahrain on one side and Qatar on the other. The three states withdrew their ambassadors to Doha in March, only returning them last week.
“The lessons from Europe are that, first of all, you need strong political commitment,” de Rato said during an on-stage interview at the Euromoney conference in Doha.
“You need to develop not only a central bank (and) a central banking authority but you also need to have some… strong fiscal union elements that would provide instruments and tools to develop an effective monetary economic policy.”
When asked whether he agreed that fiscal union included common tax policies, which in turn meant some political accountability, de Rato replied: “For sure”.
He said the recent European parliamentary elections, which saw dramatic swings in most countries, showed that previous criticism that they were unnecessary were baseless.
“When you’re talking fiscal union you need political institutions that guarantee that political sensibilities and the political debate are in place,” de Rato said.
“Monetary union without some form of fiscal union is extremely difficult to manage through the loss cycle, as we’ve seen in Europe.”
Khalid R Alkhater, a Qatari economist specialising in monetary policy, told Arabian Business “political will is all they need” to establish a common GCC currency. However, some Gulf leaders considered fiscal policy a sovereign matter, he said.
The GCC had stalled it’s discussions to watch how Europe handled the fallout of the global financial crisis, which has seen stronger economies bail out several that fell into recession.
However, Alkhater said, a common currency in the GCC would be more successful because it had similar production and external trade structures as well as a common language, culture and heritage.
All of the states except Kuwait also are pegged to the US dollar.
“The GCC is more qualified to establish a monetary union than the Eurozone,” Alkhater said.
However, whether Oman and the UAE, upset that Riyadh would host the central authority, join in a common currency also remains to be seen.
“If the four countries succeed in launching a monetary union and prove to be an example of stability and benefits, I don’t see why the other two shouldn’t follow,” Alkhater said.
“We might even have other nearby countries follow in the future. We might see one of the benefits also that other Arab countries peg their currency to the GCC union if they are able to create a unified reserve currency.” Source: Arabian Business