5 - The GCC Monetary Union

Summary

Both the GCC Charter and the 1981 Economic Agreement envisioned coordination in financial, monetary, and banking policies among GCC member states. In 1983, a committee composed of the governors of the monetary agencies and central banks in the GCC states was formed to coordinate financial, monetary, and banking policies. From 1985 to 1987, the committee explored the adoption of the International Monetary Fund's (IMF) Special Drawing Rights as a common peg for GCC currencies. However, no consensus was reached.

Because of the relative stability of the cross sectional exchange rates of the currencies of the GCC member states during the 1980s and 1990s, as well as the fact that economic theory views the formation of a monetary union and the introduction of a single currency as an advanced stage of economic integration, the prevailing opinion up to the mid-1990s was that it was not yet time to adopt a Monetary Union (MU).

In December 2000, the Supreme Council decided to adopt the U.S. dollar as a common peg for the currencies of the GCC States. At the same time, due to the progress achieved in the GC Customs Union, as well as the perceived success of the European Union with regard to the adoption of the euro, the Supreme Council instructed the ministers of finance and Central Bank governors to prepare a time frame for establishing the GCC Monetary Union and introducing a single currency.

In 2004, the GCC Economic Cooperation Committee and the Committee for Governors of Monetary Establishments and Central Banks set 2010 as the deadline for the establishment of a Monetary Union and a common currency.

Three monetary and two financial convergence criteria were identified as preconditions for the Monetary Union:

1. • inflation should not exceed two percentage points above the GCC average rate;

2. • interest rates should not exceed two percentage points above those of the three GCC states with the lowest rates;

3. • foreign exchange reserves should be equal to or more than the value of four months' imports;

4. • the budget deficit should be less than 3 per cent of GDP or 5 per cent, if oil prices are low; and public debt should be less than 60 per cent of GDP.

However, there were unresolved issues, such as the type of exchange rate regimes and the name of the currency.