A Gulf cooperation council currency union : appropriateness and implications
The six states, that together comprise the Gulf Cooperation Council (GCC), plan to adopt a single currency by 2010. If they are able to enact the necessary policy reforms and devolve some national sovereignty to supranational monetary and statistical institutions, capable of conducting a common monetary policy and managing the 'Gulf dinar", it will undoubtedly become the world’s second most significant currency union. It may also be seen as a viable reserve currency, particularly by neighbouring states, and could even be used to invoice oil sales. The aim of this thesis is two-fold Firstly, it assesses the appropriateness of a currency union for the GCC, against the optimal currency area criteria. It also examines the degree to which the GCC states have implemented the policy prerequisites for currency union, according to the experience of European Monetary Union. Secondly, it undertakes a qualitative cost - benefit analysis of currency union for the GCC as a whole and for each constituent state. This, in part, involves a review of post currency union monetary policy options and political-economy implications. The analysis employs both primary evidence collected through a GCC-wide business survey and from interviews with a panel of regional experts, and secondary evidence from published official sources. This research should add to the ongoing debate on the utility of currency unions in general and assess the validity of employing optimal currency area theory to a region which remains, to a high degree, dependent on oil. It also provides contextually based findings useful to regional policy makers. It concludes that a currency union will have significant benefits, but primarily indirect ones. Conventional benefits such as reduced transaction costs and eliminating exchange rate risks will be outweighed by benefits which will accrue from greater budgetary transparency, increased fiscal discipline and further economic diversification.