Political infighting has dogged attempts by Gulf Cooperation Council states to integrate their economies. Most recently the factious nature of GCC relations has been agitated by the planned monetary union.
With the United Arab Emirates decision in May to pull out, only four GCC members were left to sign the pact on a common currency — pegged to the dollar or a basket of currencies — when they met in Riyadh on June 7. The four members who signed-on were Saudi Arabia, Kuwait, Bahrain and Qatar; notably absent from the signing ceremony was the second largest economy in the GCC — the UAE.
Analysts say the UAE declined to participate due to the May 5 decision by the four other states to locate the headquarters for the prospective monetary union’s Gulf Central Bank in Riyadh. As the second largest economy in the Gulf region, the UAE’s move has created significant controversy and tension between itself and the rest of the GCC states, especially Saudi Arabia.
Eckart Woertz, program manager of economics at the Gulf Research Center in Dubai, believes this quarrel has nothing to do with monetary policies. “It’s a pure political issue,” he said. “Obviously, there is a hurt ego on part of the UAE, [as it] was expecting [to host] the GCC Central Bank and they didn’t get it.”
After the UAE confirmed its plans to stay out of the proposed regional monetary bloc, Saudi Finance Minister Ibrahim al-Assaf said that the location of the GCC Central Bank was non-negotiable.
Meanwhile, UAE Central Bank Governor Sultan Nasser bin al-Suwaidi said, “We are out [of the GCC monetary union] for the moment.”
A week later, UAE foreign minister Sheikh Abdullah bin Zayed al- Nahyan further hinted at the possibility of the UAE rejoining the monetary bloc at a later stage, saying the Emirates would ‘consider’ returning to the union if the terms are altered and other GCC members authorize a joint central bank to be based in the UAE. Such suggestions came as Saudi Arabia made clear that no terms will be amended regarding the central bank’s location.
“There are certainly behind closed door negotiations going on,” said Woertz. “It’s difficult for both sides to compromise without losing face.”
No matter what, Woertz said the UAE cannot declare their return to the union and then expect Saudi Arabia to welcome them with open arms.
“Maybe they’ll find a compromise; perhaps an Emirati heading the GCC Central Bank, but the bank being in Riyadh, for example.”
For now, it seems Bahrain, Kuwait, Saudi and Qatar are not worried about having to cut any sort of deals with the UAE.
But would a monetary union without the Gulf’s second biggest economy — the UAE — or Oman, make any sense? Woertz says the GCC monetary union without the UAE may never materialize.
“Oman’s withdrawal was manageable. But now, with the UAE withdrawing, there is considerable damage,” he said.
Tristan Cooper, a sovereign analyst at Moody’s Investors Service in Dubai, has doubts about the fate of the monetary bloc.
“I am not sure whether it is going to survive [the] setback [of the UAE withdrawing] and I am rather skeptical about when and whether the project will be achieved.”
But the union could go ahead, and set up a situation similar to that of the United Kingdom and the Eurozone in the late 1990s. When the UK decided not to partake in the EU’s single currency, the UK did not become politically isolated from the rest of Europe, as many had feared.
Giyas Gökkent, chief economist at the National Bank of Abu Dhabi, said that like the UK and the Eurozone, economic and political ties will move forward eventually.
The UAE’s decision to stay out of the monetary union is “really not a show-stopper,” he said.
At the end of the day, the Gulf states still have the common market, which was launched on January 1, 2008. This common market grants national treatment to all GCC companies and citizens in every Gulf state. By doing so, all possible technical hurdles are removed between cross-country investments and service trades between Gulf countries.
Pros and cons
There are benefits and drawbacks for all countries, whether they sign onto the monetary union or not. A single currency allows members to bask in improved efficiency levels of resource allocation and increased access to markets — all of which facilitate investment. Also, being part of a monetary bloc lets members benefit from lower cross border transaction costs; but in the GCC, this gain is limited, as intra-GCC trade is quite minimal. But, without the UAE, the prospects won’t be as rewarding as they could be.
“The UAE’s absence means that the gains to be realized from the currency union will be lower for the bloc as a whole, because the UAE is the second largest economy in the GCC and has the largest banking system,” said Gökkent.
On the other hand, Woertz said by basing the GCC Central Bank in the region’s largest economy, the rest of the union members will be gaining. SAMA — Saudi Arabia’s central bank — is “the most experienced central bank in the GCC,” said Woertz.
In the particular scenario of the Gulf, any disadvantages of a possible monetary bloc seem to be balanced out by the benefits. Moody’s recently reported the union would be adversely affected by the UAE’s absence, but few other factors.
“[M]any of the common advantages of a currency union… are muted in the case of the GCC,” the report said. “At the same time, the disadvantages of a currency union — such as members’ loss of independent monetary and exchange rate policies — are also less applicable, given that the GCC already have fixed exchange rate pegs.”
However Gökkent is a harsher critic of the monetary union.
“When you undertake a currency union you forgo independence on monetary policy,” Gökkent said. “If the UAE were to go into the GCC monetary union, then they would abandon that policy flexibility and they would give it to this GCC wide body. Policy-making would [thus] be subject to GCC input rather than being made from a UAE-focus.”
Dr. Abdul Rahman al-Sultan, an economics professor at the Islamic Imam Mohammed bin Saud University in Riyadh, kicked up a controversy when he said the GCC monetary bloc is more detrimental than beneficial.
“The plan to issue a common currency in this scheme is quite different from previous economic integration moves, as its costs largely surpass its gains considering the fact that the GCC countries do not represent an ideal currency zone, nor do they meet any of its criteria,” Sultan said at a conference held by the Saudi Economists Association in the kingdom’s capital in late May. “Instead of wasting their efforts on issuing a common currency in a zone that lacks the minimum currency criteria, the GCC countries should concentrate on completing previous integration stages.”
In the end, the UK has retained its monetary independence while also maintaining political ties with its neighbors, and analysts predict the same of Oman and the UAE if the monetary union becomes reality. The underlying issue seems to be how these events will affect the long-term political relationship between the UAE and Saudi Arabia.
“The move is a blow to GCC unity more generally and could be interpreted as a sign of how the balance of power between Saudi Arabia and the smaller GCC states have shifted over time,” Moody’s Cooper said. “It remains to be seen what the ramifications of the UAE’s action will be for the UAE’s bilateral relations with Saudi Arabia, but clearly it is not positive.”