Speech delivered by the Governor of SAMA
at the luncheon hosted by ABN Amro
(Dubai, September 2003)
I am delighted and honoured to have the opportunity to address such a distinguished gathering today at the luncheon hosted by ABN Amro.
The subject I would like to pursue briefly with you is the need for a monetary union in the Gulf and the progress made so far in that direction.
The six GCC countries together constitute a pretty important economic region. In 2002, they had an estimated combined GDP of about $ 342 billion, average weighted per capita income of close to $ 15,000, population around 30 million; and held some 45 and 17 percent, respectively, of the world’s proven oil and natural gas reserves.
These countries are trying to diversify their economies to reduce dependence on oil. Their modern infrastructure and structural reforms are paving the way for a greater role of the private sector in their development efforts. They have developed sound and dynamic banking systems; and thanks to their judicious monetary and fiscal policies, they are enjoying low inflation rates.
The currencies of GCC countries are fully convertible and command international confidence. GCC currencies exchange rates vis-à-vis the US dollar have remained broadly stable over a prolonged period. Their exchange polices have for long been well coordinated, with the cross-rates of their currencies showing sustained stability. In the GCC, trade and payments systems are virtually free of restrictions. This, together with a number of steps taken by GCC to integrate their economic and financial systems have created an environment which is highly conducive to intra-regional trade and investment. It is estimated that the non-oil exports of individual GCC countries within the GCC as a ratio of their total non-oil exports have ranged from 24 to 62 percent. On an aggregate basis, the ratio works out to be 34 percent.
Some may argue that when the GCC countries have become so well integrated and there are no impediments to intra-regional trade flows and other economic activities then what is the need for a monetary union. My response would be that it would further facilitate intra-regional trade and investment, as it would reduce transaction costs with significant political implications.
Achieving monetary union is a daunting task, requiring perseverance and determination. It took a long time and hard work for the European countries to achieve their monetary union. However, in the case of GCC countries it will not be as difficult, as these countries share a remarkable degree of cultural, economic and political homogeneity. Moreover, being small economies, their monetary integration would also be comparatively a less onerous task.
Let me now turn to the timetable set by the GCC countries for achieving a monetary union and the progress they have made in this regard. In December 2001, they decided to achieve a customs union by 2003 to unify the anchor for their currency by the same date; reach an agreement on convergence criteria by 2005; and adopt a common currency by 2010. The GCC countries have progressed well in implementing this timetable. They have already established a customs union, with a common external tariff rate of 5%. The exchange rate integration, requiring all the GCC countries to officially peg their currencies to a common denominator, namely the US dollar, has been achieved by the date set in the time-table.
It seems pertinent to mention here that the choice of the US dollar to serve as a common denominator was based on the premise that the US dollar is the intervention currency of all the GCC countries. This is the currency in which most of our trade is denominated, and our foreign exchange reserves for currency cover and balance of payments purposes are largely held.
As for the convergence criteria, there are being developed by the concerned committee through regular and frequent meetings. The transition from the integrated exchange rate system to a common currency by 2010 is expected to be smooth. We expect that this deadline will be respected.
As mentioned earlier, the GCC countries have already made considerable progress towards a Monetary Union. As a matter of fact, the level of economic coordination achieved by us compares favourably with the state of affairs which existed in Europe at the time of establishing the EMS. All the barriers to intra-regional trade and investment have been removed. GCC countries’ economic objectives, growth rates, inflation rates, monetary and fiscal policies, interest rates and banking policies are in broad harmony. They are diversifying their economies to reduce dependence on oil, which has often been a factor in dislocating fiscal sustainability and straining their balance of payments. Encouragement of the private sector is the major plank of their development strategy. They are undertaking privatization programs to reduce the role of the government and enlarge the scope of the private sector. It is hoped that in coming years, the GCC countries will make more concerted efforts to harmonize their policies and remove whatever structural and macroeconomic imbalances which remain.
The name of the new currency has not as yet been decided. The new currency may be linked to an anchor, be it the SDR or a special basket of currencies reflecting the trade pattern of the region’s trade, or a single currency. A decision in this regard will be taken by the GCC authorities at the eve of the launching of the common currency, taking into account the regional and international economic conditions prevailing at that time.
The cost and benefit of monetary union are well known. But I would like to emphasise the fact that in addition to promoting intra-regional trade and investment, monetary union will serve as a catalyst for integration and deepening of GCC financial markets.
Monetary union will also be associated with the pursuit of a common monetary policy, and more disciplined fiscal policies by the member countries. This will considerably enhance the credibility of the economic policies pursued in the region.
Against these benefits, the sacrifice of some sovereignty over monetary and exchange rate policies by each GCC country would be necessary for a successful monetary union. This is worth its while, particularly as the existing coordination in monetary and macro economic policies endorses a formal monetary union. GCC leaders have expressed their commitment to the Monetary Union at their Muscat Summit in December 2001 and expect to achieve it by year 2010.
In conclusion, regional monetary integration should augur well in a global context, particularly as the trend is gaining momentum and recognition. Our goal is a pragmatic one, and we will endeavour to achieve it.