An economic analysis of sustainability of a potential GCC economic and monetary union during 2005-2014

Abstract

Purpose – Gulf Cooperation Council (GCC) was set up in 1981 between Bahrain, Oman, Qatar, Saudi Arabia, United Arab Emirates and Kuwait for strengthening cooperation and economic development in the region. The GCC has made strides towards economic consolidation by forming a customs union and a common market. The long-term vision is to create an Economic and Monetary Union (EMU) with a single currency. Progress towards the EMU has been slow and the recent oil price plunge has led to concerns regarding sustainable growth of member countries due to their significant dependence on oil and lack of diversification. The purpose of this paper is to analyse the scope of an EMU in the GCC against the backdrop of current oil crisis and examine sustainability of such a union. The paper studies convergence criteria similar to the ones followed by the accession countries of the European EMU in the 1990s preceding the introduction of the single currency Euro. Design/methodology/approach – The paper draws its practical approach from the experience of the European Monetary Union, though the original idea of the single currency in Optimum Currency Areas was conceived by Mundell (1961). The present paper analyses macroeconomic time-series variables (e.g. GDP, budget deficits, debt, growth rates, inflation rates, exchange rates) for GCC during the period 2005-2014. Data has been sourced from United Nations Conference on Trade and Development (UNCTAD), The World Bank and International Monetary Fund (IMF) databases to study the convergence criteria adopted by the EMU countries for the introduction of the Euro. Findings – The paper concludes that GCC economies are similar in terms of their structural and economic fundamentals. Most elements of the convergence criteria that were followed by the accession countries in Europe are fulfilled by the GCC member states, particularly during 2011-2014. The GCC states look similar in terms of sustainable growth, price stability and exchange rate stability – three aspects of convergence met by the European Union states. However, heavy dependence on oil and lack of diversification from oil and hydrocarbon-related products in the gross domestic product (GDP) composition of GCC states pose severe risks to the potential union. Fiscal vulnerabilities of these economies to oil price shocks, such as the current oil price crisis, create concerns for such a union during oil price lows. Widely divergent fiscal deficit-to-GDP ratios and rising debt-to-GDP ratios during periods of low oil prices imply the lack of sound and unsustainable public finances for some of the GCC states. The divergence has stemmed from widely different break-even oil prices for government budgets within the GCC and also due to varying degrees of oil dependencies between the member states. The scope of a successful and more sustainable EMU can be further explored once the GCC economics have achieved adequate diversity from oil. Originality/value – The study is useful to policy makers, central banks, businesses and researchers since it highlights the EMU as a feasible option for the GCC states. The sustainability of the EMU is contingent on diversification of these economies in the future from oil and oil-related products. The study can be utilized by policy makers as a strategy to further restructure GCC economies towards greater resilience and integration prior to accession to the GCC EMU.

The impact of oil price crisis on financial performance of commercial banks in Bahrain

“…A higher level of NPLs restricts banks' credit growth and can dampen economic growth in the GCC economies. Ganguli (2016) analyzed the scope for economic and monetary union of GCC in the backdrop of oil crisis. The paper concluded that GCC countries are similar in terms of their structural and economic fundamentals.…”

Analysis of Intra GCC Merchandise Trade During 1995-2015 Amidst GCC Diversification Initiatives

“…Oil revenue comprised of 86.2% of the total fiscal revenue of the kingdom, and oil and gas exports comprised of 60.9% of the share of total exports from the kingdom (IMF, 2016). Ganguli (2016) shows that in the face of low oil prices, GCC economies do not exhibit the convergence of their macroeconomic indicators necessary for the formation of single currency monetary union, especially in the wake of low oil prices and lack of adequate diversification. Nechi (2010) shows that intra-GCC trade and financial integration remain weak, except for Bahrain and Kuwait who invest a large amount of their capital within the GCC.…”

“…Additionally, the volume of intra-GCC trade is small compared to a single currency zone, the EU for example. Ganguli (2016) argued that in the absence of convergence of the major macroeconomic indicators, GCC countries cannot create a single currency union in the absence of diversification and in the presence of low oil prices. Ganguli (2018, forthcoming) Figure 13 Bahrain Merchandise Export Growth to GCC Countries, 1996-2015 Source: Merchandise Trade Matrix: detailed products, exports in thousands of dollars, annual, 1995dollars, annual, -2016 further mentioned that, given the low volume of intra-GCC trade, Bahrain's merchandise export structure shows dissimilarity when compared with exports of other GCC states during 1995-2015.…”

“…Although it remains an unfulfilled dream, GCC members have strengthened economic ties through the formation of a common market and a customs union. Ganguli (2016) argues that the convergence factors for a successful currency union were not met, especially during the period of continued low oil prices during 2004-15, due to heavy dependence of the GCC region on oil and oil related goods and services, and lack of diversification. Ganguli (2018) concludes that while the Bahrain merchandise export structure shows dissimilarity when compared with exports of other GCC states during 1995-2015, its imports appear to be very similar to those of its GCC trade partners.…”

Do We Need a GCC Bank to Facilitate the Economic Turnaround of the GCC Region?

“…While the prospect for strong monetary sector integration in the GCC has been envisaged, there are bottlenecks vis‐a‐vis the real sector integration (Bacha, ). Nevertheless, there are similarities across the GCC constituents in terms of the structural and economic fundamentals (sustainable growth, price stability, and exchange rate stability) and with an appropriate approach toward economic diversification; the probability of an economic and monetary union seems possible (Ganguli, ). Furthermore, it has been underscored that banking concentration in developing countries may leave a positive impact on the overall economy of the region (Abuzayed & al‐Fayoumi, ) if the GCC members have similarity in inflation and business cycles.…”