Monetary union ahoy

The GCC countries have embarked on a challenging task – setting up a monetary union by the end of this decade. Such a union will lead to diversification of the economy, rise in competitiveness followed by greater integration with globalisation. With oil prices, one of the main drivers of the GCC economies, ruling at all-time highs, fiscal euphoria among the members has also peaked. The GCC countries request for an observer status at IMF committee meeting should be seen in this backdrop. The setting up of the monetary union will lead to the development of a major economic entity in a region which holds some 45 per cent of the global oil reserves and 17 per cent of gas. In 2002 the GCC had a combined GDP close to $340 billion.
Of late the pace of the intra-GCC economic integration has increased with the adoption of the unified common external tariff. Further movement towards integration will only lead to strengthening of non-oil growth, which is showing good promise, thanks to the diversification away from oil as the major source of revenue. Yet much more needs to be done. The GCC countries have decided to peg the common currency to the dollar. But with the European common unit gaining currency over the greenback other options should also be looked into particularly when the continent remains a major trade partner of the region. Therefore, another option that should be looked into would be pegging the common currency with a basket of currencies, a practice very much vogue in other parts of the world. Success in integrating the diverse economies will call for the seamless flow of transparent macroeconomic statistical information across the member countries based on internationally accepted standards and concepts. This should remain high on the wish-list but looks a rather tall order in the present situation.
And this is where the IMF should come in. The experience of the European countries suggest that for a successful monetary union it requires political and economic preparation of a magnitude which is yet to be experienced in the region – it calls for a strong political commitment. Since the GCC is venturing into an area in which its expertise and experience is rather limited it is imperative that international agencies with the requisite process-knowledge is there to extend a helping hand for the smooth implementation of the rather difficult task. This is important particularly since the price volatility of oil is high.

This is an editorial published in Oman Tribune