Abstract
The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses. JEL Classification: E5, E52
Highlights
The European Union (EU) can look back on a history of more than 50 years of regional economic and monetary integration
The main findings are that (i) a supranational Gulf Cooperation Council (GCC) monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses
The main findings of the paper are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses
Summary
The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). This process is likely to be reinforced by the very different time horizons over which the oil and gas reserves of GCC member states are expected to be exhausted, raising the possibility that a GCC monetary union might in the future comprise both major oil and gas producing countries and non-oil/gas producing countries This stresses the importance of strengthening adjustment mechanisms other than the nominal exchange rate (such as factor mobility and price flexibility) in order to cushion asymmetric shocks, the likelihood of which may increase in the wake of ongoing diversification. Ensuring sustainable fiscal convergence on the basis of sound public finances both in the run-up to monetary union and after its
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