GCC Economic Integration References Rutledge, Chapters 1 & 4 Topics addressed» GCC economic integration progress to date» Why integrate?» Recent intra GCC trade and investment trends» Setbacks to GCC economic integration» Prospects for a Gulf Dinar GCC Economic Integration, MBA 2 page 1
The Gulf Cooperation Council The GCC was set up in 1981» In a similar way to the EU, the GCC is more than just an economic project, it is also a political one» The GCC is at the 3rd stage of integration: a common market was launched in 2008» Ultimately the GCC intends to integrate more deeply still and form a monetary union GCC Economic Integration, MBA 3 Snap-shot of GCC Economies» The GCC states share a common language and culture, as well as similar economic structures yet they are not a homogenous group of economies» Oil and gas as a share of GDP ranges from 25% 60% of GDP» GDP per capita ranges from $20,400 to $121,700 Oil & Gas as % of GDP Oil & Gas as % of exports Oil & Gas as % of revenues Oil reserves per capita (in barrels) GDP per capita US$, PPP and global rank Bahrain 25.3 79.7 75.7 170 38,400 (18 th ) Kuwait 54.5 94.5 94.8 34,210 54,100 (5 th ) Oman 49.2 84.2 79.1 2,250 23,900 (40 th ) Qatar 59.6 87.0 67.1 18,130 121,700 (2 nd ) Saudi Arabia 48.1 89.6 89.5 11,150 20,400 (46 th ) UAE 35.5 69.1 69.4 19,410 42,000 (11 th ) GCC 45.3 84.1 79.3 13,550 Source: Rutledge, 2012 GCC Economic Integration, MBA 4 page 2
GCC Economic Integration Unified Economic Agreement 1981» Set out a framework for full economic union and stated that all 6 states would: endeavour to establish a joint currency New Economic Agreement 2001» Set out specific a series of specific steps that would lead to the creation of a GCC Monetary Union GCC Economic Integration, MBA 5 Key Motives for Integrating Economically Despite the setbacks, we need to consider what motivates the GCC countries in work towards greater economic integration...» Is it market driven?» Is it policy driven?» Is it driven by non economic factors (e.g. security reasons)? Evidence suggests important motives were:» Political motives the political landscape in 1980...» The demonstration effect the advent of the euro in 1999...» Economic motives recent economic diversification initiatives... GCC Economic Integration, MBA 6 page 3
Intra-GCC Trade» Intra GCC trade flows are comparatively low at 5 6% of total trade» If oil and gas exports are factored out it rises to on average approximately 16%» Oman and Bahrain are more integrated in terms of their trade than Kuwait and Qatar» Intra EU trade is more than 50% of total EU trade» Intra ASEAN trade ranges between 25 and 30% of total ASEAN trade Intra-GCC trade (oil and gas exports factored out) Intra-GCC trade (as % of total trade) Bahrain 37.5% 6.6% Kuwait 5.4% 1.9% Oman 50.9% 14.1% Qatar 9.7% 1.4% Saudi Arabia 20.0% 4.5% UAE 15.8% 6.4% GCC 16.3% 5.1% Source: Rutledge, 2012 AND IMF DOTS 2011 GCC Economic Integration, MBA 7 Intra-GCC Investment» Between 1990 and 2003 intra GCC investments were minimal, at about 2.9% of total GCC FDI (AMF)» Since 2003 however, intra GCC investments surged.» The top investor in Bahrain and Oman in 2012 was the UAE, also second biggest investor in SA and Qatar (FDI Intelligence 2012).» In 2006 the UAE over took Japan as the main source of FDI into Saudi Arabia.» In 2004 Etisalat was the leader of a consortium which won the license to operate Saudi Arabia s second GSM network.» In 2006 Emaar invested $26 billion in Saudi Arabia s King Abdullah Economic City. GCC Economic Integration, MBA 8 page 4
GCC What Stage of Integration?» In 1981 the GCC set up a free trade area (stage 1)» In 2003 all GCC states fixed their currencies to the US dollar in preparation for harmonising monetary policies.» In 2003 the GCC launched a Customs Union (stage 2)» A common tariff of 5% was placed on all imported goods from non member countries» In 2008 the GCC launched a common market (stage 3) Degree of economic integration High Low 5. Political Union 4. Economic Union 3. Common Market 2. Customs Union 1. Free Trade Area GCC Economic Integration, MBA 9 Convergence Criteria In 2005 a set of convergence criteria targets were agreed upon 1. Foreign Reserves: To cover 4 months of imports 2. Interest Rates: Short term interest rates must not exceed more than 2% of the three best performing countries 3. Inflation rates: Must not exceed more than 1.5% of the average of the best performing countries 4. Fiscal Deficits: Government deficits must not exceed 3% of GDP when oil prices are $25/bbl or above 5. Fiscal Debt: Government debt must not exceed 60% of GDP for the general government and 70% of GDP for the central government GCC Economic Integration, MBA 10 page 5
Institutional Preparations» In 2010, the GCC Monetary Council was established in Riyadh, with the Governor of SAMA, Mohammed Al Jasser, as its first Chairman» The GCC Monetary Council will serve as a precursor to a regional central bank, supervising its eventual creation» The other main existing GCC institution is the GCC Secretariat, also located in Riyadh GCC Economic Integration, MBA 11 Setbacks To Date» In 2005, Bahrain signed a unilateral FTA with the USA going against the spirit of the GCC Economic Agreement and complicated the finalisation of the customs union» In 2006, Oman opted out of monetary union citing a lack of progress in the preparations towards a single GCC currency as the reason» In 2007, Kuwait decided to abandon the US dollar peg and return to fixing its currency to a basket of currencies all GCC states had in 2003 agreed to peg to the dollar as a preparatory step towards a 2010 monetary union» In 2009, the UAE announced that it would not join the planned monetary union because of Saudi Arabia s decision to establish the GCC central bank in Riyadh despite the fact that it also plays host to the GCC Secretariat»..Consequently the deadline, originally set for 2010, has been extended GCC Economic Integration, MBA 12 page 6
Prospects for a Gulf Dinar The GCC are not likely to launch a single currency in the short term Nonetheless there is a strong chance that in the coming decade or so a single Gulf Dinar will come into being this is because:» Benefits include» The removal of intra GCC transaction costs» Likely to facilitate the increase of intra GCC trade and investment» Will enable GCC states to pursue a monetary policy suited to their economic needs, not those of the USA s Federal Reserve The major obstacles are:» Lack of statistical disclosure and standardised GCC country datasets» Political compromise on the location of the GCC central bank and other GCC institutions GCC Economic Integration, MBA 13 page 7