In 2002, very quietly and without much fuss a very important delegation from the Gulf States met with important leaders from the European Union. They were not, however, brokering some kind of deal with regard to the price of oil. Nor were they meeting to see whether or not there could be some way that these two alliances could work together. And they were not meeting to see if the Gulf States could join the European Union. No, the leaders from the Arab world had come to the European Union to ask for advice: on currency.
The Arab leaders wanted to know how to set about creating a single currency that could be used throughout the Gulf States. This currency would be used in all of the 6 nations that commonly form the Gulf States. These are the most powerful of all the oil producing countries in the world and are namely, United Arab Emirates, usually referred to as UAE, Saudi Arabia, Qatar, Bahrain, Oman and Kuwait. These countries are all part of the Co-operation Council for the Arab States of the Gulf.
Since 2002, these countries have been quietly getting together a central bank and making monetary policy that will shape the one single economy in the Gulf region and the money issued by this bank. The work has been tireless, but is still ongoing.
Single Currency: The Journey
A single currency had first been suggested because the states who were in the Co-Operation Council had felt that they need to unify the currency to make it stronger. Given that these are some of the richest countries on earth, in fact, the richest countries, this seems surprising.
They control, directly control 45% of the oil reserves for the whole world and have a combined GDP (Gross Domestic Product) of a staggering $335 billion, for 6 relatively small countries in terms of population. So it seems odd that they are starting to be worried about their currency. Most countries with that kind of turnover would be quite happy!
However, the Gulf States began to feel slightly vulnerable at the end of the 1990’s. Increasingly there was talk about the oil reserves in the Middle East running out. If the oil did run out, this would mean that these countries would in effect be left with little income, apart from tourism. Thus all the countries are heavily reliant on having income from the oil.
All 6 of the Gulf States have large areas of desert. Some do not have enough drinking water to sustain them for even a short time. Thus they have to take in water usually from the sea, then subject it to rigorous treatment and then convert it to drinking water. In addition, whilst they are able to grow some fruit and vegetables, these are actually few and far between and would not be enough for the population to live off, nor would they be able to export sufficient amounts, should they get crops to grow in the first place.
So, although currently they have vast amounts of money, there was increasing concern that this situation may not last forever and concern as well about how these countries would cope should the oil run out.
The States as a whole decided that their unity would be their strength and they decided that if they had one bank that was central to the region, which issued its own currency and regulated money, then this would help them to be strong and retain their status.
Currently, the countries use different currencies, but they are all pegged or linked to the dollar, so they share that in common, which makes it easier to create a new unified currency.
The meeting with the European Union was to ask for detailed advice about how to set up a central bank as well as creating a single currency and a monetary union between states.
Since the European Union had actually just done this, through the creation of the European Central Bank, as well as the euro and a single monetary policy throughout the European Union, the EU was obviously well placed to give advice.
The New Currency: Financial Implications
Monetary union within the 6 states was achieved by the year 2005. The new currency will come into being in 2010 (hopefully) and will be the standard of currency that is used throughout the Gulf.
Due to the fact that establishing a currency is such a novel concept and it has to be done according to very strict criteria, the International Monetary Fund had to oversee all aspects of this operation. So it had to ensure that the central bank was set up according to proper guidelines, as well as the monetary policy that it would implement. The new currency (as of 2008) has not yet been officially named, but rumours do persist and indeed this would appear to be a closely guarded secret that will only be unveiled in a blaze of publicity, when the Arab states are ready to tell the world about what it has been up to.
The IMF took a very firm stance on the work being undertaken by the
Gulf States, because it wanted to keep the currency and monetary policy stable for the whole of the region.
Concerns were expressed that if the costs of creating the new currency in particular, were to escalate, then inflation could happen, which would then lead to the temptation to print more money. If more money were to be printed, then this could potentially lead to inflation taking a serious hold on the economy.
If that happened, the whole world would have a serious problem, because the price of oil would rocket, indeed, not just rocket, but potentially go through the rood. So, the IMF watched over the whole process with an exceptionally critical eye and of course, this still goes on as the currency is developed.
The main advantages of the single Gulf currency lie mainly with the fact that dealings with this region will be much more straightforward than when dealing with the different currencies. Oman uses the rial as its currency. The Qatari rial is used in Qatar, Bahrain uses dollars, Kuwait uses dinars, Saudi uses riyals and the United Arab Emirates uses the dirham.
This means that using 6 different currencies is quite cumbersome. There is no standard way of doing deals between say three different countries, without having to pay different exchange fees, so internally it does create significant amounts of problems and also costs each country quite a bit, because they do business with each other and then end up paying out substantial fees to exchange between currencies. It is estimated that only about 7% of all business done in the Arab states is internal business. But let’s not forget here, that these economies deal in billions, so even 7% adds up to a lot of millions per year and then they have to pay exchange fees on top. Thus the Gulf States will be able to make significant savings and whilst it does seem curious to think about these states suddenly cutting back on expenditure, it shows that they are indeed planning prudently for the future, so that their economies can remain buoyant.
However, the single currency will also make it an awful lot easier for countries to be able to trade within this region. Currently countries such as the US may buy some oil or oil related products from Kuwait and some from say Oman. The sums involved could run to millions of dollars in just one transaction. Yet exchange rates had to be paid twice on this sum of money, so now, there will simply be one exchange fee. This may sound trivial, but over the years these fees add up and so it is easier for both parties to simply have one currency and then everything is straightforward.
The creation of the united monetary policy will also help the Arab States to create firms and companies that are pan-Gulf, in other words, they will be cross border and as a result, will make companies and businesses smaller. Whilst different currencies are used, it can be frustrating (and expensive) for firms to have employees in both Oman and Saudi Arabia, because they have to pay in rials and Saudi riyals! This poses administrative headaches to those trying to pay employees’ wages and is also expensive for the companies involved. Now it will simply be one currency and the whole process can be streamlined.
Travelers, particularly business travelers, will find it easy to move around the Gulf States now, without having to keep exchanging cash and worrying about which currency will be accepted in which country, so for them too, it will be much easier.
And so the new currency looks like it will have significant benefits for most businesses and travellers to the area, as well as internal businesses.
Will it happen on time?
The deadline of 2010, really is open to debate. Consistently throughout 2008 there have been rumours that the deadline for this will not be met, that it is simply too optimistic and that the more realistic deadline would be sometime around 20011-2012.
However, the Gulf States keep denying that there is any problem and they say that it will be ready for 2010.
Oman may not be ready to join at this stage, but early indications are that it wants the single currency to forge ahead and then it will join it when it is ‘ready’. It has been curiously enigmatic about the whole process, after it announced in 2006 that it would not be ready on time. Kuwait has also been acting of its own accord and when it abandoned its pegging to the dollar in May 2007, everything seemed in disarray for a while.
So on the face of it, everything is still set for 2010, but behind the scenes, there seems to be quite a lot of disharmony and states not pulling in the same direction.
For some involved, particularly the Saudis, it is an issue of national pride. The Saudis do not want to have to stand there in 2010 and say that they were not capable of getting the currency together. These are, after all the richest countries on earth and so they are able to pay for the best financial consultants in the world. So if any country, or any bloc of countries is to be able to sort out something like establishing a new currency, then these really ought to be the ones who can do it.
Consequently, there would seem to be some kind of wrangling going on between countries and of course national issues and politics will undoubtedly cause some delays.
The most that any of the States will concede is that they are going to set a review date for 2009 and then they will know for definite whether the currency will go ahead and when it will be issued and start circulation. Until that time, the rest of the world can only wait and see what develops.
The advent of a new currency in the Gulf States is an interesting issue. We will now have the European Union with its dominance of Europe through the Euro. Even countries that don’t want to join the EU want to join the Euro, as is the case with Iceland. Such is the popularity that the euro is gaining. Turkey will soon be adopting the euro and then, on the other side we have the new unified, strong Gulf currency.
The countries involved obviously want to ensure that their status is maintained and that when the oil runs out as it may someday, their economies can be safeguarded. The fact that they have started planning now is a good indication of just how worried they are. So although, things may be very good for them now, their luck and their money may run out soon.
Yet is the creation of this new currency and monetary policy a wholly good thing? Is there not a risk that the creation of a single monetary policy and currency lead to complete unification. These countries are already quite close, but could they actually become one big country. THE country in the world that produces 45% of the world’s oil and controls access to 17% of the world’s gas supply.
Undoubtedly there are advantages involved
for these countries if they were to unify. They would be one
super-country. They would have a
GDP combined of $335 billion and they would exert quite a bit of power and influence within the world as a whole. Indeed, it almost seems strange that they have not joined up officially, before now, since it seems to make perfect sense and would help them remain very powerful.
Yet they are different and do have different attitudes towards issues. Oman, Bahrain and to some extent UAE are quite liberal in terms of being a Muslim country, but Saudi Arabia is not so liberal and it is a dominant force in the region. It is likely that any unification would be dominated by Saudi Arabia and thus the more tolerant, liberal countries would simply find that they are effectively taken over. What would then be the attitude of this country towards the west, who knows, but it is an interesting issue to consider, even hypothetically.
Politically this would also have an effect. We would now have one big Muslim country that is not the most tolerant of countries (potentially) facing the United States over the price of oil. There are all kinds of financial, political and even religious issues going on here: indeed too many to even think about coherently.
The Way Forward
So it is extremely likely that some kind of new currency will be introduced, if not in 2010 then sometime soon, or the idea will be shelved forever.
The concept of the Gulf having its own currency has not found a great deal of media coverage in the West. Yet the implications for the wider world are quite significant and as such, we should all be interested in if this happens, when this happens and what the future implications will be.
Increasingly the world is changing and currencies of individual nations are suddenly disappearing, being swallowed up by the Euro, or this new currency, in the Middle East.
Who is to say whether or not the new currency would even be limited to the 6 Arab states: would there be potential for the new currency to become the currency of the Islamic world, whereby the strict financial guidelines, as contained in the Koran would be effected.
If we did suddenly have three main world currencies, the euro, the Arab States one and the US $, how would this affect the world order and would we see significant changes?
These questions can and will only be answered if this new currency comes into force. So it will be an interesting time ahead: for everyone.