1. IS THE GCC AN OPTIMAL CURRENCY
AREA?
By
Adnan Ahmed Qatinah
Mohammed Ghiath HASAN AGHA
Husam Al Dakak
Ala'a Mohamed
ECONOMIC CHANGE IN THE ARAB REGION

2. • Introduction
• The theory of Optimum Currency Area
• Definition of Optimum Currency Area
• Potential Benefits and cost of Optimum Currency Area
• Criteria of an Optimal Currency Area (OCA)
• GCC Countries and the Optimality Criteria for OCA
• Overview of the economic cooperation in GCC
• Overview of GCC economics
• Benefits and Costs for GCC to have OCA
• Does GCC meet the criteria of an Optimum Currency Area?
• Conclusion

3. In 2001, the Gulf Cooperation Council countries (GCC)
(Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab
Emirates) decided to introduce a common currency by 2010.
Furthermore, in 2005, the GCC members adopted the
European Union (EU) convergence criteria with respect to
budget deficit, public debt, currency reserves, interest rate, and
inflation.
The main objective of our presentation is to
investigate to what extent the GCC member states meet the
theoretical criteria for an optimal monetary union.

4. Mundell stated “economic efficiency would be
maximized in a geographical region if the region all
shared a single currency".
Professor Robert
Mundell, 1999 Nobel
Laureate: the father
of the Theory of
Optimum Currency

5. 1981 • The Gulf Cooperation Council (GCC) was established.
1983 • Free Trade zone was established to enhance economic
integration.
1999 • Customs Union was established.
2003 • GCC countries pegged their currencies to the US dollar as
well as established a common external tariff of 5%
2008 • GCC countries agreed to introduce a monetary union.

6. Average Growth Rates of Nominal GDP
Saudi GCC
Period Bahrain Kuwait Oman Qatar UAE
Arabia Average
1970s 25.1 30.6 46.4 31.3 47.7 51.1 38.7
1980s 3.0 -3.3 7.1 0.1 -2.5 2.1 1.1
1990s 6.6 11.3 5.9 10.3 5.2 8.0 7.9
2001-2007 13.9 17.3 10.9 20.8 10.8 15.7 14.9

7. GCC economies cycles

8. BENEFITS
• Reduces transaction costs
• Bargaining Power
• More Intra Trade
• Economies to Scale
• Removal of Foreign Exchange Risk
• Fixed Exchange Rates
COSTS
• Unitary Monetary Policy
• Constraint on national fiscal policy;

9. • Openness
• Diverse Production
• Mobile Labor
• Transfer Criterion
• Homogeneity of preferences
• Solidarity vs. nationalism

10. • McKinnon suggests that countries
with a small open economy, which
trades intensively with the world,
would be good for them to join an
optimum currency area. Ronald
McKinnon
Source:
http://www.stanford.edu/~mck
innon/

11. Openness degree of the GCC
The GCC economies have traditionally
been open to international trade in
goods and services. Asia and the
European Union have accounted for
about two-thirds of GCC exports and
Bahrain Kuwait Oman
imports. Qatar Saudi Arabia UAE

12. GCC trade in 2010
Intra-GCC trade has been low (less than 10
percent) due to the fact that all the GCC
countries are mainly oil producers and have
similar economic structures.
Intra-trade Extra-trade

13. Small open economies
GDP Trade Openness Intra-GCC
Country
Bn USD Bn USD % of GDP % of trade
Bahrain 15 21 133% 16.3%
Kuwait 94 74 78% 4.8%
Oman 35 32 91% 17.2%
Qatar 52 44 85% 7.4%
Saudi Arabia 346 250 72% 4.3%
UAE 158 247 157% 5.1%
GCC 701 668 95% 6.1%
World 48,121 24,365 51%
Source: Global Insight, IMF DOTS, Ecowin,

14. As far as the Mckinnon criterion is
concerned, most of GCC economies
qualify for joining a monetary union.
They are very open, they may will not
face asymmetric shocks.

15. Kenen stated that countries with a wide range of
products and similar production structure are more
likely to form an optimum currency area with lower
probability of asymmetric shocks.
Asymmetric shocks are more likely to have greater
negative impact on countries with less diverse
production. Peter Kenen
Source:
www.princeton.edu

16. Despite the efforts to diversify their
economies, GCC countries remain heavily
dependent on oil. Since 1991 oil and gas
income constituted, in average, 35 percent
of the GDP, 77 percent of total exports and
74 percent of government revenues.

17. GDP shares by sector
Oil and Financial Other
Country Manufacturing Government Construction Other
Gas services services
Bahrain 26.48% 12.33% 14.87% 19.80% 4.78% 12.99% 8.75%
Kuwait 54.49% 7.45% 11.99% 10.36% 1.93% 4.90% 8.88%
Qatar 59.57% 8.44% 8.87% 6.34% 5.66% 4.44% 6.68%
Saudi Arabia 50.13% 9.48% 16.09% 6.68% 4.52% 5.19% 7.91%
UAE 36.05% 12.95 9.18% 13.59% 7.99% 10.88% 9.36%
GCC 45.34% 10.13% 12.20% 11.35% 4.98% 7.68% 8.32%
Source: UNSD- Key Global Indicators, 2009

18. As far as the Kenen criterion is
concerned, most GCC economies
are qualify for joining a monetary
union, because, their economies
are similar production structure and
asymmetric shocks are not more
likely among GCC.

19. • Labor mobility is the key to dealing with asymmetric shocks in a currency area.
Thus, workers promptly move in response to economic incentives.
• full labor mobility occurs if people immediately take advantage of any different
in earnings, and move where they can earn more.
Economic Factors Non-Economic Factors
The cost of moving Culture differences
The prospect of becoming unemployed Family and friendship links
Career opportunities Current, Future Commitment to one’s country of Origin
Family career prospects (spouse, children)
Social benefits (subsidizes)
Taxation of earning both labor and saving

20. • Articles within the GCC Charter, in both the original Unified
Economic Agreement of 1981 as well as the new Economic
Agreement of 2001 contain specific provisions allowing full and
complete freedom of movement for citizenry.
• The GCC documents demonstrate a fairly liberal interpretation
of free movement rights, allowing citizens to move across the
six states’ borders for a variety of purposes, including residence
and employment, and to gain access to a host of social security
benefits in any of the member-states

21. GCC National Working in Qatar (2010)
Nationality Total
Kuwait 77
Bahrain 633
Oman 4,051
Saudi Arabia 775
United Arab Emirates 263
Total 5,799
Source: Data Collected from Qatar Statistics Authority

22. Foreigners as percent to total population in GCC
countries in 2007 •Estimates put the number of
foreign workers in the Gulf at
about 13.9 million in 2007.
• We can conclude that, labor
mobility situation might be
unable to play a major role to
deal with asymmetric shocks
in a GCC currency area.
N/A
Bahrain Kuwait Oman Qatar Saudi Arabia UAE

23. • OCA countries have to give up the exchange rate instrument used
to response to adverse shocks that hit an economy of this area.
The rest better off economies transfers compensation. When
adversely hit, a region sees its economy decline, so the tax
payments by its residents decline and the various welfare
payments (unemployment, social subsidies) rise.
• Given the recent economic boom, GCC has obtain a huge
reservation and sovereignty funds, these effective instrument will
enable GCC countries to face any adverse hit.
• On this Criterion, GCC is definitely an optimum monetary union.

24. Budget Surplus/ deficit for the GCC Countries % to GDP
Country 2003 2004 2005 2006 2007
Bahrain 1.8 1.4 5.1 2.3 0.6
Kuwait 10.0 15.1 29.1 17.6 29.7
Oman 1.4 2.4 2.5 0.3 0.3
Qatar 3.9 16.4 9.2 9.0 14.7
Saudi Arabia 45 11.4 18.4 21.7 14.6
UAE -4.5 -0.4 8.1 12.0 9.5
Source: Secretariat General of GCC, and Oman Central bank annual report

25. • In case of asymmetric shocks, country members of a currency area should
have a common reaction policy.
• Establishment of common monetary institutions is a key element. (EUCB).
• The monetary and exchange rates policies have been cooperated in the
GCC in response to exogenous shocks. (Kuwait is an exception).
• This criteria is likely to be met by GCC countries.

26. Criterion Satisfied?
Openness Yes
Product Diversification Yes
Labor Mobility No
Fiscal Transfers Yes
Homogeneity of Preferences Yes
Solidarity vs. Nationalism No

27. • For a currency area, sense of solidarity to
the union needs to overweight the own
national interests.
• In case of its establishment, the GCC
central bank might suffer from lack of
political support.
• This might be a crucial factor resulting in
catastrophic outcomes for the GCC in case
of forming a currency area.