Ms. May Y Khamis, Mr. Abdelhak S Senhadji, Mr. Gabriel Sensenbrenner, Mr. Francis Y Kumah, Maher Hasan, and Mr. Ananthakrishnan Prasad
This paper focuses on impact of the global financial crisis on the Gulf Cooperation Council (GCC) Countries and challenges ahead. The oil price boom led to large fiscal and external balance surpluses in the GCC countries. However, it also generated domestic imbalances that began to unravel with the onset of the global credit squeeze. As the global deleveraging process took hold, and oil prices and production fell, the GCC’s external and fiscal surpluses declined markedly, stock and real estate markets plunged, credit default swap spreads on sovereign debt widened, and external funding for the financial and corporate sectors tightened. In order to offset the shocks brought on by the crisis, governments—buttressed by strong international reserve positions—maintained high levels of spending and introduced exceptional financial measures, including capital and liquidity injections. The immediate priority is to complete the clean-up of bank balance sheets and the restructuring of the nonbanking sector in some countries. Clear communication by the authorities would help implementation, ease investor uncertainty, and reduce speculation and market volatility.
Following the oil price rises of late 1973 and early 1974, several organizations predicted massive accumulations of international reserves by the major oil exporting countries by the end of 1980. 1 In the event, their balance of payments surpluses on current account and their reserve accumulations have been substantially lower than expected. 2 One reason is that world economic growth has been slower than assumed. But almost certainly the major source of error concerned the absorptive capacity of the oil exporting nations. The speed with which highly ambitious development strategies could be formulated and implemented in the oil exporting countries during the period after 1973 was not anticipated by many commentators in the early days of the oil crisis. Largely as a result of these factors, the balance of payments surplus on current account of the major oil exporting countries 3 declined from $68 billion in 1974 to $35 billion in 1977; and it has been projected to decline further, to around $10 billion in 1978.4 Further, this surplus is now concentrated among five countries of relatively low absorptive capacity—Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and the Socialist People’s Libyan Arab Jamahiriya. The current account position of the other seven oil exporting countries as a group was expected to move into deficit in 1978.
This paper presents an overview of the unprecedented economic and social transformation witnessed by the member countries of the Cooperation Council of the Arab States of the Gulf (GCC)-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates-over the last three decades.
Over the past three decades the member countries of the Cooperation Council of the Arab States of the Gulf (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—have witnessed an unprecedented economic and social transformation. Oil proceeds have been used to modernize infrastructure, create employment, and improve social indicators, while the countries have been able to accumulate official reserves, maintain relatively low external debt, and remain important donors to poor countries. Life expectancy in the GCC area increased by almost 10 years to 74 years during 1980-2000, and literacy rates increased by 20 percentage points to about 80 percent over the same period. Average per capita income in the GCC countries was estimated at about $12,000 in 2002, with their combined nominal GDP reaching close to $340 billion (more than half the GDP of all Middle Eastern countries; see Table 1). With very low inflation, overall real economic growth has averaged 4 percent a year during the past three decades, while the importance of non-oil economic activities has grown steadily, reflecting GCC countries’ efforts at economic diversification. Moreover, central bank international reserves alone in some GCC countries are equivalent to about 10 months of imports. This progress has been achieved with an open exchange and trade system and liberal capital flows, as well as open borders for foreign labor. The GCC area has become an important center for regional economic growth.
The Heads of States of the Cooperation Council for the Arab States of the Gulf (GCC) decided at the end of 2001 to deepen economic integration by establishing a common currency—pegged to the U.S. dollar—by 2010. This decision represents a practical evolution to the integration efforts that started with the establishment of the GCC in the early 1980s. As an initial step, all GCC countries officially pegged their currencies to the U.S. dollar during 2002 and early 2003 (until then, most currencies of GCC countries had been formally pegged to the SDR). Moreover, a unified regional customs tariff at a single rate of 5 percent became effective in January 2003, while macroeconomic performance criteria will be established by 2005 for the needed policy convergence to support the monetary union. The establishment of an economic and monetary union will create an important regional entity: in 2002 GCC countries had an estimated combined GDP of close to $340 billion, an average weighted per capita nominal GDP of about $12,000, and held some 45 percent and 17 percent, respectively, of the world’s proven oil and natural gas reserves (1).
Over the past two decades, the GCC countries have taken important steps to achieve economic and financial integration among them. They have lifted formal impediments to the free movement of national goods, labor, and capital across these countries, and have similar policy preferences in a number of areas. In particular, these countries have been successful in maintaining price and nominal exchange rate stability, as well as an open trade regime and liberal capital flows. In addition, they have in place an open-border foreign labor policy to ensure sufficient supply of labor at internationally competitive wages, with expatriate workers accounting for the largest share of the labor force in non-oil activities. The GCC countries’ success in maintaining for several decades a de facto fixed exchange rate in the face of significant global crude oil volatility owes much to this policy framework.1 Furthermore, since the early 1990s, these countries have devoted increased attention to structural and institutional reforms to encourage diversification, enhance non-oil growth, and develop human capital.2 However, some differences in economic performance and policy preference have emerged over the past decade (Figure 2.1). Some GCC countries have also been more successful than others in promoting non-oil activities and diversifying exports and government revenue (Figures 2.2 and 2.3).
In a “full” monetary union, independent nation states adopt a single monetary policy and a common currency. This is characterized by a single external exchange rate policy, as well as the permanent absence of all exchange controls, whether for current or capital transactions. By contrast, a “pseudo”-monetary union—in some aspects currently the case among GCC countries—is an agreement to maintain fixed exchange rates among the member states, but without explicit integration of economic policy, a common pool of foreign exchange reserves, and a single monetary policy. Moreover, the institutional framework and the tools to maintain exchange rates permanently fixed do not exist in a pseudo-monetary union. Thus, there is always the possibility that one or more member countries could have a strong incentive to allow its exchange rate to depreciate or appreciate against the others if under pressure. The expectation that this may happen will likely prevent complete monetary integration.
Abdulrahman K Al-Mansouri and Ms. Claudia H Dziobek
The six member states of the Gulf Cooperation Council (GCC)-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE)-have laid out a path to a common market by 2007 and monetary union by 2010, based on economic convergence. To monitor convergence and support economic and monetary policy, comparable economic data for member countries and data for the region as a whole will be essential. What is the most efficient way to produce these data? The authors survey the statistical institutions in the GCC countries and present the case for creating "Gulfstat"-a regional statistical agency to operate within a "Gulf States System of Statistics." Valuable lessons can be learned from regional statistical organization in Africa and the European Union-Afristat and Eurostat.