Back Matter

Back Matter

Ugo Fasano-Filho, and Andrea Schaechter
Published Date:
August 2003
    • ShareShare
    Show Summary Details
    Appendix I Economic Performance and Policies of GCC Countries, 1990–2002

    The GCC countries implemented from 1990 to 2002 a broad range of structural and institutional reforms to accelerate non-oil growth and create employment opportunities for a rapidly rising local labor force, while reducing vulnerability to oil price shocks. These reforms have in common several key elements, such as lifting impediments to foreign direct investment, streamlining business regulations, expanding private sector investment opportunities, improving governance, and modernizing the financial system. GCC countries have also strengthened efforts in the past decade to diversify their production base, including through the development of liquefied natural gas, gas-based industries, and services, such as container port facilities and tourism. This appendix reviews overall economic performance in these countries since 1990, as well as progress in implementing their structural reform agenda, which is being reinforced by ongoing regional economic and monetary integration.


    Endowed with smaller oil reserves than its neighbors in the GCC area, Bahrain has promoted over the past decades a number of non-oil based economic activities.1 These included establishing an export-oriented, gas-based aluminum manufacturing industry, building up an offshore financial center (including Islamic banking), promoting the tourism industry, and, recently, encouraging information-technology industries. As a result, although the Bahraini economy remains dominated by the public sector, it has become the most diversified in the GCC area: the non-oil sector accounts for over 80 percent of real GDP, with the financial sector being the single most important activity in the country (contributing about 20 percent of real GDP).2

    Supported by a liberal trade and investment regime, no taxation, and minimum business regulations, Bahrain’s aggregate real GDP growth averaged about 4.5 percent a year during 1991-2002. This contributed to a gradual improvement in the country’s GDP per capita.3 Also, economic growth has become quite resilient to oil price shocks as reflected in a relatively robust non-oil growth, even in 1998 when global oil prices collapsed. Meanwhile, Bahrain’s real effective exchange rate—amid one of the lowest inflation rates in the GCC area (about 0.5 percent a year on average from 1991 to 2002)—has depreciated slightly over the same period, though it has been quite volatile (Table A1.1).

    Table A1.1.GCC Countries: Real Effective Exchange Rates and Inflation Volatility, 1991–2002
    Real Effective Exchange RateCPI-Inflation
    Average1deviationof variation2Averagedeviationof variation2
    Saudi Arabia–0.464.34–9.400.642.142.94
    United Arab Emirates2.184.902.243.531.550.44
    Sources: National authorities; and IMF staff estimates.

    Bahrain’s financial position has, however, remained vulnerable to oil price movements, because oil still accounts for over 60 percent of both export receipts and government revenues despite a relatively diversified economic structure. Thus, as a result of the downward trend in global oil prices during much of the last decade through 1998, Bahrain recorded fiscal and external current account deficits—albeit moderate ones. The government financed the fiscal deficits mainly through domestic debt, which increased rapidly—though from a low base. In 2000, strong world prices for key exports commodities (gas, aluminum, and particularly oil) sparked an improved financial performance. Indeed, the fiscal accounts swung into a large surplus (close to 10 percent of GDP)—most of it set aside in the Reserve Fund for Strategic Projects—and the external account balance also switched to a surplus, though one of the lowest in the GCC region (less than 2 percent of GDP). In 2001-02, as a result of weaker crude oil prices, it is estimated that Bahrain recorded a small fiscal surplus (less than 1 percent of GDP on average), while the external current account was practically balanced (Figure A1.1).

    Figure A1.1.Bahrain and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    Notwithstanding the recent improvement in the overall fiscal accounts, the underlying fiscal position has remained weak. After declining during the first half of the 1990s, the non-oil fiscal deficit deteriorated significantly during the second half, particularly between 1998 and 2002, when it increased by about 60 percent in nominal terms (or from 15 percent to about 21 percent of GDP), reflecting higher current expenditures across the board—Bahrain’s wage bill at more than 13 percent of GDP is among the highest in the GCC area. This deterioration took place even though non-oil revenues, in particular fees and charges, increased significantly as the authorities adopted cost recovery measures for government-provided services, such as electricity, water, and sewerage. Moreover, budget policy has usually presented a “stop-and-go” approach. When oil prices fell, capital expenditures have been cut, while current spending, in particular the wage bill, have remained practically untouched.

    Bahrain’s well-capitalized and supervised financial sector has been quite profitable, with a sound asset quality. The Bahrain Monetary Agency (BMA) maintains a strict segregation between the domestic and the offshore financial systems.4 Aside from conventional banking, the BMA’s recent efforts to develop a comprehensive regulatory and operational framework for Islamic banking has supported the government’s ongoing efforts to establish Bahrain as a leading Islamic financial center. The BMA adheres to Basel Core Principles for Effective Banking. Stable and credible monetary and exchange rate policies have also helped maintain a sound financial system.

    The BMA is in charge of enforcing monetary policy, which is basically directed at short-term regulation of domestic liquidity by using indirect instruments. It also uses open market operations to manage domestic liquidity by discounting treasury bills and government development bonds, as well as by carrying out foreign exchange swap operations with commercial banks. Monetary policy is framed within a currency board type of arrangement, which maintains foreign exchange coverage of 100 percent of the currency in circulation. The authorities have recently adopted a new law and several regulations to combat money laundering and the financing of terrorism.

    Although economic growth has remained buoyant through much of the last decade, unemployment pressures among nationals have started to mount, since the vibrant sectors in the economy (offshore banking, trade, and tourism) continue to depend largely on expatriate workers for employment. To deal with this problem, the Bahraini authorities have adopted an active policy of training and education, flexible employment quotas, and incentives for firms to employ Bahraini nationals.5 Moreover, they have established recruitment centers to help employers find qualified and suitable local candidates. These measures have had some success in gradually reducing the share of expatriate workers in the workforce, but a rapidly growing national labor force has hindered further improvement.

    Structural reforms have advanced gradually in Bahrain. These reforms have aimed at improving the general functioning of public administration and promoting the role of the private sector. The authorities have completed the public expenditure reviews for education and health and contracted out the management of two small public enterprises (Appendix III). Progress in privatization has been limited, in part due to the possibility of worsening unemployment among nationals in the short run. The authorities have also simplified administrative procedures and business licensing, and reformed the investment laws to make Bahrain more attractive to foreign direct investment (barriers for non-GCC foreign companies to own real estate have been eased as well).6 In addition, import tariffs on selected consumer products are in line with the adoption of the GCC common external tariff in January 2003.


    During the past decade, Kuwait has made an impressive recovery from the economic damage and disruptions caused by Iraq’s invasion in the early 1990s. In fact, oil output capacity and exports have been restored, and the fiscal and external account deficits of the mid-1990s have been eliminated and have turned to surpluses of over 20 percent of GDP in recent years.7 At the same time, foreign assets and the country’s infrastructure have been rebuilt, public debt drastically reduced, and the financial system strengthened. Inflation, which increased sharply in the aftermath of the regional conflict, averaging 10 percent a year in the early 1990s, fell on average to about 2 percent a year in the latter part of the decade through 2002 (Figure A1.2). In addition, the cushion provided by large and rising government investment income receipts has reduced Kuwait’s vulnerability to unfavorable developments in international oil markets. Indeed, even in 1998 when global oil prices collapsed, Kuwait and the United Arab Emirates were the only GCC countries to record an external current account surplus.

    Figure A1.2.Kuwait and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    Following the reconstruction boom, Kuwait’s growth in recent years has been weak. Real GDP growth averaged about 1 percent a year from 1996 to 2002, reflecting a drop in oil output. In addition, despite the recovery in non-oil growth (averaging 2 percent over the same period), this sector’s share of total GDP remains below that of the 1980s.8 The government sector continues to dominate most economic activities, including oil, transportation, telecommunications, utilities, and financial services.

    Kuwait recorded a strong financial position in the 1990s—except in the early part of the decade, owing to the high spending associated with reconstruction following the end of the regional conflict. The prudent fiscal policy reflects the objective of building up official reserves, so that future generations will benefit from the proceeds of the nonrenewable oil reserves extracted in the current period.9 The strengthening of the overall fiscal budget position in recent years was greatly assisted by large increases in global crude oil prices, a rapid expansion of income from investments in foreign assets, and higher transfers of profits of public entities. Also, total expenditures were reduced significantly, resulting in a decline in their ratio to GDP from 59 percent in 1993/94 to an average of about 40 percent in 1999/2001—though it has edged up in 2001/02, leading to a deterioration in the non-oil fiscal deficit. Except for wages and salaries, all other spending categories were affected, in particular goods and services, reflecting cutbacks in military outlays. Despite this improvement, the structure of the budget has remained weak, with heavy dependence still remaining on oil revenues, and large outlays related to the costs and subsidies associated with the “cradle to the grave” social welfare system.

    A wide array of budgetary subsidies and transfers, both direct and indirect, is provided by the government to the Kuwaiti population. A sharp increase in subsidies and transfers took place in the immediate post-conflict years, owing to payments to Kuwaiti nationals living abroad, and the transfers associated with the government’s forgiveness of all consumer and housing loans of Kuwaiti nationals outstanding at the time of the Iraqi invasion. Outlays on subsidies and transfers have since moderated, although they nevertheless have remained high, averaging 9 percent of GDP in the second half of the 1990s. Developments in Kuwait’s balance of payments have reflected the economy’s heavy dependence on oil exports and investment income, which have accounted for more than 90 percent of all current account receipts. Despite this dependence, the country has traditionally recorded (large) current account surpluses.

    Monetary policy in Kuwait has been centered on maintaining price stability, and fostering a sound financial system. The exchange rate arrangement—pegged until recently to an undisclosed basket of currencies of Kuwait’s trade and financial partners—has continued to serve the country well, keeping inflation low and enhancing confidence.10 The policy strategy in recent years has been to maintain a foreign reserve target of not less than five months of goods imports, to refrain from central bank financing of the government, and to strengthen prudential regulations in line with international standards. In the last decade, the Central Bank of Kuwait’s monetary policy instruments have evolved toward increased reliance on indirect instruments of liquidity management, in line with increasing financial liberalization. All controls on deposit interest and limits on bank charges and fees were abolished in 1995, leaving only controls on maximum rates of bank loans. At present, liquidity management is conducted primarily by means of open market operations, in addition to direct deposit-taking and lending at rates closely guided by market conditions.

    In the 1990s, Kuwait’s financial system made great strides in recovering from the stresses related to the 1982 crash of the informal stock market, and the impact of Iraq’s invasion. In order to tackle these financial problems, the government introduced the Debt Collection Program (DCP) in 1993-94 to restore the integrity of the financial system.11 Sizable resources formerly invested abroad have been channeled back to the domestic economy to support credit demand arising from the strengthening of nonoil sector activity, reconstruction-related spending, and firming oil prices. As a result, the Kuwaiti financial system has returned to a strong position, with high bank profits and capitalization.

    The financial sector in Kuwait is well supervised and regulated. Overall, the Central Bank has developed a supervisory process that conforms in most respects to the Core Principles for Effective Banking Supervision developed by the Basel Committee on Banking Supervision. Also, the Central Bank has adopted a comprehensive approach by establishing several procedures, including setting systemic prudential policy for financial institutions and issuing regulations and guidelines, as well as enforcing legal, regulatory, and prudential standards. In late 2001, the Central Bank drafted a law regulating money-laundering activities. Legal measures include the adoption of anti-money laundering (AML) guidelines (1997) and enactment of a law criminalizing money-laundering activities (March 2002) in accordance with the Financial Action Task Force (FATF) recommendations. The capital market was also strengthened in recent years. The government’s decision to open the market to foreign investors, and to strengthen regulations regarding disclosure and insider trading, together with the general improvement in business climate, contributed to a recovery in the stock market in the past few years.

    Population dynamics has led to high rate of growth of the Kuwaiti labor force in excess of 4 percent a year for much of the last decade. Nevertheless, the domestic labor market has continued to be highly dependent on expatriate workers, and has remained segmented. Most Kuwaiti workers are employed in the public sector, and most expatriate workers in the private sector. Although unemployment among Kuwaiti nationals remains low (estimated at about 2 percent), unemployment pressures are increasing, owing to the expanding Kuwaiti labor force and the unsustainable level of government hiring in the civil service, as well as the growing mis-match of skills among Kuwaiti job applicants and the requirements of the private sector. The labor market reform, approved by the National Assembly in May 2000, aimed at promoting the private sector as the main provider of jobs; making the Kuwaiti workers more attractive to private sector employers through training; limiting the allowance to public employees; and extending the social allowance to Kuwaitis in the private sector. The Manpower and Government Restructuring Program was established in July 2001 to implement the Labor Law, provide unemployment benefits and training to Kuwaiti nationals, and facilitate employment of Kuwaiti nationals in the private sector. In September 2002, the government approved quotas for the proportion of Kuwaitis that private companies must employ; companies that fail to meet this target would be subject to a fine and sanctions, such as exclusion from bidding for government contracts.

    In contrast to other GCC countries, Kuwait has only recently adopted a strategy to diversify the productive base of the economy, promote the role of the private sector, and reduce government ownership and its dominance in the economy. The authorities introduced a package of reforms in 2000-01 that seeks to restore growth in the non-oil private sector (Appendix III). The economic reforms encompass a wide range of structural reforms, from the pricing of utilities and privatization to labor market reform and foreign participation in the economy. The National Assembly has passed laws on foreign portfolio investment, foreign direct investment, and key components of the labor market reform. Other major important initiatives, such as privatization law, the reform of the corporate income tax law, and the company law, are under consideration.


    Continued high dependence on oil, limited oil resources, and, in particular, a rapidly rising young domestic labor force have led the Omani authorities to adopt an ambitious diversification strategy since the mid-1990s. This strategy aims at strengthening the export base centered on the development of the country’s natural gas resources and promoting other non-oil activities, such as entrepot activities and tourism.12 In partnership with the private sector, two major achievements of this strategy were the inauguration in late 1998 of the Salalah container port, which has become one of the world’s 20 busiest and most efficient port of its kind, and the completion in 2000 of the liquefied natural gas (LNG) plant with an initial capacity of 6.6 million tons. In addition, the authorities have also built the required infrastructure—two gas pipeline networks and port—to support the development of large gas-based, outward-oriented industrial projects, such as an aluminum smelter, petrochemicals, and fertilizer plant. Although the LNG project has contributed to an increase in Oman’s external debt, the latter has remained within a manageable level (Figure A1.3).13

    Figure A1.3.Oman and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    This development strategy helped sustain a relatively high real GDP growth in the hydrocarbon sector of over 4 percent a year during the last decade. However, nonhydrocarbon growth decelerated from close to 7 percent a year in the first half of the 1990s—spurred by growth in services, particularly trade—to about half that rate in the second half. Per capita GDP only increased slightly in the past decade, owing to rapid population growth. Meanwhile, as a result of declining import prices and a relatively low domestic inflation (about 0.2 percent a year on average from 1991 to 2002), the average real effective exchange rate has depreciated slightly during those years (see Table A1.1).14

    The Omani authorities have supported their development strategy by maintaining a prudent fiscal policy. In fact, during the second half of the 1990s, government spending remained virtually unchanged in absolute terms, while non-oil revenue grew on average by 6 percent a year as a result of increases in fees and charges and improvement in revenue collection. Consequently, the overall fiscal balance (including transfers of oil revenue to the State General Reserve Fund and investment income) moved from deficits of about 7 percent of GDP in the first half of the 1990s—mostly financed by a combination of a drawdown of government foreign assets and recourse to domestic and external debt—to surpluses in the second half, except in 1998 when world oil prices collapsed.15 The recovery in global oil prices of the past few years contributed to a turnaround in the fiscal balance, reaching surpluses of about 6 percent of GDP on average in the period 1999-2002 despite larger-than-budgeted expenditures, particularly in the area of defense. The authorities have used these surpluses to repay government debt and to build up official foreign assets. However, the increase in spending—though after almost a decade of no growth—has hindered an improvement in the non-oil/LNG fiscal deficit, which reached an estimated 25 percent of GDP in 2002.16

    The external current account balance mirrored the fiscal performance in the past decade. From average deficits of close to 2 percent of GDP a year in the first half of the 1990s, the deficit surged to 21 percent of GDP in 1998 on account of lower oil prices and higher LNG-related imports, before turning into surpluses in 1999-2002, reflecting the recovery in oil prices and the coming on stream of LNG exports. Also, non-oil exports (including re-exports) more than doubled in the 1990s, reaching $2.4 billion in 2002, or 22 percent of total exports.17

    The Omani banking system consists of 15 institutions, but it is dominated by three local banks that accounted for over 70 percent of total assets at the end of 2002. All commercial banks are majority-privately owned. There are three specialized banks, two of them publicly owned, that provide long-term soft loans (subsidized by the government) for housing and small and medium-size projects. The financial system has been also strengthened in the past few years.

    The Central Bank’s self-assessment of its supervisory system and practices indicated that the banking system was sound, well supervised and regulated, and in compliance with the Basel Core Principles. The capital adequacy ratio exceeded the Basel Committee recommended minimum. However, the ratio of nonperforming loans to total loans has increased since 1999, reaching 11.3 percent by the end of 2000. Although the Central Bank mainly relies on indirect instruments of liquidity management, such as repo facilities and central bank certificates of deposit, a few direct controls are still in place, including quantitative ceilings on consumer loans and caps on loan interest rates—set at 40 percent of total bank lending and 11 percent a year, respectively. An anti-money laundering law was adopted in late March 2002, and Oman has taken important steps toward full compliance with FATF recommendations regarding combating terrorism financing.

    The capital market is dominated by trading in government securities (development bonds and treasury bills) that are sold to both residents and nonresidents. The outstanding stock of government bonds and treasury bills stood at less than 6 percent of GDP at the end of 2001, of which local commercial banks held almost 66 percent, but secondary trading in bonds remains minimal.18 The transparency of stock market operations improved following the adoption of the Capital Market Law in 1999. This law provides for the separation of trade, regulatory, and depositary functions of the Muscat Stock Market (MSM) and requires more stringent disclosure and reporting requirements for listed companies. These reforms have, in part, boosted confidence, with the MSM rising by 26 percent in 2002 after several years of sharp losses.

    Although the economy has continued to generate more jobs than can be filled by Omani nationals, unemployment pressures among Omanis have started to rise. As is the case in other GCC countries, the authorities are relying on a mix of market-based (such as improved education and vocational training) and mandatory mechanisms (such as quotas) to create job opportunities for nationals in the private sector. Moreover, large public resources have been allocated for human capital development over the medium term (close to $500 million), and private universities and colleges have been allowed to start operations in the country. At the same time, the government has provided clear signs that it will no longer be the first source of employment for nationals. On other issues, the authorities have improved Oman’s national statistics significantly, with further efforts needed to collect comprehensive data on capital flows, external debt, and labor statistics.

    The authorities have also stepped up structural reforms to promote growth and employment. Following a number of divestitures in banking, insurance, and tourism in the mid-1990s, the authorities have recently focused on privatizing the management of public enterprises (e.g., Salalah container port and airports) and allowing private investment in areas of services—previously the sole domain of the government. In this context, the power generation and telecommunications sectors are currently at the fore-front of the privatization efforts. The installed generating capacity is being expanded through independent power projects under a build-own-operate basis. Following the regional trend, the authorities recently lifted impediments to foreign direct investment, significantly reduced the corporate income tax bias against foreign companies, and streamlined regulations to improve the business climate and attract foreign investment. Moreover, ahead of other countries in the GCC area, the Omani government has already reduced industrial incentives, including limiting the maximum amount of soft loans and bringing the cost of these loans closer to market interest rates to enhance the role of market mechanisms to improve resource allocation.


    Qatar experienced a dramatic turnaround in economic performance in the second half of the 1990s. Facing a need to revitalize growth—after a period of lukewarm economic growth during much of the 1980s and early 1990s—and to break away from its dependence on oil (projected to last only 15 years, based on current production levels and proven reserves), the country turned to its large untapped reserves of natural gas to develop the LNG sector, as well as to further expand export-oriented, energy-intensive industries, such as petrochemicals, steel, and fertilizers, and recently, tourism.19 As a result, real aggregate GDP growth surged to about 10 percent a year, on average, between 1997 and 2002, compared with 2.5 percent during 1990-96, leading to a sharp increase in per capita income. Qatar borrowed heavily in international markets to finance the development strategy. The total external debt is estimated to have reached about $16 billion or 84 percent of GDP at end-2002, though the LNG debt service is tied to proceeds from its exports.

    Despite diversification efforts, the Qatari economy is still dominated by the public sector, with the oil and gas sectors—majority-owned by the government—accounting for almost half of real GDP in 2001, and government services for an estimated 17 percent. The government also owns substantial equity in a number of business entities, including the largest bank in the country (Qatar National Bank). Partially reflecting the dominance of the government in the economy, nonhydrocarbon growth has remained subdued, averaging close to 3 percent a year through 1996 and less than 2 percent since 1998—though it is estimated that it has accelerated to 4 percent in 2002, owing to industrial projects under way. Meanwhile, the pegged exchange rate regime has contributed to keeping Qatar’s inflation low (about 2.5 percent a year on average from 1991 to 2002—though in 1996, the CPI increased by about 7 percent owing to the adjustment in some fees and charges). However, inflation has been higher than the GCC average and its main trading partners, contributing to an appreciation of the real effective exchange rate of close to 20 percent during the past decade.

    Qatar’s financial position has improved dramatically since 1999. The rise in LNG production—combined with the boost in crude oil output and the strong recovery in global oil prices of the past few years—has turned the country’s external current account balance into a surplus of more than 10 percent of GDP since 1999 (after it averaged deficits of close to 19 percent of GDP during much of the 1990s, owing in part to the surge in LNG-related imports). At the same time, Qatar moved vigorously to hold the line on public expenditures, which grew by 18 percent from 1996/97 to 2001/02 (the fiscal year is from April to March), even though oil revenues almost doubled over the same period (Figure A1.4). Fiscal retrenchment has taken the form of reform of the electricity and water sector, layoffs of expatriate government workers, and the restructuring of ministries. Consequently, the overall fiscal balance (including investment income) switched from deficits of over 6 percent of GDP on average during much of the 1990s to a surplus of about 4 percent of GDP, on average, in the past few years, with much of the recent windfall oil gains going toward building up government foreign assets. Largely because of the restrained expenditure, the non-oil/LNG fiscal deficit in relation to GDP has improved significantly since 1999/2000, reaching an estimated 15 percent of GDP in 2002/03.

    Figure A1.4.Qatar and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    2 Fiscal year (April-March)

    Notwithstanding the conservative fiscal stance, the structure of the budget remains vulnerable to oil price shocks—albeit less than in the past. On average, the budget received 66 percent of total revenue from oil sales in the 1990s, followed by government investment income, which accounted for 25 percent of the total during the same period. Non-oil revenue (excluding investment income) has remained low, ranging between 3-4 percent of GDP during much of the past decade, as the government has been reluctant to adopt a modern and broad-based tax system. On the expenditure side, the welfare system and industrial incentives remain highly generous, including government services provided free or at highly subsidized rates, despite high per capita income and living standards.

    The financial and capital sectors have been strengthened in the past few years. In 1997, the Doha Securities Market (DSM) was created, increasing on average by 16 percent a year through the end of 2001. However, the DSM still remains closed to foreign investors. The Central Bank has raised the minimum capital adequacy ratio to 10 percent and completed the liberalization of interest rates on deposits in local currency, though a recently created public development bank provides long-term soft loans. Moreover, the reserve requirements were simplified by setting unremunerated cash reserves equal to 2.75 percent of total deposits (including foreign deposits) instead of 19 percent of total demand deposits previously in effect. The Central Bank has also introduced a new short-term instrument, the Qatar monetary rate (QMR) effective April 1, 2002, to enhance liquidity management. The interest rate associated with this facility serves as a benchmark for the money market. Commercial banks can now deposit their excess liquidity in this facility and earn interest at the QMR, instead of sending it abroad, as was previously the case. The Central Bank also tightened nonperforming loan classification criteria and required banks to appoint independent auditors to assess provisioning levels.

    Qatar’s financial sector is well capitalized and supervised and remains quite profitable. However, although there are 15 banks in the country, the Qatar National Bank—50 percent owned by the government—accounted for a large portion of the sector’s total assets (over 50 percent) at the end of 2000. Also, banks hold most of the government’s domestic debt in the form of treasury bills and bonds. Monetary policy continues to be constrained by the pegged exchange rate regime and currency board-type arrangement in place that requires maintaining 100 percent foreign exchange coverage of local currency issues. For liquidity management, the Central Bank mostly relies on unremunerated reserve requirements, loans-to-deposit ratio, and trading of treasury bills and bonds. A new banking law, designed to strengthen the independence of the Central Bank and enhance its supervision role, is awaiting approval. In line with the FATF guidelines, the authorities have also completed a draft anti-money laundering law, which is presently undergoing the process of approval.

    The development strategy benefited greatly from a series of broad structural reforms aimed at increasing the role of the private sector by partially privatizing public enterprises and/or management, as well as creating a business-friendly regulatory environment. The first major sale of public assets took place at the end of 1998, when the government sold 45 percent of its share in the telecommunications company in the local stock market for about $650 million, but since then the privatization program has stalled. Major progress has been made in restructuring the power sector. The first independent power and water plant is presently under construction, and will be operated on a build-own-operate basis. The government has also taken several measures in recent years to promote investment, including revising the company and agency laws to foster domestic competition and allowing foreign investors to own 100 percent of companies in agriculture, industry, health, education, and tourism. A one-stop window was also established in 2002 for prospective domestic and foreign investors in order to expedite the process of license and land approval. Other developments under way include the partial privatization of a government company that distributes gasoline locally, and the corporatization of postal and aviation services. A new agency law under consideration seeks to reduce the monopoly power of sole agents by allowing anybody to import any good on a commercial basis subject to paying a negotiable fee of up to 5 percent of the imported value to the existing agent.

    Unemployment among Qatari nationals is currently thought to be low (no official data are available), as the number of graduates from secondary and tertiary educational institutions is small. Nevertheless, demographic dynamics point toward a rapidly growing indigenous labor force over the medium term, since about one-fourth of the population is at present under the age of 15. Thus, Qatar’s labor policy centers on efforts to gradually increase the proportion of Qataris in the labor force, particularly in the private sector, through market-based mechanisms, including appropriate training and education. By contrast, limited progress has been achieved so far in improving the quality of the country’s national statistics and public access to updated economic and financial data.

    Overall, Qatar’s development strategy has increased its ability to weather adverse oil shocks. Long-term contracts with Asian, Indian, and European firms mean the volume of LNG exports is likely to surge to over 20 million tons by 2005, toppling crude oil as the most important Qatari export (see Fasano 2001b).20 These strong fundamentals have been reflected in declining country risk in the past year as perceived by the international capital markets (Figure A1.5).

    Figure A1.5.Qatar: Country Risk, June 26, 2000-May 28, 20031

    (In basis points)

    Source: Bloomberg.

    1 Measured by the difference in interest rates on 30-year Qatari government debt (originally issued in June 2000) compared with those on similar U.S. debt maturity.

    Saudi Arabia

    Saudi Arabia’s economic performance has improved in recent years, after having recorded relatively low economic growth during much of the 1990s. As a result of this weak performance and a rapidly increasing young labor force, strains in the employment market for Saudi nationals have emerged, and income per head has stagnated. However, in the past few years, the authorities have strengthened the process of structural reforms and intensified the diversification drive. Consequently, while real non-oil GDP growth averaged 1.8 percent a year from 1991 to 1999, it accelerated to close to 4 percent in the following three years. In contrast, cuts in oil output in 2001-02 to stabilize global crude oil prices have caused total real GDP growth to slow to about 1 percent a year (Figure A1.6). Private sector activity, which accounts for almost 60 percent of the non-oil sector, has become less dependent on the stimulus of government spending.21 This is evident by the continued growth of private investment despite restrained expenditure growth in the past years. Meanwhile, Saudi Arabia’s inflation has been one of the lowest in the GCC area (about 0.5 percent on average from 1991 to 2002). As a result, the real effective exchange rate has depreciated slightly, even though the U.S. dollar, to which the local currency is pegged, has strengthened in international markets until recently (see Table A1.1).

    Figure A1.6.Saudi Arabia and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    Saudi Arabia’s financial position improved in 2000, reflecting the strong recovery in global oil prices.22 Indeed, after having registered on average deficits of about 7 percent of GDP during much of the 1990s, the central government’s overall budgetary accounts moved to a surplus of 3.2 percent of GDP in 2000 before returning to a deficit of about 4 percent in the following year. Many years of deficits have contributed to a sharp increase in the government domestic debt, which reached 90 percent of GDP by the end of 2001, with over two-thirds being held by government agencies, such as pension funds. In 2002, the overall fiscal deficit is estimated to have risen to 6 percent of GDP, with government domestic debt ratio increasing further. The country’s underlying fiscal position has also deteriorated, with a non-oil deficit estimated at about 30 percent of GDP from 23 percent in 1998-99. As in the case of other GCC countries, the budget structure remains weak, with the wage bill estimated to have reached about 17 percent of GDP in 2002—one of the highest level in the region.

    After recording deficits during much of the 1990s, the external current account balance has presented a surplus since 2000. Non-oil exports (mainly petrochemicals and manufactured goods) more than doubled in the 1990s, reaching close to $9 billion in 2002—the second highest level in the GCC area after the United Arab Emirates. Despite current account deficits throughout much of the 1990s, net foreign assets of the Saudi Arabian Monetary Agency (SAMA) have remained at a comfortable position (equivalent to about nine months of imports of goods and services in 2002).

    The Saudi banking system is considered to be sound. Banks enjoy high profitability, the capital adequacy ratio is over 20 percent, and nonperforming loans are low. SAMA has also assigned high priority to appropriate prudential regulations and close supervision of banks. In addition, compared with other GCC countries, the banking system is not highly concentrated, with 2 local banks out of 11 accounting for about one-fourth of total assets. Efforts to further deepen and broaden the capital market have been enhanced. The government is presently in the process of adopting a new capital markets’ law that will help mobilize resources, enhance transparency, clearly define listing requirements for companies, and establish a securities and exchange commission to regulate the functioning of the stock exchange. Monetary policy continues to be constrained by the pegged exchange rate regime and the currency board-type arrangement in place, which requires maintaining 100 percent foreign exchange coverage of local currency issues. For liquidity management, the central bank mostly relies on indirect instruments of liquidity management, especially repo operations in government bonds and foreign exchange swaps with banks.

    Saudi Arabia has taken a leading position on the introduction of the anti-money laundering legislation in the area. An anti-money laundering law was passed in May 1999 in line with recently mandated international guidelines.

    Saudi Arabia has recently made progress in advancing broad structural reforms that aim primarily at encouraging foreign investment and enhancing the role of the private sector. Ongoing key reforms include institutional strengthening of economic policy-making, the restructuring of state enterprises and privatization, and revision of the foreign investment law—allowing foreign investors full ownership of business in most economic sectors.23 In the area of privatization, a sequential strategy aims initially at privatizing management, and then divestment, deregulation, and finally privatization. While there is no firm timetable for privatization, the primary focus, in the short run, will be on the corporatization of enterprises, and on establishing the associated regulatory frameworks (mainly in the electricity, telecommunications, and transportation sectors) in order to prepare for their eventual privatization without creating private sector monopolies. Saudi Arabia offered 30 percent of the shares of the Saudi Telecommunications Company for sale to the private sector in December 2002. The revision of a number of laws (e.g., company, agency, competition, mortgage lending, capital markets) is under way to promote private sector activity and foster domestic competition.

    To create employment opportunities for a rapidly rising global labor force, the authorities have in place a strategy that consists of skills development and correction of labor market distortions. The Human Resource Development Fund was recently established to finance the training of Saudi nationals for jobs in demand by the private sector, while a database to help match Saudis seeking employment in the private sector with job openings is being developed. As regards other reforms, Saudi Arabia’s external tariffs were recently reduced to 5 percent from 12 percent in accordance with the GCC common external tariff adopted in early 2003. Efforts are also under way to complete negotiations to join the World Trade Organization. In addition, substantial progress has been achieved in improving the quality, timeliness, and dissemination of data.

    United Arab Emirates

    The United Arab Emirates is a confederation of seven emirates that hold considerable political, judicial, financial, and economic autonomy.24 Overall, the U.A.E. economy has developed within a highly liberal, business-friendly, and market-oriented economic policy framework. Real GDP rose at an average annual rate of about 5 percent during the 1990s, double the growth rate in the 1980s, as development efforts intensified, particularly in non-oil activities. As a result, the U.A.E. economy is one of the most diversified in the GCC area, with petrochemicals, aluminum, tourism, banking, and entrepot trade activities currently accounting for a large share of GDP. Moreover, the United Arab Emirates—the sixth largest world crude oil exporter—has systematically recorded a trade- and income-driven external current account surplus, and remained a net creditor nation. The country has accumulated substantial official foreign assets, providing ample latitude to respond to oil price shocks. A pegged exchange rate—effectively fixed to the U.S. dollar—has served as a nominal anchor for the economy since the early 1980s. However, with an average annual inflation of 3.5 percent from 1991 to 2002, the REER appreciated substantially during those years—though there is no evidence so far that this appreciation has hindered the performance of non-oil exports or economic growth.

    The United Arab Emirates generally recorded small consolidated fiscal deficits during the 1990s, mostly financed through changes in government foreign assets (Figure A1.7).25 These deficits averaged about 2 percent of GDP. However, rising global oil prices in 2000 contributed to a sharp improvement in the fiscal accounts, which reached a surplus of 6 percent of GDP despite a surge in expenditure, mostly on account of higher defense and subsidies. In 2001-02, the overall fiscal balance switched to a large deficit reflecting the high level of spending and lower oil revenue and investment income (owing to declining global interest rates). Mirroring these developments, the non-oil fiscal deficit widened significantly, reaching an estimated 26 percent of GDP or about Dh 68 billion in 2002—almost double the level registered in the mid-1990s. In addition, the rapid expansion of non-oil activities has not generated a corresponding increase in nonoil revenue due to the absence of a developed tax system, with oil revenue as a share of total government revenue remaining high (in the range of 40-60 percent in recent years).

    Figure A1.7.United Arab Emirates and GCC Countries: Selected Economic Indicators1

    Sources: National authorities; and IMF staff estimates.

    1 GCC countries’ weighted average.

    As is the case in other GCC countries, an open economy, liberal capital flows, and the exchange rate peg entail limited scope for an independent monetary policy in the United Arab Emirates. As a result, domestic interest rates have closely tracked movements in U.S. rates. In this context, the main monetary policy instruments of the Central Bank are reserve requirements for the commercial banks, and, since the government does not issue securities, its own certificates of deposit (CD).

    Banks in the United Arab Emirates are broadly profitable and well supervised. Net profits of the banking system—consisting of 46 banks, 20 locally incorporated and 26 branches of foreign banks—have averaged about 12 percent since 1996. In 2001, a World Bank-IMF Financial Sector Assessment Program (FSAP) was carried out in the United Arab Emirates. The assessment generally endorsed the soundness and strong supervision of the banking sector, although oversight of insurance companies was felt to be in need of improvement.26 Since the end of 2000, the Central Bank has stepped up efforts to combat money laundering and terrorism financing. A new anti-money laundering law came into effect in early 2002 while the supervision of the “hawala” system of informal money transfers has been strengthened.

    With energy demands surging in the United Arab Emirates, power generation and water desalination are at the forefront of privatization efforts. In particular, Abu Dhabi has embarked on new power projects through joint ventures with foreign investors, and selling of some existing assets. Other structural reforms under way at the federal level are a comprehensive reform of public expenditure management and other fiscal initiatives, including the adoption of an electronic government project. A number of steps, such as the enactment of the Federal Securities Law and the creation of the Emirates Securities and Commodities Markets Authority, have been adopted to address deficiencies in the capital market, with formal stock exchanges (in Abu Dhabi and Dubai) opening in 2000. Meanwhile, restrictions on foreign ownership of companies and properties remain in place, including a maximum 49 percent foreign ownership of companies. But these restrictions have had little practical effect because, other than Abu Dhabi, the emirates have established free zones that allow 100 percent foreign ownership of companies. Moreover, Dubai has recently allowed foreigners to own land and properties in some real estate development, contributing to a construction boom. It also announced in 2002 the launch of several new free zones that aim to establish the emirate as a global hub for trade in gold bullion, research and development of technology, and financialactivities.

    Given the relatively small indigenous population and an open-border foreign labor policy, the labor market is heavily dependent on expatriate workers. Although there is currently no evidence of unemployment among U.A.E. nationals, strains are likely to appear in the period ahead as a result of population dynamics. The authorities are focusing on improving education and intensifying training to enhance the employ ability of nationals, particularly in the private sector, while avoiding the widespread use of mandatory measures to hire nationals, such as quotas.27 The National Human Resource Development and Employment Authority was created in 2001 to help improve the skills of nationals looking for jobs, and a national labor database is being established to facilitate employment search efforts.


    This appendix was prepared by Behrouz Guerami (Bahrain), Ibrahim Al Gelaiqah (Kuwait), Van Can Thai (Oman), Bright Okogu (Qatar), Shehadah Hussein (Saudi Arabia), and John Wilson (United Arab Emirates), with contributions from Ugo Fasano.

    Onshore proven fossil fuel reserves are expected to be exhausted in about 15 years at the current rate of production. About 80 percent of Bahrain’s offshore oil comes from the Abu Saafa oil field in Saudi Arabia, with its proceeds accruing to Bahrain indefinitely.

    The public sector dominates about 60 percent of GDP, with the government owning 77 percent of the aluminum industry, the cornerstone of the non-oil sector activity in manufacturing.

    Many outside analysts rank Bahrain as the country with the most open economy and strongest social indicators in the Middle East. For instance, on its 2002 index of economic freedom, the Heritage Foundation ranks Bahrain as first in the region and fifteenth worldwide.

    Offshore banks are not allowed to accept deposits or provide loans to residents, but are permitted to borrow funds from commercial banks on the interbank market.

    Expatriate workers account for about 60 percent of the workforce and for about 70 percent of private sector employment.

    The Economic Development Board (established in April 2000) is to recommend and oversee these reforms, acting as the one-stop shop to handle and approve all foreign direct investment applications in the country.

    IMF staff estimates of the overall fiscal balance differ from official data because the former include investment income of government foreign assets.

    The non-oil sector as a share of GDP fell during 1996-2002 to 52 percent of GDP, relative to an average of 66 percent in the 1980s, while in 2002, the oil sector is estimated to have accounted for more than 48 percent of GDP, 92 percent of exports, and 88 percent of budget revenues.

    The policy of reserve accumulation was formalized in 1976, when the government passed a law requiring that 10 percent of all budget revenues be diverted to the Reserve Fund for Future Generations. See Fasano (2000) for further details.

    In October 2002, the Kuwaiti authorities announced that they would peg the local currency to the U.S. dollar effective January 2003 in line with the GCC decision to achieve a monetary union by 2010.

    The DCP is a debt workout scheme introduced by the government to recapitalize commercial banks that suffered losses as a result of the collapse of Souk Al-Manakh in 1982 and the Iraqi invasion. It has a favorable impact on a bank’s financial situation by removing delinquent debt from its balance sheet and replacing it with government debt.

    Based on current proven reserves and production levels, gas resources are projected to last for some 45 years, more than double the projection for crude oil resources.

    The LNG plant has created about 350 direct jobs.

    Oman’s currency has been officially pegged to the U.S. dollar since the 1970s.

    Oman’s prudent use of its oil revenue has contributed to the accumulation of financial wealth administered by the State General Reserve Fund—a government savings fund established in 1980 to replace dwindling oil resources. For further details see Fasano (2001a).

    Although dividends from the LNG project have already started to accrue to the budget, a 10-year tax holiday has been granted to the project.

    The Oman Center for Investment Promotion and Export Development was established in 1998 to provide the institutional support to promote non-oil activities and exports.

    Banks are allowed to buy a maximum of 30 percent of their net worth in development bonds, but there are no limits on the amount of treasury bills that they can hold.

    Qatar has become the largest Middle East producer of chemical fertilizers and some petrochemical products, and the fourth largest LNG exporter in the world.

    The government has indicated that beginning in the coming years, the budget is likely to start receiving dividends and other revenues from LNG exports. This, coupled with declining debt and interest payments, would help maintain a strong fiscal position.

    See Fasano and Wang (2001) on the relationship between government spending and non-oil growth in GCC countries.

    Following the end of the 1991 regional conflict, Saudi Arabia has devoted increased attention to fiscal consolidation. As a result of cuts that affected most categories of expenditure, the overall fiscal deficit returned to the pre-conflict level in nominal terms by 1995. But the second half of the 1990s witnessed renewed volatility in government spending, reflecting the fluctuation in oil prices.

    Preliminary data point to the positive impact of the new sponsorship and foreign investment laws on private sector investment, as the government has approved projects by foreign investors worth more than $10 billion since 2000.

    The seven emirates are Abu Dhabi, Dubai, Sharjah, Ajman, Umm al Qaiwain, Ras al Khaimah, and Fujairah. There are important differences among individual emirates because of the uneven distribution of oil and gas. The Emirate of Abu Dhabi is the largest one, accounting for 90 percent of the country’s oil reserves and about half of total GDP, while it has the highest per capita income in the country (about five times higher than the income in the poorest emirate). Dubai—the second largest emirate—accounts for one-fourth of the country’s total GDP and has been at the forefront of developing non-oil activities in anticipation of the depletion of its crude oil reserves over the medium term.

    Fiscal data consolidate federal and the four largest emirate governments, including investment income.

    The Financial Sector Stability Assessment report (IMF, 2003) is available on the IMF’s external website (

    Quotas are currently only applied in the banking sector.

    Appendix II GCC Countries: Comparative Tax Rates and Incentives
    United Arab
    BahrainKuwaitOmanQatarSaudi ArabiaEmirates
    Tax rates
    On individuals NationalsNone.None.None.None.None.None.
    Foreigners (self-employed)None.None.None.None.Progressive tax structure, with rates ranging from 5 percent (on income of SRIs 16,000) to 30 percent (on income over SRIs 66,000), with a tax-free threshold of SRIs 6,000.None.
    On corporate income Local companiesNone.None.0 percent for taxable income up to RO 30,000, and 12 percent for income above RO 30,000.None.None.None.
    Oil companies46 percent.55 percent and special arrangements.55 percent.85 percent.85 percent.55 percent (Abu Dhabi); 50 percent (Dubai).
    Foreign companiesNone, except foreign banks, which are subject to a fee.Progressive tax structure with rates ranging from 5 percent (for income between KD 5,250–18,750) to 55 percent (above KD 375,000).Companies with up to 70 percent foreign ownership are taxed as domestic companies; companies with more than 70 percent foreign ownership are subject to a progressive tax structure with rates ranging from 0 percent to 30 percent.Progressive tax structure with rates ranging from 0 percent for profits up to QR 0.1 million to 35 percent for over QR 5 million. However, the maximum rate was recently reduced to 30 percent.Progressive tax structure with rates ranging from 15 percent (on first SRIs 100,000) to 30 percent (on over SRIs 100,000).Only foreign banks are taxed at 20 percent on profits.
    Customs dutiesSingle 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.Single 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.Single 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.Single 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.Single 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.Single 5 percent on most products; 0 percent for foodstuffs; and 100 percent on tobacco and alcoholic beverages.
    Export dutiesNone.4 percent on all goods not subject to import duties.None.None.None.None.
    Social security contributionsEmployer 10 percent, employee 5 percent.Employer 10 percent, employee 5 percent.Employer 9 percent, employee 5 percent, and government 2 percent (private sector).None currently, but under consideration.Employer 8 percent, employee 5 percentEmployer 12.5 percent, employee 5 percent, and government 2.5 percent (private sector).
    Other taxesMunicipal taxes: 10 percent of rent on commercial property. Training levy: companies with more than 50 employees have to provide training schemes or pay training levy of 2 percent of Bahraini wage bill or 4 percent of foreign usage bill.Property transfer tax is 0.5 percent of value. Kuwaiti shareholding companies are required to donate to research and development of 5 percent net profit to Kuwait Foundation for the Advancement of Sciences.Training tax: applicable to all companies with more than 20 employees. The rate is a flat RO 100 annually. Companies providing specified training for their Omani employees are exempt from the training tax. Municipal taxes: 2 percent on electricity, 3 percent on tenancy contracts and airline tickets, 5 percent on hotels and restaurants, and 10 percent on cinemas and amusement parks.Municipal taxes vary among emirates: 5 percent rental taxes and 5 percent hotel taxes in Dubai and Abu Dhabi.
    Tax and other incentivesCost of exploratory well can be deducted at 20 percent. Direct subsidies for electricity and provision of water and sewerage services at below economic cost.Tax holidays: up to 10 years. Exemption from customs duty on imports of capital equipment and raw materials.Tax holidays: 5 years and renewable for a period not exceeding 5 years. Customs duty exemptions.Tax holidays: up to 10 years, depending on the nature of the investment and business, and utilities services are subsidized. Also, imports of raw materials not available in Qatar are duty free. Operating losses can be carried forward for up to 3 years.No tax holidays to Saudi nationals or foreigners on new investments under the revised foreign investment law enacted in April 2000. Incentives are allowed to run their course on existing investments; these included 10-year tax holidays on agricultural and manufacturing projects, and a 5-year tax holiday for other economic projects. Exemptions from customs duties for imports of machinery and raw materials, nominal rents for plant, industrial building, and workers’ living quarters.Tax holidays: 15 years, renewable in most free zones.
    Sources: National authorities; and PriceWaterhouseCoopers, Corporate Taxes. Worldwide Summaries 1999-2000.
    Appendix III GCC Countries: Summary of Recent Key Structural Reforms in Selected Areas
    United Arab
    BahrainKuwaitOmanQatarSaudi ArabiaEmirates
    Administrative reformsApproval of the Early Retirement Scheme in April 2000 to facilitate downsizing labor in some government agencies.Appointment of a new Higher Committee for Development and Economic Reform (2001) to facilitate the reform process.Amending the commercial company law to eliminate the sole agency monopoly.The ministries of electricity and water an of telecommunications and transport were abolished and their functions were transferred to autonomous public-private partnerships operating on a commercial basis.Establishment of the Supreme Economic Council to oversee an coordinate economic policy (August 1999).Adoption of “e-Government" initiative in Dubai; and similar initiatives at the federal level.
    Adoption of a Public Expenditure Management Strategy initiative to increase cost recovery on government services, contracting out publicly provided services, and corporatization and eventual privatization of selected government activities.Restructuring the Public Telecommunications Authority into a closed company, and liquidating the Public Authority for Agriculture.Establishment of the Supreme Council for Petroleum and Mineral Affairs to formulate policies on hydrocarbons and supervision of ARAMCO (January 2000).
    Establishing a one-stop service for prospective local and foreign investors.The ministry of telecommunications and transport was broken up into three autonomous corporations.
    Review of the expenditure management system to establish a medium- to long-term framework for more efficient budgetary planning while reaching a balanced budget by 2006 (under way).Establishment of the Higher Tourism Authority to encourage international tourism (November 2000).
    Financial sector reformRatifying anti-money laundering legislation.Portfolio foreign investment law (approved September 2000). Under this law, foreigners are allowed to own and trade shares of joint-stock companies listed on the Kuwait Stock Exchange, subject to specific limits.Expanding repo facilities to the interbank market. Adoption of a capital market law to restructure the Muscat Securities Market into three separate bodies dealing with regulations, trading and exchange, and depository registration.Removal of deposit interest ceilings in 2000; closer bank supervision, resulting in tightening of nonperforming loan criteria.Allowing foreigners to trade on the stock market through open-ended mutual funds.Strengthened Central Bank supervision in 1998-99; in 2000, formal stock markets and regulatory body fo capital markets were established; provisions for anti-money laundering were completed with the 2000 law, and along with provisions for combating the financin of terrorism became federal law in January 2002; a third Islamic bank (National Bank of Sharjah) became operational; new Securities Law was enacted in 2000 to address volatility and malpractices that plagued the securities market in 1997 and 1998; a comprehensive pilot risk-management module for banks is being implemented; a new insurance law is being drafted to bring the local market in line with international standards.
    Enforcing Bahrain Stock Exchange rules and regulations and suspending noncompliant companies.Approval of new capital markets law by the Shoura to deepen the financial markets and strengthen the stock market (January 2003).
    Issuing the first Islamic government bills to complement the working of the Islamic financial institutions, and taking steps toward improving prudential regulations for Islamic bankingAdoption of a new banking law in 2000. Tightening central bank supervision to reduce the risk of overlending to individuals, corporations, and related parties; strengthening risk management.A new short-term instrument has been introduced by the Central Bank to enhance liquidity management. Under the scheme, commercial banks can deposit their excess liquidity with the Central Bank and receive interest at the newly established Qatar monetary rate.
    Establishing an Islamic rating agency and Islamic Securities Market (under way).
    Foreign investmentEasing ruleson non-GCC firms to own buildings andlease land, and establishing a one-stop shop to facilitate licensing procedures.Foreign Direct Investment (FDI) Law (passed April 2001) to allow foreigners to own 100 percent of Kuwaiti companies.Reduction of income tax disparitybetween Omani and foreign companies by raising the single rate for the former to 12 percent from 7.5 percent, and lowering the rates for the latter to 5-30 percent from 15-50 percent.In 2000, the Company, Foreign Investment, and Agency Laws were simplified, including allowing 100 percent foreign ownership in agriculture, industry, health, education, and tourism sectors, and streamlining investment approval procedures.Enactment of a new Investment Law and establishment of the associated investment authority (SAGIA) to facilitate foreign direct investment processing including the establishment of one-stop shop (April 2000). Permission for 100 percent foreign ownership of business, except for about 22 activities, subject to annual revision. In February 2001, gas, power generation, water desalination, and petrochemicals were removed from the negative list. Cut the highest corporate income tax on foreign investment from 45 percent to 30 percent (May 2000).Foreign ownership remains limitedto no more than49 percent by federal law, except in free zones, where 100 percent is possible. Dubai announced the launch of several new free zones intended to establish the emirate as a global center for trade in gold bullion, research and development of technology, and financial activities.
    Ratifying the amendment to the GCC Common Economic Agreement, by which the national origin of a traded good became solely defined in terms of the source of its value added.Under the new law, corporate taxes were reduced to 25 percent from 55 percent. Companies would enjoy a tax holiday of 10 years, exemption from customs duty on imports of capital equipment and raw materials, and permission to bring in necessary foreign labor.
    Foreign ownership permitted to increase from 49 percent to 100 percent of businesses in all but a few strategic sectors (e.g., oil and aluminum).A Foreign Investment Capital Office was established to process foreign direct investment applications.Redefining "foreign" company as one with more than 70 percent foreign ownership instead of 49 percent.The maximum corporate tax has been reduced from 35 percent to 30 percent.
    Establishment of one-stop shop to facilitate foreign investment licensing procedures.Allowing foreign, non-GCC firms to own buidings and lease land.
    Reduction of external tariff to 5 percent from 5.5 percent and 7 percent.Opening up the service sector to full foreign ownership in line with WTO agreements.
    State enterprise reform and privatizationPrivatized the public slaughter house and the capital’s waste collection and incineration. Other privatizations are under way, including the public transport company (bus) and tourism facilities. The telecommunications and postal services sectors are being liberalized.The privatization law, approved by the Finance Committee of the National Assembly, establishes a comprehensive framework for large-scale privatization, identifies areas and modes of privatization, and sets up a pricing mechanism and safeguards against job losses. The government plans to offer for saleto the private sector most of the 62 public sector entities still underits control.The power sector is at the forefront of privatization efforts, with three power plant now under constructio by foreign investors under a build-own-operate basis. Existing government power plants are being restructured for their future privatization. Oman has also recently privatized the management of airport services. Other services to be privatized in thenear future include water distribution, waste water network, postal services, and telecommunications. The government also plans to gradually sell its participation in the few remaining non-oil public companies listed in the local stock market.Partially privatized the Telecommunications Company at end-1998. Corporatized the electricity and water sector and sold most of the government’s power generation plants to Qatar Electricity and Water Company, which is majority-owned by the local private sector. Construction is under way of the first independent power and water plant, which is majority-owned by a foreign developer. Sold 60 percent of the government’s stakein a recently created company—spunoff from Qatar Petroleum—to take over the local distribution of gasoline.Announced in June 2002 a new privatization strategy under which management would be given autonomy, followed by deregulation (corporatization) and ultimately private ownership. Twenty sectors are presently identified for privatization, including telecommunications, electricity, industrial parks, postal services, water, railroad, education, and air transportation. Saudi Arabia has recently privatized 30percent of the Saudi Telecommunications Company. Eightregional electricity companies have been merged into the Saudi Electricity Company, and a regulatory authority was established to set tariff rates and regulate market access to new entrants.Introduced utility privatization, embarking on new power projects through joint ventures with foreign investors, and selling some existing assets.
    Real estateExcept for GCC nationals, the purchase of real estate by non-GCC nationals is generally prohibited, but there are exceptions.GCC nationals may purchase real estate for private residence purposes.No controls.GCC nationals may purchase real estate for private residence purposes.Permitting non-Saudis to own real estate for their business or residence, except in the two holy cities (May 2001).The Emirate of Dubai recently relaxed restrictions on foreign investment in specific real estate projects.
    Labor market reformDeveloping a new two-year National Employment Strategy in cooperation with the International Labor Organization, this includes providing fiscal subsidies for training nationals in the private sector, and financial aid for the unemployed.The labor market law (for National Labor Support and Encouragement to Work in Non-Government Sectors) was approved by the National Assembly on May 10, 2000, and is designed to encourage Kuwaitis to seek employment in the private sector. The Manpower and Government Restructuring Program (MGRP) was established in July 2001 to implement the labor law, provide unemployment benefits to unemployed Kuwaiti nationals, and provide training and facilitate employment of Kuwaiti nationals in the private sector.Introducing measures to improve vocational and technical training programs, and passing new legislation that allows private universities and colleges. Modernizing the educational system at all levels.The government has formally ended the policy of automatic employment for graduates. It now assists jobseekers by maintaining information on job openings and by counseling and training., A department has been established in the Ministry of Civil Service with responsibility for this function.Creation of the Human Resources Development Fund (HRDF)—with financial participation of the private sector—to provide training of Saudi labor force in skills required by the private sector, and development of a database for matching and placement of Saudi workers in the private sector (November 2000).The National Human Resource Development and Employment Authority were created in 2001 to help improve skills of U.A.E nationals looking for jobs; a national labor market database is being established to facilitate job search.
    Introducing new measures to improve general education standards, and vocational and technical training programs.Setting a uniform minimum wage for Omanis at RO 100 (plus RO 20 as transportation allowance) instead of the previous two-tiered (skilled/unskilled) minimum wage.
    Abolishing "free visa" system to expatriate labor force.New ministry of manpower created in 2002. New labor law approved in May 2003.
    Implementation of order to increase employment quota of Bahrainis in small and medium-size companies; lowering quotas for construction sector from 50 percent Bahrainis on payroll to 15 percent (under way).In September 2002, the government approved quotas for the proportior I of Kuwaitis that private companies must employ; companies that fail to meetthis targetwould be subject to a fine and sanctions such as exclusion from bidding for government contracts.
    Source: IMF staff based on information provided by the national authorities.
    Appendix IV Experience of Selected Monetary Unions

    There are currently five monetary unions—three in Africa, one in the Caribbean, and one in Europe.1 Two unions in Africa are part of the CFA franc zone and comprise the West African Economic and Monetary Union (WAEMU), which has eight members, and the Central African Economic and Monetary Community (CAEMC), which has six members.2 Each regional grouping issues its own CFA franc, but they are exchangeable one-for-one against each other and are pegged to the euro. The Common Monetary Area (CMA) includes four members in southern Africa (Lesotho, Namibia, South Africa, and Swaziland). The South African currency, the rand, is the common currency in operation in this union, although the other countries have retained their own currencies, which are pegged to the rand, and their central banks function as currency boards.

    The fourth currency area, the Eastern Caribbean Currency Union (ECCU), is constituted by eight small island economies that share a single currency, the Eastern Caribbean dollar, and a central bank. The Eastern Caribbean dollar was pegged to the British pound from 1950 to 1976, and since then, it has been pegged to the U.S. dollar. The fifth monetary union currently in existence—the European Economic and Monetary Union (EMU)—is the most recent and by far the most economically important (see Table 3.1). Although the euro has been in existence only since January 1, 1999, the EMU’s extensive process of institutional preparation for a common central bank and a new currency, as well as the efforts invested in macroeconomic convergence, provide important lessons for the creation of a monetary union from the outset.

    The CFA Franc Zone

    The CFA franc zone3 was established in 1948 by 14 countries in West and Central Africa to provide an anchor for their economic and financial policies. The two groupings of sub-Saharan countries, the WAEMU and the CAEMC, each has its own central bank—the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO) and the Banque des États de l’Afrique Centrale (BEAC), respectively.4 Each central bank has an operations account with the French Treasury, into which 65 percent of their foreign exchange holdings are deposited. The regime resembles a currency board type of arrangement, with the CFA franc fixed exchange rate—only changed once since 1948 (see below). Convertibility is guaranteed by provisions for overdrafts at the French Treasury and by a requirement that a percentage of local monetary liabilities be backed by foreign reserves deposited at the French Treasury. The central banks are required by their statutes to maintain 20 percent foreign exchange coverage of their sight liabilities, a limit designed to act as a barrier against open-ended access to the operations accounts that the central banks maintain with the French Treasury.

    The countries of the CFA franc zone experienced from the beginning a long period of very low inflation, and, until the mid-1980s, sustained economic growth. During the second half of the 1980s and in the early 1990s, however, these countries faced two major external shocks that adversely affected their growth performance and balance of payments positions. First, the zone’s terms of trade deteriorated by about 50 percent during the second half of the 1980s as the world market prices for its major export commodities—cocoa, coffee, cotton, and petroleum—dropped sharply. At the same time, the external competitiveness of the zone deteriorated further as a result of the marked appreciation of the French franc against the currencies of the zone’s other major trading partners. Combined with labor market rigidities that led to a steep rise in unit labor costs, the result was a considerable real effective exchange rate appreciation of the CFA franc that contributed to a stagnation of real output from 1986 onward.

    This deteriorating economic situation was aggravated by indirect bank financing of government spending. Although central bank financing to each member country was subject to a limit equal to 20 percent of their previous year’s budgetary revenues, credits for marketing and stockpiling of crop exports were excluded from this limit. Throughout the 1980s and early 1990s, this type of financing constituted a source of monetary expansion outside the BEAC’s control. These credits were rediscounted automatically and at concessional rates. A similar situation existed in the West African CFA franc countries. Côte d’Ivoire and Senegal were able to avoid direct controls on financing by borrowing from commercial and development banks, which could obtain refinancing from the BCEAO at concessional rates. The lack of control over these credits opened the door to excessive lending to governments, despite the formal acknowledgement of the ceilings on direct financing. The result was large and growing fiscal deficits in CFA franc countries that exacerbated the overvaluation of the CFA franc. In addition, since prudential ratios on banks were not adequately enforced, banking crises occurred in CFA franc countries in the late 1980s and early 1990s, and the central banks—which had extended loans to the commercial and development banks—ended up as the major creditors. In January 1994, the 14 countries of the CFA franc zone ceased to rely exclusively on measures of internal adjustment and decided collectively to devalue their common currency by 50 percent. This exchange rate realignment led to a significant turnaround in economic activity in the zone, with output, exports, and investment increasing rapidly during the second half of the 1990s, while there was little inflation pass-through.

    Although the CFA franc countries have had a monetary union for several decades, full economic integration has only progressed gradually. In 1973, the West African Economic Community (WAEC) was founded in response to the drawbacks of a previous customs union that attempted unsuccessfully to create a preferential internal regime in the absence of a common external tariff. The WAEC created a more adequate instrument of compensation for lost tariff revenues through a regional tax. In 1994, WAEC was superseded by the WAEMU, which established an economic and monetary union and has since put in place a common external tariff, introduced fiscal convergence criteria, and established a degree of surveillance over fiscal policies. WAEMU’s budgetary convergence criteria are assessed through the concept of basic fiscal central government balance—defined as fiscal revenue minus expenditures and excluding both grants and foreign-financed investment. This balance has to be positive or nil. Moreover, a ceiling of 70 percent was set up for the overall ratio of public debt to GDP. The convergence pact has also restricted the sources of budget financing to public debt issues; thus, eliminating arrears and monetary financing by the regional central banks.

    By contrast, regional integration has been slower in Central African CFA countries. The treaty creating CAEMC, signed in 1994, was only ratified in June 1999. In fact, their first mutual surveillance exercises using new fiscal and other criteria took place in 2002. With oil receipts being an important source of fiscal revenue in several CAEMC countries, fiscal convergence has been difficult to gauge in times of volatile oil prices. One alternative being currently considered is to use moving average of oil prices to better gauge the underlying fiscal position, as well as set up oil funds for future generations to take some of that revenue out of the budget to increase total savings. Moreover, although reforms pushed by its predecessor organization were in principle achieved (creating a common external tariff and a preferential internal tariff and the harmonization of indirect and business taxes), in practice, they have been unevenly applied.

    Eastern Caribbean Currency Union

    The ECCU5 comprises eight small island economies: Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. The economies have traditionally been primary commodity producers (banana, sugar, root crops), but tourism is now the most important source of foreign exchange earnings. Two aspects of the ECCU members stand out: their very small size, and their vulnerability to shocks. Geographic barriers complicate the functioning of a single market, and even taken as a whole, the ECCU is a very small economy.6 The individual economies are exposed to natural disasters—particularly hurricanes, and less frequently drought and volcanic eruption.

    The East Caribbean Currency Authority was formed in 1965 as the monetary authority for ECCU members and replaced in 1983 by the Eastern Caribbean Central Bank (ECCB). The members share a common currency, the Eastern Caribbean dollar, which has been pegged to the U.S. dollar since 1976, and was formerly pegged to the British pound. There is a single central bank for the monetary union and a single monetary policy. The ECCB operates as a quasi currency board, in which lending to member governments is strictly limited by statute, and 60 percent of its monetary liabilities are required to be backed by foreign currency assets. Foreign assets are part of a common pool and are not assigned to individual members. The main objective of monetary policy is to maintain foreign exchange cover.

    Under the institutional arrangement described above, there is clearly no possibility for an independent monetary policy at the national level. The trend rate of inflation in the region is determined fundamentally by inflation in the United States and the other main trading partners, while market interest rates within the region follow U.S. interest rates closely with a premium reflecting local conditions. Restrictions on capital flows have in the past impeded the creation of a single money market and contributed to the segmentation of the regional banking market and the persistence of large spreads between lending and deposit rates, as well as differences in rates across economies. However, the region’s trading systems are relatively open.

    The ECCU and the ECCB provide an impressive example of successful, long-standing monetary cooperation. The monetary and exchange rate arrangements maintained by the union have been instrumental in facilitating domestic price and exchange rate stability. Despite the relatively frequent occurrence of major natural disasters, and the secular decline of key economic activities, the financial systems in the region have remained stable and virtually free from banking crises. A primary factor behind the success of the monetary union has been the strong Eastern Caribbean dollar policy pursued by the ECCB, which has imposed hard limits on its ability to extend credit to participating governments. Indeed, the ECCB has maintained foreign exchange backing of around 95 percent of monetary liabilities, well in excess of the minimum requirement of 60 percent set in the 1983 Act of Agreement. This has been possible because this act stipulates that lending to governments, up to prescribed limits, is at the discretion of the ECCB, and because member governments have exercised restraint in borrowing from the common central bank.

    Each member conducts fiscal policy in the region independently. In sharp contrast to the recent experience with the EMU, there have been no fiscal harmonization criteria or targets, though the common currency arrangement has fostered a tradition of fiscal discipline across members. However, there have been exceptions, with some economies recording at times sizable fiscal deficits (financed without recourse to ECCB credit) by borrowing from external or domestic creditors. Moreover, in several economies in the region, public sector savings have been low in recent years, sometimes with adverse consequences for public investment and growth of output and employment.

    Monetary union among these Caribbean economies has not stimulated significant development of intraregional trade despite trade liberalization. Trade was liberalized with the implementation of the common external tariff (CET) under the CARICOM agreement of 1992, which committed the signatories to reduce import tariffs to a maximum of 20 percent over six years starting in 1993. All economies in the region reduced the maximum tariff to 35 percent in 1993, but since then progress in this area has proceeded at differing paces, with St. Vincent and the Grenadines adhering strictly to the timetable for phased reductions and Antigua and Barbuda, as well as St. Kitts and Nevis and Anguilla lagging the most. Their slow progress has been related mostly to concerns about the effect of tariff reductions on government revenues and on certain domestic activities. Moreover, nontariff barriers are widespread in the region. In particular, import licenses are widely used, since Article 56 of the CARICOM Agreement allows protection of domestic production from competition by more advanced CARICOM members. In addition, members maintain licensing requirements to import a broad range of products from outside CARICOM. For these and other reasons the share of intraregional trade in total trade is relatively low. Although complete data are not available, rough estimates based on the IMF’s Direction of Trade Statistics suggest that less than 10 percent of ECCU members’ total trade is accounted for by trade within the region.

    European Economic and Monetary Union

    The euro area came into effect on January 1, 1999, and currently comprises 12 countries.7 In contrast to the other monetary unions—which first established a monetary union before engaging in efforts to strengthen economic and financial integration—the EMU followed a long transition period, and the prior creation of a customs union in 1957, and of a single market for goods and factors in 1986. The Werner Report of 1970 recommended a monetary union among the then European Community members by 1980, but it was not until June 1988 that the European Union (EU) heads of government invited the then President of the European Commission, Jacques Delors, to produce a report on an economic and monetary union.

    Following the 1989 Delors Committee Report, the EMU was established in three stages. The first stage (from July 1, 1990) abolished capital controls and involved coordination of national monetary policies and fostering of economic convergence. The first phase also saw the signing of the Maastricht Treaty (December 1991), which laid out the commitments underpinning the single currency. The Treaty mandated a long transition period, in which countries had to prove that they had converged to low fiscal deficits, inflation, and interest rates, manageable government debt, and exchange rate stability. Nevertheless, the road to a monetary union was not smooth. The Danes rejected the Treaty at a referendum in June 1992, and the United Kingdom negotiated the right to stay out of the single currency at its inception, though choose to join at a later stage. The monetary union faced a further setback with the speculative attacks against a number of European Monetary System (EMS) currencies from September 1992 to July 1993, the subsequent withdrawal of the Italian lira and pound sterling from the exchange rate mechanism, and devaluations of several other central parities.

    In stage two (from January 1, 1994), the European Monetary Institute was set up as a precursor to the European Central Bank (ECB). At the time when the ECB was established in June 1998, also the bilateral conversion rates were announced. Moreover, stage two was characterized by economic convergence to fulfill the Maastricht criteria. The third and final stage of monetary union took place on January 1, 1999, with the launching of the euro—when the rates of conversion between the euro and 11 European currencies were irrevocably fixed (Greece joined the EMU in 2001). On January 1, 2002, euro notes and coins were introduced, with the agreement that all previous national notes and coins were to be withdrawn from circulation no later than July 2002.

    At the onset of the EMU, intraregional trade already accounted for a significant share of total trade unlike most of the other monetary unions (internal trade within the EU was 46 percent of both imports and exports of member countries in the late 1990s). Economic activity in the countries of the euro area is fairly integrated, with individual country’s production being relatively similar and diversified. Since the transition period to EMU, the EMU economies have converged in many aspects. Inflation has come down, budget deficits are smaller, and the level of government debt has also fallen. The introduction of the euro has also increased price transparency and competition in the marketplace, lowered transaction costs, and enhanced greater financing and investment opportunities in the deeper and more liquid euro-denominated financial markets.

    Together the ECB and the national central banks make up the European System of Central Banks (ESCB). Monetary policy is determined by the ECB, though implemented in part by the national central banks. There is a single monetary policy and set of official central bank interest rates for the entire zone. Foreign exchange reserves are partly pooled and partly retained by national central banks. The two main decision-making bodies of the ECB are the Executive Board and the Governing Council. The main task of the Executive Board (consisting of the ECB’s President, Vice-President and four other members) is to implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council by giving instructions to the national central banks. The Governing Council, which is responsible for formulating the single monetary policy and setting guidelines for its implementation, comprises the Executive Board and the governors of the national central banks of the 12 euro area countries.8

    The main objective of monetary policy is to maintain price stability, and subject to that objective being achieved, to support economic activity. The ECB’s Governing Council has stated that in the pursuit of price stability, it will aim to maintain inflation rates close to 2 percent over the medium term, providing a sufficient margin to guard against the risk of deflation. It has also indicated that the ECB will not respond to short-run deviations from the inflation objective arising from shocks to energy prices or other sources. The ECB has formulated a two-pillar strategy to achieve this inflation objective. The first pillar assigns a prominent role to the growth rate of M3 for which it has set a reference growth value of 4.5 percent. The second pillar is a broadly based assessment of the outlook of price developments and risks to price stability in the euro area as a whole using a wide range of economic and financial indicator variables, such as long-term interest rates and the yield curve, as well as indicators of consumer and business confidence, wages and unit labor costs, and others.

    The ECB has a range of instruments at its disposal for implementing monetary policy. Open market operations are used to manage liquidity in the money market and to steer short-term interest rates. The most important instrument is reverse transactions (applicable on the basis of repurchase agreements or collateralized loans). They are initiated by the ECB, but are normally carried out through the national central banks. In addition, two standing facilities—the marginal lending and deposit facilities—allow eligible counterparties to cover their overnight liquidity needs or to invest their daily liquidity surpluses. The marginal lending rate normally determines the ceiling for the overnight market interest rate while the deposit rate normally represents the floor. Credit institutions are also required to hold a minimum of 2 percent of specified liabilities as reserves on their account with the national central banks. These required reserves are remunerated at a level corresponding to the weekly tender rate for the main reverse operations, broadly in line with market conditions.

    The Treaty strictly prohibits direct or indirect monetary financing of governments. Moreover, the constraints on fiscal policy upon joining the monetary union were further strengthened by agreeing on the Stability and Growth Pact. The member states have committed themselves to respect the medium-term budgetary objective of positions close to balance or in surplus. Deficits of 3 percent of GDP are regarded as excessive, unless they are expected to be temporary and have occurred under exceptional circumstances. The Stability and Growth Pact also defines those circumstances and lays out the process for implementing the excessive deficit procedure that can ultimately result in sanctions of up to half a percent of GDP.9 These fines are not automatic and require majority approval among the EU members, and they are not paid for at least two years. Portugal and Germany have been the first countries for which the Council decided that excessive deficits existed. Those instances have fueled anew the discussion about the role of the Pact, its design, and effectiveness. Some have argued to relax the Pact because it has left the members without sufficient flexibility in times of economic slowdown. Suggestions include relaxing the tight definitions for exceptional circumstances, focusing on cyclically adjusted deficits, and being less strict with countries that have lower levels of debt. Nevertheless, there is general agreement that rules and procedures to ensure fiscal prudence in EMU are crucial to avoid negative externalities, even though there might be room to revise some aspects of the existing fiscal rules in the future.

    Some concerns have been expressed regarding the institutional setup of the EMU. One is that the monetary policy institutional framework lacks a central lender of last resort. The ECB has not been granted power by the Treaty to serve this function, in sharp contrast with other modern central banks, that exercise lender-of-last-resort responsibilities to guarantee the liquidity and functioning of the payments system. In addition, there is no central authority to supervise the financial systems, including the commercial banks, operating in the euro area. The Maastricht Treaty gives the ECB some supervisory functions, but they are primarily the task of the union member countries. To address these issues, a Memorandum of Understanding has been signed that lays out some key principles of cooperation between the banking supervisors and central banks of the EU in crisis management situations.


    By Rina Bhattacharya and Andrea Schaechter.

    Bordo and Jonung (1999) analyze the establishment of monetary unions in the late eighteenth and nineteenth centuries.

    In 2000, the leaders of six West African non-CFA zone countries declared their intention to form a monetary union by 2003, as a first step toward creating a wider monetary union, including all 15 member countries of the Economic Community of West African States (ECOWAS), of which eight are already members of the WAEMU.

    IMF studies on the CFA franc zone include Clement and others (1996), Hernández-Catá and others (1998), and Masson and Pattillo (2001).

    At present, the eight members of WAEMU are Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The six member countries of CAEMC are Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea, and Gabon.

    For a more detailed analysis of the ECCU, see van Beek and others (2000).

    The ECCU had a total population of approximately half a million and a combined GDP of less than $3 billion in 2001.

    Austria, Belgium, Finland, France, Germany, Greece (joined in 2001), Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The history of the Economic and Monetary Union is described in detail on the ECB website ( For a detailed description of the monetary policy strategy and policy instruments, see ECB (2001d).

    Currently each euro member has one vote, and most decisions—including those on monetary policy—can be taken by simple majority. However, votes for decisions that affect the positions of the national central banks as shareholders of the ESCB (e.g., relating to the capital and the foreign exchange reserves of the ECB) are weighted by the share of each national central bank in the ECB’s capital.

    The Stability and Growth Pact and its implementation process is described in ECB (1999a).


      Abed, George T., S. NuriErbas, and BehrouzGuerami, 2003, “The GCC Monetary Union: Some Considerations for the Exchange Rate Regime,” IMF Working Paper No. 03/66 (Washington: International Monetary Fund).

      Alexander, William E., TomásJ.T. Baliño, and CharlesEnoch, 1995, The Adoption of Indirect Instruments of Monetary Policy, IMF Occasional Paper No. 126 (Washington: International Monetary Fund).

      Alesina, Alberto, and Robert J.Barro, eds.,2001, Currency Unions (Stanford, California: Hoover Institution Press, Stanford University).

      Allen, Polly Reynolds1976, Organization and Administration of a Monetary Union, Princeton Studies in International Finance No. 38 (Princeton, New Jersey: Princeton University Press).

      Askari, HosseinVahidNowshirvani, and MohamedJaber, 1997, Economic Development in the GCC: The Blessing and the Curse of Oil (Greenwich, Connecticut: JAI Press).

      Barnett, Steven A., and Rolando J.Ossowski, 2002, “Operational Aspects of Fiscal Policy in Oil-Producing Countries,” IMF Working Paper No. 02/177 (Washington: International Monetary Fund).

      Bayoumi, Tamim, and BarryEichengreen,1994, One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World, Princeton Studies in International Finance No. 76 (Princeton, New Jersey: Princeton University Press).

      Beetsma, RoelXavierDebrun, and FrancKlaassen, 2001, “Is Fiscal Policy Coordination in EMU Desirable?” IMF Working Paper No. 01/178 (Washington: International Monetary Fund).

      Blejer, Mario I., Jacob A.Frenkel, LeonardoLeiderman, and AssafRazin, eds.,1997, Optimum Currency Areas, New Analytical and Policy Developments (Washington: International Monetary Fund).

      Bordo, Michael D.LarsJonung, 1999, “The Future of EMU: What Does the History of Monetary Unions Tell Us?” NBER Working Paper No. 7365 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Clément, Jean A.P.,1996, Aftermath of the CFA Franc Devaluation, IMF Occasional Paper No. 138 (Washington: International Monetary Fund).

      Davis, Jeffrey, RolandoOssowski, JamesDaniel, and StevenBarnett, 2001, Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications, IMF Occasional Paper No. 205 (Washington: International Monetary Fund).

      De Grauwe, Paul, and WimVanhaverbeke, 1991, “Is Europe an Optimum Currency Area? Evidence From Regional Data,” CEPR Discussion Paper No. 555 (London: Centre for Economic Policy Research).

      de la Torre, Augusto, Kelly, Margaret R., 1992, Regional Trade Arrangements, IMF Occasional Paper No. 93 (Washington: International Monetary Fund).

      Doré, Ousmane, and Paul R.Masson, 2002Experience with Budgetary Convergence in the WAEMU,” IMF Working Paper No. 02/108 (Washington: International Monetary Fund).

      DeutscheBundesbank, 2000, “The Integration of the German Money Market in the Single Euro Money Market,” in Monthly Report January 2000, pp. 15-30 (Frankfurt).

      Eichengreen, Barry1997, “Is Europe an Optimum Currency Area?” in European Monetary Unification: Theory, Practice, and Analysis, by Barry Eichengreen (Cambridge, Massachusetts: MIT Press).

      El-Erian, Mohamed A., and StanleyFischer, 1996, “Is MENA a Region? The Scope for Regional Integration,” IMF Working Paper No. 96/30 (Washington: International Monetary Fund).

      Engel, Eduardo, and Rodrigo O.Valdes, 2000, “Optimal Fiscal Strategy for Oil Exporting Countries,” IMF Working Paper No. 00/118 (Washington: International Monetary Fund).

      European Central Bank, 1999a, “Banking in the Euro Area: Structural Features and Trends,” Monthly Report(April), pp. 41-53.

      European Central Bank, 1999b, “The Implementation of the Stability and Growth Pact,” Monthly Report(May), pp. 45-72.

      European Central Bank, 2000, “EMU and Banking Supervision,” Monthly Bulletin(April), pp. 49-64.

      European Central Bank, 2001a, The Euro Money Market,July (Frankfurt).

      European Central Bank, 2001b, The Euro Bond Market,July (Frankfurt).

      European Central Bank, 2001c, The Euro Equity Markets,August (Frankfurt).

      European Central Bank, 2001d, The Monetary Policy of the ECB (Frankfurt).

      European Commission, 1990, “One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming An Economic and Monetary Union,European Economy, Vol. 44.

      European Central Bank, 1996, Credit Institutions and Banking, The Single Market Review Series. Subseries II—Impact on Services (Brussels).

      European Central Bank, 1999, Report of the Giovannini Group, EU Repo Markets: Opportunities for Change (Brussels).

      European Central Bank, Economic and Financial Committee, 2001, Report on Financial Crisis Management, EFC/ECFIN/ 251/01 (Brussels).

      Fasano, Ugo2000, “Review of the Experience with Oil Stabilization and Savings Funds in Selected Countries,” IMF Working Paper No. 00/112 (Washington: International Monetary Fund).

      Fasano, Ugo2001a, “With Limited Oil Resources, Oman Faces Challenges of Economic Diversification, Structural Reforms,IMF Survey, Vol., 30, No. 15(July 30), pp. 254-57.

      Fasano, Ugo2001b, “Sluggish Growth, Declining Oil Resources Prompt Qatar to Diversify Economy Away from OilIMF Survey,Vol, 30, No. 22(November 26), pp. 382-84.

      Fasano, Ugo2002, “With Open Economy and Sound Policies, U.A.E. Has Turned Oil ‘Curse’ into a Blessing,IMF Survey, Vol. 31, No. 19(October 21), pp. 330-32.

      Fasano, Ugo2003, “Fiscal Sustainability with Oil Resources,” in United Arab Emirates: Selected Issues and Statistical Appendix, IMF Country Report No. 03/67 (Washington: International Monetary Fund), pp. 38-41.

      Fasano, Ugo and ZubairIqbal, 2002, “Common Currency,Finance & Development, Vol. 39(December), pp. 42-45.

      Fasano, Ugo and QingWang, 2001, “Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries,” IMF Working Paper No. 01/195 (Washington: International Monetary Fund).

      Fasano, Ugo and QingWang, 2002, “Testing the Relationship Between Government Spending and Revenue: Evidence from GCC Countries,” IMF Working Paper No. 02/201 (Washington: International Monetary Fund).

      Fasano, Ugo and RishiGoyal, 2003, “Rising Unemployment in GCC Countries: Policy Options,forthcomingIMF Working Paper.

      Hernández-Catá, Ernesto, and other, 1998, The West African Economic and Monetary Union, IMF Occasional Paper No. 170 (Washington: International Monetary Fund).

      International Monetary Fund,2003, “United Arab Emirates: Financial System Stability Assessment, Including Reports on the Observance of Standards and Codes on the Following Topics: Monetary and Financial Policy Transparency, Banking Supervision and Payment Systems,” IMF Country Report No. 03/20 (Washington).

      Issing, Otmar,1999, “The Monetary Policy of the Eurosystem,Finance & Development, Vol. 36(March), pp. 18-21.

      Jadresic, Esteban,2002, “On a Common Currency for the GCC Countries,” IMF Policy Discussion Paper No. 02/12 (Washington: International Monetary Fund).

      Jahjah, Samir, 2001, “Financial Stability and Fiscal Crises in a Monetary Union,” IMF Working Paper No. 01/201 (Washington: International Monetary Fund).

      Kopits, George, ed., 1992, Tax Harmonization in the European Community: Policy Issues and Analysis, IMF Occasional Paper No. 94 (Washington: International Monetary Fund).

      Masson, Paul, and JacquesMélitz, 1991, “Fiscal Policy Independence in a European Monetary Union,Open Economics Review, Vol. 2, pp. 113-36.

      Masson, Paul, and CatherinePattillo, 2001, Monetary Union in West Africa (ECOWAS): Is It Desirable and How Could It Be Achieved?, IMF Occasional Paper No. 204 (Washington: International Monetary Fund).

      Masson, Paul, and MarkTaylor, 1993, “Currency Unions: A Survey of the Issues,” in Policy Issues in the Operation of Currency Unions,ed.PaulMassonMarkTaylor (Cambridge and New York: Cambridge University Press).

      Mélitz, Jacques and Axel A.Weber, 1996, “The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union,” CEPR Discussion Paper No. 1374 (London: Centre for Economic Policy Research).

      Mehran, Hassanali, and others, 1998, Financial Sector Development in Sub-Saharan African Countries, IMF Occasional Paper No. 169 (Washington: International Monetary Fund).

      Mundell, Robert A.,1961, “A Theory of Optimum Currency Areas,American Economic Review, Vol. 51, pp. 657-64.

      Mundell, Robert A.,1997, “Updating the Agenda for Monetary Union,” in Optimum Currency Areas: New Analytical and Policy Developments,ed. byMarioBlejerJacobA. FrenkelLeonardoLeidermanAssafRazin (Washington: International Monetary Fund).

      Padoa-Schioppa, Tommaso, 1994, The Road to Monetary Union in Europe: The Emperor, the Kings, and the Genies (Oxford: Clarendon Press).

      Padoa-Schioppa, Tommaso, 1999, “EMU and Banking Supervision,” lecture delivered at the London School of Economics, Financial Markets Group,February 24.

      Padoa-Schioppa, Tommaso, 2000, “The Eurosystem and Financial Stability,” speech delivered at the Belgian Financial Forum,February 10.

      Persson, Torsten, 2001, “Currency Unions and Trade: How Large Is the Treatment Effect?Economic Policy: A European Forum, No. 33(October) pp. 435-61.

      Rose, Andrew, 2000, “One Money, One Market: Estimating the Effects of Common Currencies on Trade,Economic Policy: A European Forum, No. 30(April) pp. 9-45.

      Sandwick, John A., ed., 1987, The Gulf Cooperation Council: Moderation and Stability in an Interdependent World (Boulder, Colorado: Westview Press).

      Santillán, Javier, MarcBayle, ChristianThygesen, 2000, The Impact of the Euro on Money and Bond Markets, ECB Occasional Paper No. 1 (Frankfurt: European Central Bank).

      Sinn, Hans-Werner and HolgerFeist, 1997, “Eurowinners and Eurolosers: The Distribution of Seigniorage Wealth in EMU,” NBER Working Paper No. 6072 (Cambridge, Massachusetts: National Bureau of Economic Research).

      Tenreyro, Silvana2001, “On the Causes and Consequences of Currency Unions,” paper presented at an IMF Research Department Seminar,December 5.

      van Beek, Frits, José RobertoRosales, MayraZermeno, RubyRandall, JorgeShepherd, 2000, The Eastern Caribbean Currency Union: Institutions, Performance, and Policy Issues, IMF Occasional Paper No. 195 (Washington: International Monetary Fund).

      Williams, Oral, TracyPolius, and SelvonHazel, 2001, “Reserve Pooling in the Eastern Caribbean Currency Union and the CFA Franc Zone: A Comparative Analysis,” IMF Working Paper No. 01/104 (Washington: International Monetary Fund).

      World Bank, 2001, World Development Indicators (Washington).

    Recent Occasional Papers of the International Monetary Fund

    223. Monetary Union Among Member Countries of the Gulf Cooperation Council, by a staff team led by Ugo Fasano. 2003.

    222. Informal Funds Transfer Systems: An Analysis of the Informal Hawala System, by Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson. 2003.

    221. Deflation: Determinants, Risks, and Policy Options, by Manmohan S. Kumar. 2003.

    220. Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, by Eswar S. Prasad, Kenneth Rogoff, Shang-Jin Wei, and Ayhan Kose. 2003.

    219. Economic Policy in a Highly Dollarized Economy: The Case of Cambodia, by Mario de Zamaroczy and Sopanha Sa. 2003.

    218. Fiscal Vulnerability and Financial Crises in Emerging Market Economies, by Richard Hemming, Michael Kell, and Axel Schimmelpfennig. 2003.

    217. Managing Financial Crises: Recent Experience and Lessons for Latin America, edited by Charles Collyns and G. Russell Kincaid. 2003.

    216. Is the PRGF Living Up to Expectations?—An Assessment of Program Design, by Sanjeev Gupta, Mark Plant, Benedict Clements, Thomas Dorsey, Emanuele Baldacci, Gabriela Inchauste, Shamsuddin Tareq, and Nita Thacker. 2002.

    215. Improving Large Taxpayers’ Compliance: A Review of Country Experience, by Katherine Baer. 2002.

    214. Advanced Country Experiences with Capital Account Liberalization, by Age Bakker and Bryan Chappie. 2002.

    213. The Baltic Countries: Medium-Term Fiscal Issues Related to EU and NATO Accession, by Johannes Mueller, Christian Beddies, Robert Burgess, Vitali Kramarenko, and Joannes Mongardini. 2002.

    212. Financial Soundness Indicators: Analytical Aspects and Country Practices, by V. Sundararajan, Charles Enoch, Armida San Jose, Paul Hilbers, Russell Krueger, Marina Moretti, and Graham Slack. 2002.

    211. Capital Account Liberalization and Financial Sector Stability, by a staff team led by Shogo Ishii and Karl Habermeier. 2002.

    210. IMF-Supported Programs in Capital Account Crises, by Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Aleš Bulíř, Javier Hamann, and Alex Mourmouras. 2002.

    209. Methodology for Current Account and Exchange Rate Assessments, by Peter Isard, Hamid Faruqee, G. Russell Kincaid, and Martin Fetherston. 2001.

    208. Yemen in the 1990s: From Unification to Economic Reform, by Klaus Enders, Sherwyn Williams, Nada Choueiri, Yuri Sobolev, and Jan Walliser. 2001.

    207. Malaysia: From Crisis to Recovery, by Kanitta Meesook, Il Houng Lee, Olin Liu, Yougesh Khatri, Natalia Tamirisa, Michael Moore, and Mark H. Krysl. 2001.

    206. The Dominican Republic: Stabilization, Structural Reform, and Economic Growth, by Alessandro Giustiniani, Werner C. Keller, and Randa E. Sab. 2001.

    205. Stabilization and Savings Funds for Nonrenewable Resources, by Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett. 2001.

    204. Monetary Union in West Africa (ECOWAS): Is It Desirable and How Could It Be Achieved? by Paul Masson and Catherine Pattillo. 2001.

    203. Modern Banking and OTC Derivatives Markets: The Transformation of Global Finance and Its Implications for Systemic Risk, by Garry J. Schinasi, R. Sean Craig, Burkhard Drees, and Charles Kramer. 2000.

    202. Adopting Inflation Targeting: Practical Issues for Emerging Market Countries, by Andrea Schaechter, Mark R. Stone, and Mark Zelmer. 2000.

    201. Developments and Challenges in the Caribbean Region, by Samuel Itam, Simon Cueva, Erik Lundback, Janet Stotsky, and Stephen Tokarick. 2000.

    200. Pension Reform in the Baltics: Issues and Prospects, by Jerald Schiff, Niko Hobdari, Axel Schimmelpfennig, and Roman Zytek. 2000.

    199. Ghana: Economic Development in a Democratic Environment, by Sergio Pereira Leite, Anthony Pellechio, Luisa Zanforlin, Girma Begashaw, Stefania Fabrizio, and Joachim Harnack. 2000.

    198. Setting Up Treasuries in the Baltics, Russia, and Other Countries of the Former Soviet Union: An Assessment of IMF Technical Assistance, by Barry H. Potter and Jack Diamond. 2000.

    197. Deposit Insurance: Actual and Good Practices, by Gillian G.H. Garcia. 2000.

    196. Trade and Trade Policies in Eastern and Southern Africa, by a staff team led by Arvind Subramanian, with Enrique Gelbard, Richard Harmsen, Katrin Elborgh-Woytek, and Piroska Nagy. 2000.

    195. The Eastern Caribbean Currency Union—Institutions, Performance, and Policy Issues, by Frits van Beek, Jose Roberto Rosales, Mayra Zermeno, Ruby Randall, and Jorge Shepherd. 2000.

    194. Fiscal and Macroeconomic Impact of Privatization, by Jeffrey Davis, Rolando Ossowski, Thomas Richardson, and Steven Barnett. 2000.

    193. Exchange Rate Regimes in an Increasingly Integrated World Economy, by Michael Mussa, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andy Berg. 2000.

    192. Macroprudential Indicators of Financial System Soundness, by a staff team led by Owen Evans, Alfredo M. Leone, Mahinder Gill, and Paul Hilbers. 2000.

    191. Social Issues in IMF-Supported Programs, by Sanjeev Gupta, Louis Dicks-Mireaux, Ritha Khemani, Calvin McDonald, and Marijn Verhoeven. 2000.

    190. Capital Controls: Country Experiences with Their Use and Liberalization, by Akira Ariyoshi, Karl Habermeier, Bernard Laurens, Inci Otker-Robe, Jorge Ivan Canales Kriljenko, and Andrei Kirilenko. 2000.

    189. Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union, by Donal McGettigan. 2000.

    188. Financial Sector Crisis and Restructuring: Lessons from Asia, by Carl-Johan Lindgren, Tomas J.T. Balino, Charles Enoch, Anne-Marie Guide, Marc Quintyn, and Leslie Teo. 1999.

    187. Philippines: Toward Sustainable and Rapid Growth, Recent Developments and the Agenda Ahead, by Markus Rodlauer, Prakash Loungani, Vivek Arora, Charalambos Christofides, Enrique G. De la Piedra, Piyabha Kongsamut, Kristina Kostial, Victoria Summers, and Athanasios Vamvakidis. 2000.

    186. Anticipating Balance of Payments Crises: The Role of Early Warning Systems, by Andrew Berg, Eduardo Borensztein, Gian Maria Milesi-Ferretti, and Catherine Pattillo. 1999.

    185. Oman Beyond the Oil Horizon: Policies Toward Sustainable Growth, edited by Ahsan Mansur and Volker Treichel. 1999.

    184. Growth Experience in Transition Countries, 1990-98, by Oleh Havrylyshyn, Thomas Wolf, Julian Berengaut, Marta Castello-Branco, Ron van Rooden, and Valerie Mercer-Blackman. 1999.

    183. Economic Reforms in Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, by Emine Giirgen, Harry Snoek, Jon Craig, Jimmy McHugh, Ivailo Izvorski, and Ron van Rooden. 1999.

    182. Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union, by a staff team led by Liam Ebrill and Oleh Havrylyshyn. 1999.

    181. The Netherlands: Transforming a Market Economy, by C. Maxwell Watson, Bas B. Bakker, Jan Kees Martijn, and Ioannis Halikias. 1999.

    180. Revenue Implications of Trade Liberalization, by Liam Ebrill, Janet Stotsky, and Reint Gropp. 1999.

    179. Disinflation in Transition: 1993-97, by Carlo Cottarelli and Peter Doyle. 1999.

    178. IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment, by Timothy Lane, Atish Ghosh, Javier Hamann, Steven Phillips, Marianne Schulze-Ghattas, and Tsidi Tsikata. 1999.

    177. Perspectives on Regional Unemployment in Europe, by Paolo Mauro, Eswar Prasad, and Antonio Spilimbergo. 1999.

    176. Back to the Future: Postwar Reconstruction and Stabilization in Lebanon, edited by Sena Eken and Thomas Helbling. 1999.

    175. Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97, by Luis M. Valdivieso. 1998.

    Note: For information on the titles and availability of Occasional Papers not listed, please consult the IMF’s Publications Catalog or contact IMF Publication Services.

      You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here

      Other Resources Citing This Publication