GCC Single currency could retain the dollar peg

Gulfnews, Nov 5 – The planned unified currency of the six-nation Gulf Cooperation Council (GCC) should be pegged to the US dollar. The GCC states plan to issue the currency at an unspecified future date as part of implementing their monetary union by 2010.

While the date for carrying out the ambitious monetary union is several years away, still, debate rages over whether to link the planned currency to the US dollar or a basket of currencies including the dollar, the euro and the yen.

Yet, another option calls for floating the currency in the future, suggested as five years following its circulation.

I argue for linking the unified currency to the greenback as the practice would give investors the confidence in dealing with regional economies.

Small investors, who are the majority, tend to seek instability. In other words, the link allows the GCC countries to avoid unnecessary volatility associated with floating currencies.

The GCC economies would possibly not be able to absorb the sort of consequences connected with the short experience of the euro. The euro has appreciated in value by nearly a quarter since its formal launch in 2002.

In fact, a line can be drawn from upheavals experienced in regional stock markets over the past year or so. The rise and subsequent decline of performance indexes caused losses to investors throughout the region.

There were also reported cases of deaths amongst few investors, who were traumatised on hearing news of a substantial plunge in values of their investments.

In addition to the stability factor, the link uniquely fits the nature of GCC exports, which are priced in the US dollar. GCC merchandise exports primarily comprise crude oil, petroleum products such as diesel, petrochemicals, aluminum goods and textiles.

Needless to say, oil receipts are the major contributor to treasury income in all the GCC states including Bahrain, which is the least dependent on the hydrocarbons sector.

The petroleum sector contributed 76 per cent of actual budgetary income of Bahrain in 2005, as opposed to 71 per cent from the projected, on the back of strong rise in oil prices.

Also, services such as financial services are likewise priced in the dollar. Additionally, a sizable amount of imports are priced in the dollar, notably products from the US and China, to name a few.