Bank for International Settlements

Mohammed Ali Bin Zayed Al Falasi

English

Research Papers in Economics

 
120  BIS Papers No 17
 
Concrete steps towards the establishment  
of a monetary union for the 
Gulf Cooperation Council countries 
Mohammed Ali Bin Zayed Al Falasi 
The United Arab Emirates (UAE) has a population of about 4 million, with a per capita GDP in 2001 of 
$17,000. The country has one of the most diversified economies in the Gulf region. Indeed, the share 
of the oil and gas sector has been limited to around 30%.  
The dedication of the leadership to development and economic freedom are at the origin of this 
success story. The country is now host to 16 “free zones” where businesses can be established 
without complicated administrative procedures. Indeed, about 3,500 companies from all over the world 
have set up in these zones. Jebel Ali is now the world’s largest free zone with over 2,400 companies 
from over 80 countries. Innovative development projects include the Dubai internet and media cities, 
the Dubai International Financial Centre and a new metal and commodities centre. 
The UAE economy was ranked 14th worldwide in 2001, according to the Heritage Foundation’s Index 
of Economic Freedom. Fund transfers abroad are totally free. Foreign banks are active in the UAE. 
The UAE joined the World Trade Organization in 1996, and is confident that its economy is in a 
position to face the challenges of international competition. 
Sequencing of economic and monetary integration in the Gulf 
In the GCC countries,
1 economic and monetary integration are proceeding hand in hand. Indeed, the 
adoption of the single currency is conceived as a way to enhance economic and monetary integration. 
In the GCC case, monetary union is preceding economic integration. 
The anchor currency 
A decision was already taken in December 2001 to adopt a fixed peg to the US dollar for all GCC 
countries. Indeed, this currency has been a de facto anchor in the past for all GCC members except 
Kuwait, whose currency does not fluctuate much against the dollar either. The fixed peg of the GCC 
currencies to the dollar has served the economies quite well. First, as exports are priced in dollars, 
fluctuations of the dollar against other major currencies will have a minor impact on the GCC 
currencies. Second, the peg to the dollar is a stabilising influence for government budgets as oil and 
gas are major sources of revenue. These reasons would indicate that the dollar will be the anchor 
currency when the currency union is established in 2010. But they do not exclude a later shift to 
another anchor (such as the euro) or a float of the currency. 
Convergence criteria 
According to the agreed agenda, the observance of convergence criteria will start in 2005. The 
process of choosing these criteria and studying the appropriate way to implement them is currently 
underway. The criterion for the budget deficit could refer to a fixed maximum limit as a percentage to 
GDP. Alternatively it could be expressed as a permissible limit (1 or 2 percentage points) above the 
average ratio of the other members. A target for the public debt could be expressed as a declining 
range, with a final target in the order of 60-70% of GDP. With a fixed peg to the dollar, interest rates 
should be aligned to the interest rates in the United States. 
                                                       
1  Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.  
BIS Papers No 17  121
 
Institutions 
A special commission of the Governors of the GCC central banks and monetary authorities was set up 
to coordinate and follow up on all matters pertaining to the monetary union, including the convergence 
criteria. 
It is likely that the relationship between the future Gulf Central Bank and the central banks of the 
member countries will be similar to that now existing between the corresponding institutions within the 
euro area. 
Conclusion 
The adoption of a monetary union in the GCC is a very specific experiment, in that all members 
already rely on oil and gas as their major export. They all strive to diversify their economies, and they 
have all adopted a fixed peg to the dollar years before the adoption of a single currency. The 
challenge now is to take advantage of all these elements and accelerate the process of monetary and 
economic integration. 
 

Regional currency areas and the use of foreign currencies

http://www.bis.org/publ/bppdf/bispap17l.pdf

Regional currency areas and the use of foreign currencies

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Research Papers in Economics