GCC Finally Agrees On Timing Of Tariff Unification And Common Currency

VOL. XLV

No 1

7 January 2002

GCC

GCC Finally Agrees On Timing Of Tariff Unification And Common Currency

The Gulf Cooperation Council (GCC) announced on 31 December, following the close of its 21st summit in Muscat, Oman, that it had agreed to unify regional customs tariffs at 5% (compared to the existing 4-15% and broadly in line with WTO requirements) as of 1 January 2003 and create a single market and currency “no later than 1 January 2010.” According to the final communique, the customs union arrangement provides for “the procedural steps to be taken as regards the establishment of GCC Customs Union,” moving forward its enforcement date and lowering customs tariffs on all imported, non-customs union foreign commodities to 5% unless exempted in accordance with the Council’s decision taken at the 20th summit conference. (Already there is free intra-regional trade for goods with 40% of their value added from GCC sources). The agreement also allows for the waiving of all fees on industrial machinery and raw material destined for industrial establishments in GCC member states.

With regards to the introduction of a single currency, the communique explained that “the Council directed the Committee of Monetary and Economic Cooperation and the Committee of Governors to coordinate, within a period not to exceed 2005, the necessary economic performance standards essential to the success of the Monetary Union.” The GCC also pledged to formalize standards and procedures such as agricultural quarantine systems and veterinary services and decided to set up a new independent authority on standards and measurements. Participants brought Yemen somewhat closer to the GCC fold by granting it membership of the Council of the Ministers of Health, the Arab Education Bureau of the Gulf states, the GCC Council of the Ministers of Labor and Social Affairs and the Arab Gulf Football Tournament – all non-political organizations.

A common market is expected to facilitate the conclusion of a trade agreement with the EU, which has thus far been impeded by the EU’s tariff conditionality and, some argue, its protectionist stance in certain sectors. Speaking at the summit, the GCC’s envoy to the EU, Najib al-Rawwas, said that “now there are no more excuses for them to postpone signing the free trade zone (agreement) between the two blocs.” The communiqué notes that the GCC has approved a “long-term strategy for relations and negotiations with regional and international organizations and blocs, and endorsed the declaration of principle for mutual cooperation between the GCC and the European Free Trade Association (EFTA).” The EU is the region’s largest trading partner with annual bilateral trade estimated at $40bn but with a $10bn trade surplus in favor of the EU. The GCC has been lobbying most notably for a reduction in barriers to entry on petrochemicals and aluminum in international markets, but has been challenged on the basis that these items effectively receive government subsidies in the form of cheap natural gas. The common tariff policy is expected to resolve the issue (MEES, 6 December 1999).

The GCC has been discussing the possibility of a unified trade and finance regime since it first signed an initial economic agreement (and was established) in 1981, with much vocal commitment thereto since (MEES, 8 January 2001). In 2001, the Bahraini Minister of Finance and National Economy, 'Abd Allah Saif, reiterated the rationale behind the project, noting that a single currency “will provide significant benefits for regional trade and investment. It will eliminate the costs and inconvenience associated with intra-Gulf foreign exchange transactions. By making the prices of goods, services and investments readily comparable, it will enhance competition and improve overall economic performance” (MEES, 4 June 2001). He also said that the adoption of the same currency and associated monetary policies would facilitate decision-making and help generate foreign direct and portfolio investment and a single Gulf financial market.

Such benefits are broadly accepted, and economists point out that a common customs rate also provides greater market certainty and allows businesses, both domestic and international, to plan and target the regional market rather than just the domestic one, thereby creating economies of scale and ultimately the re-specialization of resources. However, progress in this direction has been less than speedy, largely due to vested sovereign interests (tariffs accrue to treasuries) and large discrepancies in official levels (MEES, 6 December 1999). The UAE, for example, had voiced concerns that if the rate was set at 5-7.5% it would have to increase rather than reduce its current broad customs tariff rate of around 4% and thereby compromise Dubai’s commanding position as a regional transit trade point (MEES, 6 December 1999). There were also structural discrepancies - Saudi Arabia, for example, in the last 25-30 years has focused on developing import substitution industries and a protective regime to support them, while the UAE has focused on re-export and has an interest in customs liberalization. It is still not clear whether Saudi special tariffs, such as those on cement and sugar, will be reduced in 2005.

But the urgent challenges facing the region in the coming decade – rapid population increase, unemployment and debt growth – coupled with the renewed focus on the region’s oil shock vulnerability seem to have forced the issue. In less than two years, GCC states have seen crude oil prices spiral down to $8/B and then climb back up to over $30/B. The International Monetary Fund (IMF) has renewed recommendations that the GCC introduce taxes (ranging from value added to corporate and income) and reduce subsidies to offset this vulnerability. And even reform-averse Saudi Arabia has made a call for “action rather than words.” During the summit, Saudi Arabia’s Crown Prince 'Abd Allah complained that the GCC had not achieved the objectives defined in 1981. “We have not yet set up a unified military force that deters enemies and supports friends. We have not reached a common market, nor formulated a unified political position on political crises…objectivity and frankness require us to declare that all that has been achieved is too little and it reminds us of the bigger part that has yet to be accomplished…We are still moving at a slow pace that does not conform with the modern one.” The prince called on the GCC to stop hiding behind the veil of an exaggerated concept of sovereignty, pointing to the EU experience. The summit coincided with the launch of the European single currency, the euro, highlighting the viability of a common currency with many more practical barriers than those of the Gulf, such as a multiplicity of languages and diverse cultural and institutional structures.

Skeptics say that the new-found Saudi enthusiasm for a single currency is hardly surprising given that the kingdom – with the highest level of domestic debt and the proportionately smaller levels of reserves – is most likely to benefit from the stability brought about by consolidated reserves and external assets. And, as one analyst notes, within a customs union, which creates common institutions and markets, the largest country by definition gains the greater control. And even with Saudi Arabia’s backing, there are huge practical hurdles to be overcome. Both common tariffs and a common currency require common institutions – the most obvious being a single central bank – that the GCC has been less than adept at establishing. The GCC has yet to establish executive bodies that can enforce region-wide policies, with its Directorate acting more in the role of secretary than director. The region’s capital markets still operate totally independently, despite some cross listing and constant pledges to consolidate. Labor market flexibility – a prerequisite for a functioning common market – has yet to be addressed significantly in any forum. The summit’s communique made only a vague reference to carrying out “previous decisions regarding the creation of job opportunities for citizens of GCC states among the member states,” noting “the progress of work on the implementation of the joint plan of action to develop educational curricula.” And fiscal reform is less than apparent.

Moreover, while the GCC’s final communique does talk of harmonized economic standards being achieved by 2005 in preparation for a single currency, no specific targets have been mentioned. A 10-year deadline in this respect would seem inordinately ambitious if the GCC is to adopt similar guidelines to the EU – a deficit to GDP ratio of 3% and a debt to GDP ratio of 66%. “It will take decades to convert a common tariff policy into first a common market and then an economic union,” comments one economist, noting that it took 20 years just to agree on the principle.