GCC: Full steam ahead to monetary union (page 1 of 3)

The six members of the Gulf Cooperation Council (GCC; consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE)) took a step closer to monetary union last week as central bankers agreed the text associated with fiscal and monetary targets agreed in March.

Given the imperative of job creation in the region, there is an increasing realisation of the need for the region to become a more attractive investment site for both small and medium enterprises and larger companies. The key is to make it easier and cheaper to set up companies and then allow them to operate efficiently.

In this regard, much work remains to be done. In its recently released report - Doing Business in 2006: Creating Jobs - the World Bank ranked countries according to how easy it is to do business. Out of the four GCC countries that are ranked, Saudi Arabia is best positioned at 38th out of the 155 countries surveyed (Kuwait is 47th, Oman 51st and the UAE 69th).

In terms of starting a business, the GCC countries are comparable to East Asia. The number of days to set up a business averages 47, compared to East Asia's 51. Meanwhile, it still costs almost 40% of per capita Gross National Income to set up a business versus 41.7% for East Asia. However, there is considerable scope for improvement with OECD averages of 19 days and 6.5%, respectively.

Given the lack of an advantage in a business environment context versus East Asia, the issue of size becomes increasingly important. For larger companies in particular, there is a need for new investments to show their ability to become economically significant. In recent times, China and India have been dominating the headlines in terms of attracting foreign direct investment. This is partly due to their ability to produce things more cheaply than other countries, but as important is the attractiveness of the local market.

The size of the economy can be considered a proxy for the general size of opportunity facing the corporate sector. In 2004, China's GDP was USD 1,649bn. For India, it was USD 692bn. The largest GCC economy is Saudi Arabia at USD 251bn. For the GCC as a whole, it was almost USD 450bn.

An economically united and efficient GCC is clearly a more interesting proposition for larger companies than each individual economy, especially given the impediments to trade evident within the region. This is why trade relations within the GCC have been a core focus of late.

The natural extension of this trend for increased integration is to introduce a common currency in order to further facilitate trade between the different countries. On Wednesday, Bahrain central bank chief Rasheed al-Maraj reiterated that the region's central bankers had agreed to pursue monetary union in a similar fashion to the rules used in Europe. These rules still have to be formally signed off by the countries' rulers, after which it is envisaged that countries will need to comply by 2007 before monetary union is achieved in 2010.

In line with the Maastricht criteria, the requirements for entry are that a country's budget deficit is less than 3% of GDP and the public sector debt is less than 60% of GDP.