The report, prepared for the Dubai International Finance Centre, comes just ahead of the meeting finance ministers from Saudi Arabia, the UAE, Kuwait, Qatar and Bahrain tomorrow to discuss the Gulf monetary union.
Observing that a major hurdle to setting up the GCB has been the lack of agreement on its institutional framework, the report said the GCB should be managed by an executive board with the governors of the national central banks and monetary authorities joining it to form a monetary policy committee, which would be the main policy-making body.
Voting rights could be assigned according to the GDP (gross domestic product) size or according to a quota based on indicators of economic size (GDP, population, trade, market capitalisation) with a 20% share allocated to the executive board, said the report entitled ‘The Institutional Framework of the Gulf Central Bank’.
Noting that international investors and central banks around the world would want to hold assets denominated in the new Gulf currency, as both a safe haven and a hedge against oil price shocks and inflation, the report said the proposed currency could “clearly be among the five major currencies in the world”.
“The creation of a new strong currency, whose stability is guaranteed by oil wealth and, increasingly, by financial wealth, will attract sizeable capital inflows from all over the world and provide a safe haven for investors when commodity prices spike or when security tensions arise,” it said.
On the much-discussed issue of where the GCB would be headquartered, the report said some bank departments could be located separately from the headquarters.
The report also said it made sense for the GCB – which will become the ‘voice’ of the Gulf Co-operation Council on global economic issues and look after the interest of its member countries – to be located in a city with a “sizeable financial market, with a good banking network, international transport, communications and telecommunications infrastructure.”
It would be meaningful to quickly launch the GCB, possibly at the beginning of 2009 with adequate capital, human resources and transfer of foreign reserves necessary to conduct interventions in the market if the need arises, the report said. Accordingly, the preparations of the January 1, 2010 deadline of the single currency could be brought under the umbrella of a strong body whose appointed leaders will have a mandate backed by political commitment.
The central bank, with a monetary policy geared to targeting inflation, will generate investor confidence in the region’s financial markets and create an international reserve asset for oil importing countries, a natural hedge against inflation and commodity price volatility.
The report said the GCB and the currency union will be one of the crucial factors helping member countries face up to the challenges posed by globalisation and the global financial turmoil. It would be wise to decide early on the capital of the GCB, the endowment each country would confer and the amount of foreign currency reserves the bank would maintain under its control
A capital equivalent to $ 1bn shared in proportion to the voting power of each country or, alternatively, to their GDP and population would be sufficient, the report said.
Foreign reserves of about $ 100bn equal to slightly more than four months of imports (according to 2007 data) should be sufficient, especially if the (GCB) executive board could call on additional resources from national central banks in case of emergency (similarly to what has been envisaged for the eurozone), it said.
The report said the current share of each member country’s currency in circulation could be a reasonable yardstick to divide the seignorage among participants in the Gulf monetary union.
