Transcript Document

Search for Criteria of
Economic Convergence
in the GCC Area
Abdel Aziz Hamad Al-Uwaisheg
Director - Economic Integration Department
Gulf Cooperation Council (GCC)
Presented at the European Commission Conference
Europe, the Mediterranean & the Euro
Athens, Greece - 3 February 2003
Search for Criteria
 According to the timetable approved by
the heads of state, criteria for
convergence are to be adopted before
the end of 2005. GCC member states
are now searching for suitable criteria.
 This is an exploration of various possible
criteria under discussion.
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Categories
1. Criteria for Real Sector
Convergence: GDP, Trade
2. Monetary Criteria: Prices, Interest
Rates, Exchange Rate Convergence
3. Fiscal Criteria: Government Finance
Convergence: revenue & spending
cycles; deficits; debt
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Per Capita GDP
 In the year 2000, the spread in per capita GDP
between the six GCC states was noticeable:
 Qatar
US $ 28442
 UAE
US $ 26914
 Kuwait
US $ 17328
 Bahrain
US $ 12344
 Oman
US $ 8254
 Saudi Arabia
US $ 8031
Divergence: Graph next shows the gap persisting
during the periodEconomic
underIntegration
consideration.
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US dollars
Path of Per Capita GDP
Qatar
UAE
Kuw ait
KSA
Bahrain
Oman
UAE GDP p/c
Oman GDP p/c
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Bahrain GDP p/c
Qatar GDP p/c
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KSA GDP p/c
Kuwait GDP p/c
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Cyclical Movements
GDP Growth Rates
 During the period (1969-2000), GDP grew
(or contracted) around the same time in all
GCC states. Remarkably similar rates were
recorded.
 As would be expected, since GCC states
depend on oil as the main source of income,
fluctuations of oil prices affect all of them in
similar ways. Notice the extreme highs of
the mid-to-late seventies.
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Kuwait
(% )
growth
Path of GDP Growth Rates
1969-2000
UAE growth
Oman growth
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Bahrain growth
Qatar growth
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KSA growth
Kuwait GDP growth
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Intra-GCC Trade
Despite trade barriers, GCC trade
grew three-fold in the past 15
years.
Intra-GCC imports grew over
200% between 1986 and 2001 from $2.6 billion in 1986, to $8
billion in 2001.
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' dollars
Path of Intra-GCC Imports
(1986-2001)
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Share of Intra-GCC Imports
However:
Although the size of intra-GCC
imports tripled during 1986-2001, their
share in overall imports remained
steady and low, at less than 10%.
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Path of Share of Intra-GCC
Imports in Total Imports
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Interest Rates (1987-2000)
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Data for 1-year deposit rates were compared for 5 GCC states
(All except UAE):
In general, interest rates moved in the same direction for the
countries observed, hitting flex points around the same time.
Qatar rate was fixed until 1991. Once it was allowed to
fluctuate, it moved in a fashion similar to other GCC states.
Kuwait moved with the other interest rates, except during the
period between 1990 and 1994.
Spread between the highest (Oman) and the lowest (Bahrain)
rates fluctuated between a low of 0.82 percentage points
(1990, 1995) and a high of 3.72 percentage points (1998).
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Path of Interest Rates
1987-2000
Bahrain
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Kuwait
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CPI Levels (1969-2001)
 Other than the hyper inflations years of the mid
1970s, and Kuwait’s case following the Iraqi
occupation, CPI levels have converged around a
narrow band in the GCC states.
 During the period 1983-2001, inflation rates have
not exceeded 5% in any state (with the exception of
Kuwait (1990-91) and Qatar (1996).
 Movement within the narrow band is convergent as
well.
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CPI Path (1969-2001)
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Kuwait
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UAE
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Exchange Rates (1969-2000)
The period 1969-1980 witnessed some volatility.
1973: Omani riyal is pegged to the dollar.
1980: UAE, Bahrain & Qatar currencies pegged to the US
dollar.
1986: KSA riyal pegged to the dollar
Common peg reduced variation between the five currencies.
Although the Kuwaiti dinar is not pegged to the US dollar, the
weight of the dollar in the basket is large enough to provide
stability regarding other GCC currencies.
Note: in the graph next: the Bahrain dinar, Omani riyal and Kuwaiti
dinar were multiplied by 10, to highlight the similarities.
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Exchange Rates Path (19692000)
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Government Revenue (19692000)
oThroughout the period, government
revenue grew and contracted at similar
levels most of the time in GCC member
states.
oIn part, this is due to the fact that
government finances are dependent on
oil as the major source of income. As
oil prices grew, government revenues
increased. Economic Integration Department
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%
Revenue Growth Rate
Path of Government Revenue
Growth Rates
UAE Rev Gr
Bahrain Rev Gr
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Qatar Rev
Gr
Kuwait
Rev Gr
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KSA Rev Gr
Oman
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Government Spending
 Government spending cycles appear similar, with
few exceptions.
 Government spending appeared closely correlated
with government revenue, and consequently
correlated with oil prices. Hence, growth cycles of
government spending appear similar to the revenue
growth cycles.
 High degree of convergence in government spending.
 Kuwait spending in 1990-1992, and to some extent
other GCC states, was dictated by the Gulf War.
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%
Govt Spending Growth
Path of Government Spending
UAE Exp GR
Bahrain Exp Gr
Qatar Exp Gr
Kuwait Exp Gr
KSA Exp Gr
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Oman Exp Gr
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Deficit
 3 periods:
1. Until the early 1970s: balanced budgets.
2. Early 1970s – early 1980s: surpluses accumulated
due to dramatic increases in oil prices. Large
development projects launched.
3. Early 1980s until present: deficits are the norm.
Once the level of spending was raised in the
previous period, it was difficult to reduce it when
revenues declined.
However, member states differ as to the magnitudes of their
deficits and their ratios to GDP.
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Deficit/GDP Ratios - 1
UAE Bahrain KSA Oman Qatar Kuwait
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Deficit/GDP Ratios - 2
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Deficit/GDP Ratios - 3
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