Search for Criteria of Economic Convergence

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Search for Criteria ofEconomic 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

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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

• Criteria for Real Sector Convergence GDP, Trade
• Monetary Criteria Prices, Interest Rates,
  Exchange Rate Convergence
• 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 period under consideration.

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Path of Per Capita GDP
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Cyclical MovementsGDP 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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Path of GDP Growth Rates 1969-2000
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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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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)

• 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 Rates1987-2000
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CPI Levels (1969-2001)

• Other than the hyper inflations years of the mid
  1970s, and Kuwaits 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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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 (1969-2000)
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Government Revenue (1969-2000)

• Throughout the period, government revenue grew
  and contracted at similar levels most of the time
  in GCC member states.
• In 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.

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Path of Government Revenue Growth Rates
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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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Path of Government Spending
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Deficit

• 3 periods
• Until the early 1970s balanced budgets.
• Early 1970s early 1980s surpluses accumulated
  due to dramatic increases in oil prices. Large
  development projects launched.
• 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
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Deficit/GDP Ratios - 2
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Deficit/GDP Ratios - 3