“Euro crisis demonstrates the need for financial and monetary coordination among the Gulf countries in their attempt to adopt a common currency
By ABDULLAH BIN IBRAHIM EL-KUWAIZ
Since August 2007, the world — and particularly the United States, Europe and Japan — have suffered from the real estate crisis or what is known as bad loans. This crisis was dramatically escalated in the United States in September 2008 after the bankruptcy of Lehman Brothers bank. When these countries’ economies have started to improve in 2010, sovereign loan problem emerged in the last quarter of the same year, particularly the sovereign bonds of the euro zone governments. Undoubtedly, there is a link between the two crises. During the first crisis, governments had to buy some of the assets of their banks to make available more cash necessary to vitalize the economy and to avert bankruptcy of these banks. For the governments to be able to do so, they issued new bonds thus increasing their indebtedness and indeed their inability to meet their obligations. Therefore, in spite of the gradual solutions adopted, the current sovereign debts will stay with us for at least another three more years.
The two economic crises coincided with a semi-structural change in the energy sector as technology helped to make the exertion of oil and gas from rocks more feasible. This has diversified the sources of energy from different regions and created new investment opportunities for energy companies. Some consuming countries may reach self-sufficiency in one of these two energy sources.
In this part of the world, the Arab Spring took off in the beginning of this year in a way that had some negative economic consequences, at least in the short run. Estimates of these losses range from $32 billion to $55 billion. Yet, I personally believe that the loss may be double of the highest figure after the setback that hit the Syrian, Egyptian, and Libyan oil and gas industry. Add to this the depreciation in the value of stock markets in the countries that witnessed the Arab Spring and losses of tourism. Needless to mention, the high number of human causalities and the destruction of infrastructures in the countries of the Arab Spring.
Without prejudging the positive outcome of this popular political movement in the form of a new government setup or new regional arrangements, it is safe to say that the positive elements of this popular movement outweigh some of the possible short-term negative consequences. The overcoming of fear by citizens, the realization of justice, equality before the law, the existence of effective public scrutiny of government institutions and action, the participation of citizens in the realization of their destinies and those of their children and grand children, creating the foundation of good governance, and the elimination of repression elements in countries that witnessed this popular uprising are worthy of all these sacrifices.
In this article, I will address the economic impact of the political tsunami on the Gulf states in light of the current economic crises and then I will present some conclusions and recommendations.
The Gulf Cooperation Council:
Every now and then, we hear that the Gulf states are not impacted by the world economic crisis and are immune to the Arab Spring. Yet, this is a more wishful thinking than reality. An in-depth study conducted by a specialized team from Oxford Institute for Energy Studies concludes that the excess production of oil is available only in three countries of the GCC — namely Saudi Arabia, Kuwait and UAE. This means that if an interruption of flow of oil, as happened in Libya, the only places that can make up for this are these three countries. The study also points out that almost 50percent of liquid gas comes from the Arab states. This reality has placed some national, regional and international obligations on the GCC.
First, the Gulf countries have allocated some funds to stimulate the international economy after the real estate crisis within the framework of the G-20. This costs Saudi Arabia some $400 billion for a 5-year period from 2009.
Second, the Arab Spring has pushed GCC governments to raise salaries in addition to other privileges such as unemployment benefits, more health, housing, and educational facilities. In the case of Saudi Arabia, the cost hit $132 billion.
Third, in solidarity with other Arab states, four of the GCC members allocated more than $37 billion to help Bahrain, Oman, Jordan, Morocco, Egypt and Tunisia. Fourth, there are other funds allocated to countries that are directly affected by the political movement in the region. This was done within the Deauville initiative that was held under the auspices of the G8 as a result of a French proposal. These new obligations are indeed outside the budget and therefore will have some negative consequences on the GCC countries.
These consequences include the inability of the Gulf countries to be flexible when it comes to oil price. To meet the new obligations they will ask for higher price that may lead to a slowdown in world economic growth. This will have a negative impact on the world economy, on demand for oil and will create some friction with consuming countries. Here, the oil rock may become more appealing and more feasible than oil coming from Arab countries.
Unquestionably, the political movements in the region will push the governments to delay the review of the pricing of local energy. This, in turn will, aggravate the price distortions and will increase local consumption of energy. In Saudi Arabia, for example, the local consumption of oil is one third of its oil production.
Additionally, the amount of funds allocated for investment in increasing production and maintaining producing fields will be less.
Needless to mention, the losses that hit the public and private investments of GCC countries in the Arab countries that witnessed this uprising, as well as the adverse impact on inter-Arab investment.
Conclusion and Recommendations:
1. The current euro crisis demonstrates the importance of coordinating the fiscal and monetary policies among the GCC countries in their attempt to adopt a common currency. In other words, a common currency should be associated with a common tax regime, a pre-agreed levels of budget deficit and governmental debt, and an agreement on interest and inflation rates. The crisis demonstrates the significance of coordination of fiscal policies to create the conditions for a successful common currency.
2. The political movements that swept the region should not distract the GCC governments from continuous revision of their economic policies with an aim to improve them and make them more responsive to people’s needs. Seen in this way, subsidies of fuel, electricity and gas should be reconsidered. Any surplus achieved as a result of such revision should be channeled to the needy people. Studies clearly show that the group that benefits most from this state of distorted way of pricing and subsidies is indeed the rich one.
3. Additionally, for a political movement to lead to good results, it should be associated with economic stability and growth. It seems that the private section — whether domestic or international — is unwilling to inter into new investments until the situation is clear and that transitional governments are replaced by elected ones. For this reason, moving the economy will be the domain of governments.
These governments will need regional and international financial support. The IMF estimates the funds needed are around $50 billion in 2012 alone. The GCC countries are now the de facto leaders of the Arab cooperation efforts and the only Arab countries that have cash. The Arab Spring countries expect the GCC countries to step in and help. Therefore GCC governments should revise the Arab common economic cooperation institutions within the framework of the Arab League to make them more effective. This revision should include the following:
First, one of the most effective development vehicles is improving the inter-Arab trade. Therefore, all impediments that still stand in the way of the implementation of the free trade area among the Arab countries should be removed. If this proves difficult to materialize, then the GCC countries collectively should work to reach free trade area agreements with the rest of the Arab countries on an individual basis as was done with some countries and other groups such as Singapore and EFTA.
Second, facilitate Arab labor movement into the Gulf countries and remove all obstacles in the face of Arab investments in the Gulf lest these investments go somewhere else amid the prevailing uncertain condition in much of the Arab countries.
Third, there is a need to restructure the Arab common economic institutions. This may entail integration among these institutions and a revision of their goals to make them more relevant, flexible, and to increase their administrative efficiency and effectiveness. This process also requires that we set a time limit for the term of office of their top management. More than any previous time, activating these institutions is a must should these institutions seek to bear the financial responsibilities created by the current political tsunami.
Abdullah Bin Ibrahim El-Kuwaiz is a Saudi economist.