Internal rivalries and the falling dollar will need to be addressed as the GCC seeks to create a unified economic bloc.
If the GCC succeeds in shaping itself into a unified economic bloc, it will have a combined gross domestic product (GDP) of nearly $800bn. This will give it the economic clout to drive foreign investment and increase its profile and poli-tical influence in the world.
However, the falling dollar, rising inflation, increasing economic diversification and internal rivalries have made it almost impossible to keep the ambitious plan on track.
Rasheed Mohammed al-Maraj, governor of the Central Bank of Bahrain, is one of the people trying to bring these threads together and strengthen the country’s role in the GCC, while also trying to ensure its financial system remains an attractive alternative to Dubai and Qatar.
Since becoming governor in January 2005, his role has changed significantly. In the three years since then, the 2010 deadline for a GCC single currency has seemed more unrealistic with every passing the day.
Meanwhile, the dollar peg, which had given the region monetary credibility, is fast becoming a major source of speculation. Kuwait depegged itself from the dollar earlier this year, with other countries rumoured to be on the verge of doing the same.
Yet Al-Maraj is adamant that speculation on both is misguided. “Officially, 2010 has not been scrapped but we know it will be difficult to implement in that timeframe,” he says.
“Once we have finished implementing the common market and seen greater convergence of the GCC economies, we will have better visibility for a practical deadline and timeframe for the monetary union.”
The key to successfully implementing the GCC single market will not be rushing to hit an arbitrary deadline, he says, but giving some indication the GCC has learned from the adverse results of setting itself targets that it cannot meet.
“I have no idea when the currency union will happen,” says Al-Maraj.
“It could happen quickly. It all depends on how much we progress on these integration issues. That is why we do not want to set deadlines we know we cannot meet.”
Asked if the GCC or Bahrain aim to revalue their currencies, he says: “Why do we need to discuss these things? There is no perfect solution. We are aware that there is volatility in the markets, and that sometimes volatility is higher at certain adverse economic points in the cycle. But you cannot take a short-term view and start ripping up your economic or monetary policy because of volatility during one snapshot of the economic conditions.”
He also dismisses rumours that a GCC-wide revaluation of the dollar peg will occur in 2008. “That is like the rumour that Elvis was seen in Bahrain,” he says.
Despite most economic observers saying the region desperately needs a new policy, Al-Maraj insists the dollar peg continues to work in Bahrain. “I think Bahrain has a transparent, credible foreign exchange policy that has served the economy well and allowed it to grow with a minimum of ambiguity about the foreign exchange rate,” he explains. “As far as I am concerned, we are sticking with the current policy.”
Currency speculators have a different view, particularly considering the GCC members’ failure to set a new single currency deadline and agreeing to go their own way in combating inflation. The traders have been piling into the UAE dirham and Saudi riyal in particular, speculating that a currency revaluation is imminent.
Al-Maraj accuses some banks of producing research clamouring for a revaluation while selling investment products based on a change in the dollar peg. He describes this as “unethical”.
While the media and analysts have been speculating on whether a revaluation will occur, the GCC has been trying to put a single market in place, using the EU as a guide. “We look at the experience of the EU as a live example of how to create a single market and currency union,” says Al-Maraj.
“Obviously, there are certain differences. But I think it is a critical piece of education for us to understand how the model works, not just when things are going well but also when there is disparity in terms of economic growth and how the system reacts when countries go through adverse economic conditions.”
Al-Maraj is a key figure in maintaining the kingdom’s competitiveness against the region’s other financial centres. Bahrain is often praised for its progressive and liberal attitude to market regulation, something that has put it in a strong position as competition in the region increases, no matter how much Al-Maraj insists that financial centres are not competing for a limited pool of resources.
He says he is keen to see Bahrain continue to develop as an open economy, but early realisation that it needs to increase local employment will be key to its future, and a major differentiating factor in the region.
He also talks convincingly of wanting to hand over staffing issues to businesses while ensuring that local workers have the skills needed to participate in the new economic sectors that are developing.
The financial sector is at the forefront of these efforts. “If any organisation here wants to employ expatriates then so be it,” he says. “But our duty is to provide Bahrainis with the skills they need to make them attractive employees. Because we have promoted an open and flexible approach to employment while training Bahrainis, we have one of the highest percentage penetrations of the local workforce into the financial sector, without forcing companies into employing locals.”
The other advantage for companies operating in Bahrain is that employing skilled locals is cheaper than using workers from developed markets, which would help the country keep its rate of inflation low compared with elsewhere in the region.
This is one of the reasons why financial institutions continue to come to Bahrain, says Al-Maraj. However, he says there are still plenty of opportunities for each of the GCC states. “It is premature to say whether one country can be overtaking any other. We have seen a lot of ups and downs in the financial industry over the past 40 years, but our system in Bahrain has managed well throughout.”
The other main domestic concern for Al-Maraj is inflation. While Bahrain is still a more benign environment than its neighbours, with inflation of only 2.9 per cent compared with 12 per cent in Qatar, for example, it remains a concern.
Bahrain may have avoided the more extreme price pressure that has been experienced in Qatar and the UAE, Al-Maraj says, but the population has been affected psychologically by all the media reports of price rises.
This is despite subsidies for many basic items, including meat, petrol, household energy and water bills. The dollar peg contributes moderately to inflation, he says, but the rising price of oil and some other basic commodities, such as wheat, affect the economy as well. He attributes Bahrain’s lower inflation level to “more steady growth without a lot of speculative real estate investment, and more room given to the private sector”.
But it is not just the dollar peg and rising international commodity prices that have increased inflation. Expansionary budgets have also been a GCC issue, and one Al-Maraj says he is keen to keep in check, unlike some of his contemporaries.
According to Citigroup research, private sector credit expansion in Bahrain rose by 27 per cent in the year to July 2007. In the same period in Qatar, it increased by nearly 60 per cent. The Central Bank of Bahrain is aware that if liquidity continues to grow at these levels, it will drive up inflation.
To temper this, it has placed caps on consumer, corporate and sovereign exposure, and maintains dialogue with banks about their credit portfolios.
Al-Maraj says he is also open to using “moral persuasion” to convince banks to restrict their lending growth without enforcing explicit regulations.
“The Central Bank of Bahrain uses regulatory measures and dialogue, as appropriate, to temper massive credit growth,” he says. “We are watching closely the current credit expansion and its implications, since any undue expansion can have a negative impact [on inflation], and we will take the required action as and when it becomes necessary.”
If Al-Maraj can succeed in this and keep inflation below 5 per cent - the IMF is already predicting it will fall by to 2.7 per cent - he will have succeeded in helping Bahrain deal with one of the GCC’s most challenging issues.
This will also serve the country’s financial sector well in its attempts to compete with Dubai and Qatar, where inflation is rampant.
The dollar peg may be the issue that attracts the most publicity, but if Al-Maraj allows Bahrain to lose any ground to rival financial centres, it will also diminish the country’s bargaining powers in the GCC. Bahrain’s economic future is resting on his shoulders.
Jan 2005 Rasheed Mohammed al-Maraj is appointed governor of the Central Bank of Bahrain for his first four-year term
April 1999 Al-Maraj takes on the role of general manager and chief executive officer of Arab Petroleum Investments Corporation (Apicorp), the intergovernmental regional financial institution that concentrates on energy projects
1995 Moves to the Transportation Ministry in Bahrain as under-secretary
1981 Gets his first governmental exposure to economics when he joins the Finance & National Economy Ministry as assistant under-secretary for economic affairs
1979 Joins the Industry & Development Ministry as an engineer
1979 Receives a degree in industrial engineering from the University of Houston in the US after completing a diploma in project evaluation at Strathclyde University in the UK
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