Co-operating Council

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As 2005 came to an end, an armada of rulers, ministers and aides arrived in the UAE to discuss the political and economic future of the Gulf Cooperation Council (GCC).

The organisation's Fourth Economic Forum and its 26th Leaders Summit were both held in the Emirates in late December, giving rise to much speculation over whether its oil-rich nations were finally moving toward achieving a single currency - and presenting an integrated, EU-style front to the world.

"Today, when you look around in the GCC, there are a lot of developments happening," Ali al-Kamali, the managing director of the Datamatix Group, told the audience at the Economic Forum, held at Burj al-Arab.

"There is talk about economic reforms, a non-oil economy, a single currency, a customs union, ICT developments, real estate, foreign ownership, foreign direct investment, etc. The events during the GCC economic forum aim at encouraging a dialogue on these issues and also bringing about solutions for the sustainable growth of the GCC economy."

That notion of stability is definitely an important one in the booming GCC. Adbullah Atatrah, chairman of the Bonyan International Investment Group, presented the keynote address on the forum's first day and addressed a question plaguing bubble-watchers: why is the GCC concentrating so heavily on real estate and not on other sectors? Analysts and real estate brokers now put the value of the GCC's booming real estate market at $750bn.

Yet despite fears of the bubble bursting, V. Jayaraman, general manager of ETA Star properties, a Dubai-based real estate developer, told the conference that the GCC's booming real estate market should continue growing at its current rate well into the foreseeable future.

"The GCC real estate sector is booming", he said, "with considerable inflows coming from the repatriation of funds into home markets. Governments within the region have also been proactive in diversifying their economies and the region has witness a dramatic increase in tourism. The construction spending from entities such as Dubai alone has exceeded $40bn."

Meanwhile, the possibility of GCC monetary union was also discussed at the Economic Forum. Proponents of the idea say it would protect GCC countries from major currency fluctuations and that convergence will be easier than it was for the EU, since all GCC economies share the same basic structure.

"It's still very early days, but the economies appear to be heading in roughly the same direction. A small measure of convergence is already there," said Richard Fox, a senior director at Fitch Ratings.

However, critics of the proposed union cite the difficulty that most GCC nations are likely to have in abiding by the budgetary rules they agree on, since government revenues are so sensitive to fluctuations in the price of oil.

This in addition to concern among smaller GCC states that the "super economies" - Saudi Arabia and the UAE - will dominate the union. These concerns may be sapping the necessary political will to drive toward economic integration.

This certainly seemed to many to be the case when the 26th GCC Leaders Summit was held from December 17-19, 2005, in Abu Dhabi, following an agenda-setting meeting of GCC ministers in Dubai.

The summit failed to yield a timetable for monetary union, although the states did endorse five macroeconomic and budgetary criteria which might lead in that direction.

The council agreed to cap budget deficits at 3% and public debt at 60% of GDP. At the same time, inflation will have to be kept by each member state to no more than 2% above the GCC average, while interest rates can only be a maximum 2% above the average of the lowest three member states. In addition, the countries agreed on a requirement that foreign reserves cover 4-6 months of imports by 2010, should the GCC reach its target date for integration.

The leaders summit also failed to produce much discussion about where any future central bank would be located and what role it would play in regulating the GCC economies.

Officials from the UAE, Saudi Arabia, Kuwait, Bahrain, Oman and Qatar have discussed the possibility of monetary union since at least 1990, yet progress has been widely seen as slow. Many observers now wonder if the whole project might not be running out of steam, especially following recent moves by some GCC members to conclude unilateral free trade agreements (FTAs) with non-members. These have been controversial, with states such as Saudi Arabia seeing such FTA accords as undermining the collective basis of the organisation.

Yet the bigger picture of Gulf co-operation and its advantages remains - and big-picture thinking is Dubai's specialty. While monetary union may still be some way off, clearly the capacity of member states to work together elsewhere is still substantial, as are the benefits.

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