Search for Criteria of Economic Convergence Abdel Aziz Hamad Al-Uwaisheg Director - Economic Integration Department Gulf Cooperation Council (GCC) Presented

Search for Criteria ofEconomic Convergence

Abdel Aziz Hamad Al-UwaishegDirector - Economic Integration Department

Gulf Cooperation Council (GCC)Presented at the European Commission

Conference

Europe, the Mediterranean & the EuroAthens, Greece - 3 February 2003

in the GCC Area

February 2003 Economic Integration Department GCC Economic Convergence

2

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.


3

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


4

Per Capita GDP

In the year 2000, the spread in per capita GDP between the six GCC states was noticeable:

Qatar US $ 28442UAE US $ 26914Kuwait US $ 17328Bahrain US $ 12344Oman US $ 8254Saudi Arabia US $ 8031

Divergence: Graph next shows the gap persisting during the period under consideration.


5

Path of Per Capita GDP

05000

100001500020000250003000035000400004500019

75

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

US d

olla

rs

UAE GDP p/c Bahrain GDP p/c KSA GDP p/cOman GDP p/c Qatar GDP p/c Kuwait GDP p/c

Qatar

UAE

Kuw ait

KSABahrain

Oman


6

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.


7

-100-50

050

100150200250300

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

grow

th

(%)

UAE growth Bahrain growth KSA growthOman growth Qatar growth Kuwait GDP growth

Kuwait

Path of GDP Growth Rates 1969-2000


8

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.


9

Path of Intra-GCC Imports (1986-2001)

0

2000

4000

6000

8000

10000

000

' dol

lars


10

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%.


11

Path of Share of Intra-GCC Imports in Total Imports

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

%

sh

are


12

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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0

2

4

6

8

10

Bahrain KSA Oman Qatar Kuwait

Path of Interest Rates1987-2000


14

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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-10.00

0.00

10.00

20.00

30.00

40.00

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

%

UAE Bahrain KSA Oman Qatar Kuwait

Kuwait

CPI Path (1969-2001)


16

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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2

2.5

3

3.5

4

4.5

5

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999


Exchange Rates Path (1969-2000)


18

Government Revenue (1969-2000)

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.


19

Path of Government Revenue Growth Rates

-100

0

100

200

300

40019

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

99

Reve

nue

Grow

th Ra

te

%

UAE Rev Gr Bahrain Rev Gr KSA Rev Gr

Qatar Rev Gr Kuwait Rev Gr Oman


20

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.


21

Path of Government Spending

-100

-50

0

50

100

150

200

250

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Gov

t Spe

ndin

g G

rowt

h

%

UAE Exp GR Bahrain Exp Gr KSA Exp Gr Oman Exp Gr

Qatar Exp Gr Kuwait Exp Gr


22

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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UAE Bahrain KSA Oman Qatar Kuwait1975 15.9 3.1 13.1 -16.9 27.4

1976 14.4 -1.8 3.7 -9.7 24.0

1977 7.2 0.6 -3.3 -0.4 5.8

1978 1.8 -0.9 -6.6 -6.1 11.2

1979 8.0 5.3 5.9 3.2 17.5 56.8

1980 14.8 11.9 21.4 -1.2 28.1 26.2

1981 4.0 12.4 15.9 1.5 14.3 -1.6

1982 -4.0 7.3 0.3 -8.6 6.4 -9.5

1983 -8.5 -2.3 -6.4 -10.0 1.4 0.5

Deficit/GDP Ratios - 1


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UAE Bahrain KSA Oman Qatar Kuwait1984 -5.9 -1.1 -12.8 -13.0 5.1 -7.21985 -5.8 1.7 -16.1 -9.9 -5.2 -11.81986 -14.7 -4.2 -22.5 -22.3 -24.6 -21.71987 -6.3 -2.5 -25.3 -4.5 -16.6 -8.91988 -11.1 -5.4 -17.6 -11.2 -30.5 -10.91989 -5.1 -3.8 -11.2 -8.2 -6.2 1.91990 -6.4 -2.3 -16.9 -0.2 2.31991 -7.0 -1.3 -6.5 -4.61992 1.3 -4.0 -9.0 -12.1 -2.3 -27.0



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1993 -4.8 -3.3 -10.5 -10.8 -10.7 -20.3

1994 -12.9 -6.2 -7.7 -10.0 -9.3 -14.8

1995 -14.4 -3.0 -5.9 -9.0 -4.6 -8.2

1996 -13.8 0.3 -3.7 -4.5 -8.6 5.3

1997 -4.5 0.1 -2.9 -0.7 -8.9 -4.1

1998 -16.5 -6.5 -10.1 -6.9 -4.4 -16.1

1999 -15.4 -2.5 -6.8 -7.8 -4.8 13.6

2000 -3.8 0.2 3.5 -4.8 7.3 15.3

2001 -3.9 -3.3


Documents

Search for Criteria of Economic Convergence Abdel Aziz Hamad Al-Uwaisheg Director - Economic Integration Department Gulf Cooperation Council (GCC) Presented