1. Search for Criteria of Economic Convergence 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 in the GCC Area

2. February 2003 Economic Integration Department GCC Economic Convergence2 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. February 2003 Economic Integration Department GCC Economic Convergence3 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. February 2003 Economic Integration Department GCC Economic Convergence4 Per Capita GDP In the year 2000, the spread in per capita GDP between the six GCC states was noticeable: QatarUS $ 28442 UAEUS $ 26914 KuwaitUS $ 17328 BahrainUS $ 12344 OmanUS $ 8254 Saudi Arabia US $ 8031 Divergence: Graph next shows the gap persisting during the period under consideration.

5. February 2003 Economic Integration Department GCC Economic Convergence5 Path of Per Capita GDP

6. February 2003 Economic Integration Department GCC Economic Convergence6 Cyclical Movements GDP 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. February 2003 Economic Integration Department GCC Economic Convergence7 Path of GDP Growth Rates 1969-2000

8. February 2003 Economic Integration Department GCC Economic Convergence8 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. February 2003 Economic Integration Department GCC Economic Convergence9 Path of Intra-GCC Imports (1986-2001)

10. February 2003 Economic Integration Department GCC Economic Convergence10 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. February 2003 Economic Integration Department GCC Economic Convergence11 Path of Share of Intra-GCC Imports in Total Imports

12. February 2003 Economic Integration Department GCC Economic Convergence12 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).

13. February 2003 Economic Integration Department GCC Economic Convergence13 Path of Interest Rates 1987-2000

14. February 2003 Economic Integration Department GCC Economic Convergence14 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.

15. February 2003 Economic Integration Department GCC Economic Convergence15 CPI Path (1969-2001)

16. February 2003 Economic Integration Department GCC Economic Convergence16 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.

17. February 2003 Economic Integration Department GCC Economic Convergence17 Exchange Rates Path (1969- 2000)

18. February 2003 Economic Integration Department GCC Economic Convergence18 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. February 2003 Economic Integration Department GCC Economic Convergence19 Path of Government Revenue Growth Rates

20. February 2003 Economic Integration Department GCC Economic Convergence20 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. February 2003 Economic Integration Department GCC Economic Convergence21 Path of Government Spending

22. February 2003 Economic Integration Department GCC Economic Convergence22 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.

23. February 2003 Economic Integration Department GCC Economic Convergence23 Deficit/GDP Ratios - 1

24. February 2003 Economic Integration Department GCC Economic Convergence24 Deficit/GDP Ratios - 2

25. February 2003 Economic Integration Department GCC Economic Convergence25 Deficit/GDP Ratios - 3