Readiness of the GCC firms 1
READINESSOF THE GCC FIRMS TO A SINGLE CURRENCY
ProposedResearch Topic 3
Researchon Optimum Currency Area 6
UK’SReadiness Index Prior to Joining the EU’s Single Currency 6
Readinessof GCC Countries for a Single Currency 7
Feasibilityof the Single Currency Proposal of the GCC 7
Benefitsof the Research to the Research Community 10
Benefitsof the Research to the Businesses 11
PracticalApplication of the New Knowledge 11
Choiceof Methodology 12
Readinessof the GCC Firms to a Single Currency
Thereadiness of Gulf Cooperation Council’s (GCC) firms to adapt theirproducts, organizational structure, and product pricing, toaccommodate the single currency union between the member countries.
Answersto these questions are expected to direct the overall conclusion weexpect to draw from the research. This is with regards to the levelof preparedness of the GCC companies to the single currency agenda.
How will a single GCC (Gulf Cooperation Council) currency affect GCC trade with external companies as a bloc?
Have management taken adequate measures to adapt to the new changes proposed?
How will companies` products be affected? Will they benefit or not?
Would this union impact the GCC position as a single trading bloc negatively or positively? – Similar to the EU.
What are the total costs that might be incurred by Saudi companies if they don`t come up with new policies?
What are the employment ramifications? Will these lead to a better job market within the GCC or will it repel talent away?
Have the VAT measures adopted in Saudi Arabia helped to ease this transition in the future?
What theories underline this?
What are benefits to the research community from this research?
What are the benefits to the businesses?
What are the limitations?
Asingle currency has been proposed among all the six GCC membercountries including Saudi, Oman, UAE, Qatar, Bahrain and Kuwait. Thisproposal has taken more than a decade to be actualized by thecountries, due to oppositions and concerns. These bottlenecks haveraised questions as to the preparedness of the member states to acommon currency. Despite some minor barriers, companies in thisregion already enjoy trade liberalization across political borders.These companies are required to adapt to the proposed change byadjusting their products, organization structures and pricingpolicies. This paper is a study that tries to come up with answers tothe many questions on the level of preparedness of the companies inthe member states, to the transition to a single currency within thebloc.
Regionalintegration has been a notable trend globally in an attempt tocapture synergies of free trade and increased market opportunitiesamong member countries. The GCC was established in 1981 with the aimof forming an economic and political regional cooperation amongst itssix member countries. The main aim of the pact was to bring theseGulf countries closer and in the process strengthen each othereconomically.
Supra-nationalinstitutions have been established – like a common exchange marketregulator to fore-see the success of the different aspects of thetransition process. The GCC has continued to develop this regionalintegration with the establishment of other ‘unities’ – forexample in 2004 they signed an intelligence sharing pact MORGAN,(2012).This was followed by the common currency proposal which has beendelayed since its announcement, due to ‘unavoidable circumstances.’Four of the six countries have already accepted the proposal.However, the proposal is still in the process of actualization.
Amongthe main stakeholders in this transition process are the companieswithin the trading bloc. Firms within the GCC enjoyed a certainstatus-quo for some time, in terms of the business environment. Withthe actualization of the single currency proposal, this environmentexpects changes. Despite there being a kind of liberal tradingenvironment within the bloc, a common currency will necessitatestructural changes due to, among other things, the adoption of thecommon labor laws. Two out of the six countries – UAE and Omanhave withdrawn their support for the common currency which bringsadditional questions on mobility of labor and material in the newarrangement. The main question is how prepared are the companieswithin the bloc in anticipation to this new arrangement
Theresearch will start with sampling of ten companies in the GCC andseeking interviews with the top management and leaders to gathertheir first-hand opinions on this topic. Using the informationacquired in the interviews, questionnaires targeted at students inthe UK will be developed and distributed to capture their opinions.This is aimed at acquiring relevant information on a similar tradingbloc – the European Union that made their transition to a singlecurrency earlier. Considering the physical size of this research -spanning the six GCC countries additional secondary research on theinternet would be effective to corroborate the acquired information.Reliable websites including those of the specific companies will beresearched to get any additional information and support some thatwas already collected.
Evenbefore GCC announced the single currency proposal in Kuwait, researchand literature had been developed on some relevant issues around thetopic. Different queries have been researched over the years aroundthe main topic. These are aimed at answering some pertinent questionsas to the level of delay since the announcement to the actualimplementation date of the single currency agenda. As seen on thesesample narratives, there has been no research conducted specificallyon the level of preparedness, or any other issue that affects thefirms within the GCC. However, the literature forms relevantbackground information, necessary to support a research on theeffects of the single currency agenda on companies within theregional bloc.
Researchon Optimum Currency Area
Aresearch was conducted by Labaas and Limam, to assess the readinessof the GCC to form a monetary union. The financial systems of thecountries were analyzed to compare the characteristics of theirindividual currencies (Laabas and Limam, 2002). It was concluded thatthe countries enjoyed almost similar real exchange rates thatfluctuate uniformly and thus the region constitutes an optimumcurrency area.
UK’SReadiness Index Prior to Joining the EU’s Single Currency
Aresearch on the costs and benefits of a common currency in the GCCwas conducted by Badr-El-Din,Ibrahim. Five parameters that found application in assessing the keyfinancial statistics during the UK’s decision to join the EU singlecurrency –convergence,flexibility, investment, financial services and growth, stability andemployment were used in the analysis. These measures of readinesswere applied to the GCC countries in this research (Badr-El-Din,Ibrahim, 2004). It concluded that the expected benefits accruingafter the transition may not be as significant as expected. It alsostated that the structural convergence of the currencies in the GCCis also not an impediment to the success of the single currency.
Readinessof GCC Countries for a Single Currency
Aresearch on the readiness of the GCC countries to migrate to a singlecurrency was published by Al-Omran in 2004. The study was conductedusing macro-economic measures and statistics to assess individualpreparedness, which determined that the countries need some more timebefore they jumped into a single currency regime.
Feasibilityof the Single Currency Proposal of the GCC
Ananalysis of the literature and research done on the GCC between 2002and 2014 was conducted by (Abdussalam,Fead, and Lukman, 2015). This research was done to analyze if theproposal is still feasible given the changes that have occurred sinceits declaration in Kuwait. They concluded that the single currencyagenda is still viable in the GCC but only after a consensus isreached on the pending political and economic impediments.
Extra-regionaltrade is expected to be enhanced by a single currency regime in theGCC. A single currency among the GCC countries will eliminate anyexchange rate uncertainties that exist in individual currenciesespecially for the smaller economies. This will create moreconfidence from the external markets and multinationals on thestability of the GCC currency. This, coupled with the increasedtransparency of prices across the bloc is expected to attract moreforeign business into the region.
Fromthe interviews with company management corroborated with secondaryresearch, there is evidence that companies are realigning theirbusinesses strategically. This is with the aim of benefiting the mostand avoiding the risks that come with the single currency agenda ofthe GCC. Companies have started to set performance standards thatreflect the expected level of competition within the bloc. Thecompanies’ management had begun to restructure their productioncycles to ensure the quality and competitiveness of their products inthe new free market.
Thesingle currency is expected to result in better quality productswithin the bloc. A free market is expected to result from the commoncurrency across the GCC countries. Elimination of the costsassociated with doing business across internal borders is expectedboost competition among companies within the bloc. The increasedcompetition will result in massive investments into innovation bycompanies, in an attempt to create an edge in the free market. Thiswill lead to products of very high quality being enjoyed by consumerswithin the region.
Asingle currency within the GCC will lead to global reserves beingcreated to accommodate it for exchange purposes, given the size ofits economy. This will be similar to the EU’s currency – Euro. Dueto the perceived strength of the new currency, the bloc will gainstronger negotiating positions in international platforms, (MORO,2013). The union is also expected to result in more transparency intrade given the new standards and establishment of strongsupra-national institutions. This will create trust in internationalbusiness partners who will react by increasing trade with the region.In addition, considering the new currency will be pegged on thedollar, the perceived stability will attract more trade to theregion.
AssumingSaudi companies fail to develop new policies to ensure they succeedin the new environment created by the currency union, they areexpected to suffer some costs. The companies will meet increasedcompetition in the new freer market with a common currency,(Espinoza, Fayad, & Prasad, 2013). They will lose their marketshare even in their domestic market in addition to not having a shareof the regional market given the Saudi’s lower competitiveness. Apricing policy that will not be commensurate with the new marketdemographics will result in loss of the customer base for thecompanies in Saudi.
Thelabor market is expected to benefit greatly from a common currencymarket, especially given the rising unemployment levels. Among themain benefits of the new market environment will be economicdevelopment in the individual countries, which will create additionalemployment opportunities. The single currency is also expected togrow intra-regional trade especially for the non-oil sectors of theregion, (The Economist, 2013).The growth of this sector will createeconomic diversity from the oil-based economies and thus more jobs ina variety of fields will emerge to absorb the talent within the bloc.This new market will have a common set of labor laws to guideemployment and other labor issues within the region. This is expectedto especially benefit the women in securing employment to bridge thewide gender-gap in the region’s labor-force.
InJanuary 2017, King Salman of Saudi Arabia chaired a sitting in Riyadhwhere the cabinet approved a GCC proposed VAT rate. The GCC wasadvised by the IMF to adopt some revenue collection measures likeexercise duties or VAT’s given the effects the low oil prices washaving on their economies. The GCC approved a 5 percent VAT onselected commodities across the region and its implementation inSaudi signifies financial dependence, which is the right direction tothe single currency market (Arab News, 2017).This common revenuecollection method is also expected to ensure the region has enoughreserves to support a smooth transition.
Amongthe main theories that address this topic is the Optimal CurrencyArea (OCA) theory of the 1960s. The OCA theory was advanced by RobertMundell to try and analyze the economic compatibility of countriesplanning a transition to monetary union. The theory contains thecriteria that countries should fit to guarantee that they willbenefit from a common currency. Macro-economic parameters like labormobility, capital mobility, a currency risk-sharing system andbusiness cycles, are measured for the member economies, (Ramady,2014). The theory was used practically when the euro was adopted asthe common currency for the EU.
Benefitsof the Research to the Research Community
Thispaper is supported by the direct responses from managers in the GCCregion and student from the UK universities.Thisdata will be relevant in future research related to the transition tosingle currency as secondary information. Regional single currencyadoption is an ongoing trend and the analysis in this researchcoupled with the methodology, will find application in assessing thereadiness of companies in other trading blocs that plan the samearrangement. This research will also help the community to understandthe effects to businesses in a single currency transition.
Benefitsof the Research to the Businesses
Thebusinesses will get a perspective of what their managers think aboutthe transition. The businesses within the GCC will benefit byunderstanding the market opportunities that come with the singlecurrency and the competition that will follow. The research explainssome expected benefits of a single market in form of better, moretransparent business policies which create a good environment foreconomic prosperity. Businesses will also understand the costs thatthey will incur if they fail to adjust their policies to accommodatethe expected changes. The businesses can also pick some lessons whenthey compare their level of preparedness to the EU’s before theEuro.
Duringthe data gathering process there were a few limitations that werepresent, however the research was without major short-coming.Firstly, due to the physical size of the research and thecumbersomeness of securing the interviews, the primary informationwas sampled from only 10 managers of GCC companies. A wider samplewould have provided more information. This sample was made that smallto make the budget reasonable and also the low rate of success ofsecuring the interviews. In addition, the language barrier during theinterviews was anticipated and therefore there were translators toensure the correct information was captured.
PracticalApplication of the New Knowledge
Thenew knowledge acquired after the research will find a lot of usepractically within the GCC countries and to other regional blocs. Thesingle currency proposal by the GCC requires companies to adjusttheir policies accordingly to ensure they maximize on the arisingopportunities. Firms will also ensure that they are in compliancewith the new laws to avoid costs in litigation. The effect of theGreece debt crisis on the Euro is another lesson for the regionalcountries to ensure that individual country’s shocks are notdestructive to the entire region and its currency. Macro-economicmeasures of preparedness of the regional countries can be determinedbefore the single currency proposal is implemented.
Thissection represents an overview of how the research was conducted toconclusion. The research requires a lot of data collection from thetwo primary sources – the GCC business executives and the UKuniversity students. The methods used to collect data from thesources will be explained in details. The research was deductive andcomparative in nature to support the conclusions at the end of theresearch on the level of preparedness of the GCC companies.
Thenecessary changes in companies to accommodate the transition includepolicy adjustments, changes in production cycles and the companystructure among others. The best source of such information is thetop executives of selected GCC companies. Interviews were arrangedwith a sample of 10 firm managers to collect the primary data for theresearch. Information on EU’s transition to a single currency wasrequired to offer comparative value to the research. Questionnaireswere designed and distributed to university students in the UK onlinewith some incentives to encourage participation. In additional tothese primary sources of information, historical literature reviewand the internet offered some secondary information to support thisresearch. The first hand data from the management will direct theresearch which will be compared and corroborated by the secondarydata to arrive at a conclusion as to whether the companies areprepared as needed.
Theresearch is partially deductive but for the most part it is acomparative enquiry based on the available theories and data on theEuro zone’s transition to a single currency. The process startswith the collection of first-hand information from the sampled topexecutives in GCC companies. This information is used as a base forthe comparative analysis. The information is also analyzed againstthe secondary literature review and online data. Questionnaires willbe used to collect relevant comparable information at this stage,from the university students in UK on their experiences during thetransition to the Euro. Using theories obtained through literaturereview and the top business executive responses, a state ofpreparedness of the companies within the region is measured. Aparallel is drawn with the information obtained on the UK’stransition to the Euro, to confirm or dispel the preparedness of GCCcompanies.
Thereare four research philosophies including positivism, realism,pragmatic and interpretivism. This research has employed aninterpretivism policy to address the research question. A smallsample of top business executives in the GCC was used as the primaryinformation, representing the views of the rest of the companyleaders within the bloc. This data has also been used as the basis ofthe research by comparing it to past theories on the topic and a casestudy of the Euro zone’s transition. This research philosophyrelies on theories and past experiences to interpret the first-handexecutive interview information and arrive at an informed conclusion.
Interviewson a sample size of 10 company executives, was decided to be used asthe source of the primary data. We will use a biased method ofsampling them to get the most information out of the very smallsample size. The primary data will be weighed against the ‘Eurozone transition to the Euro’ case. Past theories on the topic willalso be used against the primary data to get an interpretation ofwhat to conclude on the research topic.
Forthe primary data, a sample size of 10 top company executives withinthe GCC will be used. A combination of two judgmental samplingmethods will be employed, given the complexity of this samplepopulation. The sampling method will be purposive to ensure that itrepresents the entire region, considering the small sample size.However, considering the cumbersomeness involved with securinginterviews with this top business executives, convenience samplingwill be used. A combination of the two methods is expected to resultin the required information being collected, using the minimum timepossible.
Afterthe interviews with the executives are arranged, onsite translatorswill facilitate the conversations, given the language barrier. Asaved copy of the live interview recording will also be transcribedand translated for better understanding and hardcopy purposes. Theadditional primary data for comparative purposes will be collectedthrough questionnaires to UK university students. The questionnaireswill be distributed to the students through email, with an incentiveto ensure maximum participation. Additional corroborative secondarydata will be researched through online sources.
Duringthe interviews with the company executives, the recording must beapproved by the interviewee. The interview will be in writing, andthe interviewee will have prior familiarization to the issues fordiscussion. The questionnaires will be distributed randomly on thestudent emails with an incentive attached to ensure maximumparticipation. The incentives will not be assigned to individuals,rather ten randomly selected respondents will get movie ticketsthrough the same email they participated with. The questionnaire willnot insist on the student details but will use their emails foridentification purposes.
Theemail sent to students contains an introduction letter which explainsthe incentive for participating. The questions were made as directand understandable as possible with the questions being closed-ended.(Saris, 2012) stated that ‘questionnaires should aim to fulfil twokey objectives maximizing the response rate and obtaining accurate,relevant information for research.’ The questionnaire designed forthe UK students is contained in Appendix 1
Abdussalam,A., Fead, M., and Lukman, R. 2015.Isa Single Currency Agenda Still Feasible in the Gulf CooperationCouncil? A Qualitative Meta-Analysis.Retrieved on 14thMarch 2017 from,https://www.researchgate.net/publication/271195396_Is_a_Single_Currency_Agenda_Still_Feasible_in_the_Gulf_Cooperation_Council_A_Qualitative_Meta-Analysis
ArabGulf Cooperation Council (AGCC),Ministry of Finance, Muscat: Sultanate of Oman.
ArabNews. 2017. SaudiCabinet approves VAT measure.Retrieved on 15thMarch 2017 from, http://www.arabnews.com/node/1046616/saudi-arabia
Badr-El-Din,Ibrahim, (2004). Dothe AGCC Economies need a Single Currency? Some
Espinoza,R. A., Fayad, G., & Prasad, A. (2013). Themacroeconomics of the Arab States of the Gulf.Oxford, Oxford University Press.
Laabas,B. and I. Limam. (2002).Are GCC Countries Ready for Currency Union?.Arab Planning Institute, Kuwait
Morgan,P. J. R. (2012). Eurocrisis: aggregate demand control is European single currencyweakness: a critique of the current European economic governancesystem, with practical solutions.[England], Morganist Economics.
Moro,G. (2013). Thesingle currency and European citizenship: unveiling the other side ofthe coin.New York, NY, Bloomsbury Academic.
PotentialCosts and Benefits of a Monetary Union for the Member States of the
Ramady,M. A. (2014). Political,Economic and Financial Country Risk Analysis of the Gulf CooperationCouncil.Political, Economic and Financial Country Risk. Cham, Imprint:Springer. http://dx.doi.org/10.1007/978-3-319-02177-5.
Saris,W.(2012). Design,evaluation, and analysis of questionnaires for survey research.Hoboken,N.J: Wiley-Interscience.
TheEconomist. (2013). Differentrates and different fates.Retrieved on 15thMarch 2017 from,http://www.economist.com/blogs/freeexchange/2013/08/sustainability-single-currency
Appendix1: Design of the Closed ended questionnaire for UK universitystudents
Answerthe questions with an affirmative or a ‘nay’ statement.
Are you doing a business related course?
Do you support regional trading blocs?
Do you support a regional single currency?
Do you think politics contributed to the transition?
Do you think the UK should stay in the EU?
Do you think there is better transparency in the conduct of business within the region?
Would you recommend a single currency to another trading bloc?
Do you prefer the GBP or the Euro?
Is the Euro more stable than the GBP?
Was the UK prepared to handle the transition to a single currency?
Did the UK benefit from joining the single EU currency?
Did the single currency increase labor mobility within the EU?
Was capital mobility across the region better under the single currency?
Did the consumers in UK enjoy cheaper prices after joining the EU?
Do you think the Greece debt crisis offers a lesson to other trading blocs?
Did the companies change their structures during the transition to the Euro?
Does the number of countries in a trading bloc matter to the success of a single currency?
Is the labor market better under a single currency?
Do you think the local companies were prepared to handle the increased competition from the single currency market?
Do you think the single currency increased external trade to the region?
Did the transition have an effect on the product quality within the region?
Did the transition increase intra-regional trade?
Do you think that the single currency increases the region’s negotiating power in international trade?
Do you believe the dollar should remain the base currency for all regional currencies?
Do you think the GCC should have a single currency?