Exchange Rate System In The Gcc Countries Economics Essay

The inquiry above is the inquiry we worked on for our essay. It includes an issue which is related to the GCC states. In add-on to that, it grabbed our attending because it involves a recent event which will happen in the close hereafter ( 2010 ) . Furthermore, this subject is profoundly refering because of the important and major impacts it will add to the Gulf citizens and communities.

The essay tackles assorted positions and screens tonss of information from different angles. We will foremost get down by depicting the different Exchange Rate Systems and specifically, the Exchange Rate Systems across the GCC states, and so we will speak about the virtues of this system and the challenges confronting it. We will so show the consequences of a primary research carried out to measure people ‘s sentiments on the individual currency enterprise proposed for the GCC.

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The Exchange Rate system is divided into three chief classs ; the Crawling Peg, the Flexible and the Fixed Exchange Rate which is applied in the GCC states. The term of “ Exchange Rate ” stands for the “ monetary value of a state ‘s money in footings of another state ‘s money ” .

Fixed Exchange Rate

The term of “ Exchange Rate ” normally comes around our heads or surveies as concern pupils, but have we of all time wondered what an Exchange Rate is? Harmonizing to Michael Parkin in his book “ Economicss ” 1, an exchange rate is “ the monetary value of a state ‘s money in footings of another state ‘s money ” . In other words, the exchange rate is the monetary value in which you can purchase another currency with. For illustration, the exchange rate of US dollars for the Bahraini Dinar is 1:0.378. Countries around our huge universe usage assorted types of exchange rate systems to find their exchange rate with another state ‘s currency. There are three types of Exchange Rate Systems. First, a Flexible Exchange Rate System is “ one that permits the exchange rate to be determined by demand and supply with no direct intercession in the foreign market by the Central Bank ” ( Parkin, 2008 )[ 1 ]. Second, a Crawling Peg Exchange Rate System sets a specific mark for the exchange rate that changes on occasion in the market. Third, a Fixed or Pegged Exchange Rate System – as applied in the GCC states – where the authorities or cardinal bank has a major function in nail downing the currency to another currency ‘s value so that it does non acquire influenced by the supply and demand of the foreign exchange market.

The manner that a Fixed Exchange Rate operates is as follows. To maintain the domestic exchange rate of a state at a peculiar degree, the cardinal bank has to purchase and sell its ain currency to the foreign exchange market in return for the currency that it is pegged to. For case, if it is specified that the value of a individual unit of domestic currency peers to US $ 2, the cardinal bank will hold to do certain that it is able to provide the market with those dollars. To maintain that rate, the cardinal Bankss have to keep a high degree of foreign militias to let go of excess financess into or out of the market. Therefore, that state is traveling to hold proper money supply and appropriate float of currency or rising prices in the market. Another undertaking that the cardinal bank enjoys is to alter the official exchange rate in the market when required.


Harmonizing to a research done by Dr. Pardeep Kumar[ 2 ], it was found that the Fixed Exchange Rate reduces hazard in international trade ; that ‘s when purchasers and Sellerss of goods internationally agree on a fixed monetary value by keeping a fixed rate. And this will promote investing in GCC states as they use the Fixed Exchange Rate System. The unneeded fluctuations of exchange rate therefore can cut down the inducement of the GCC states to put in export capacity. Alternatively, local production in the domestic market will be encouraged among the GCC states in order to maximise net incomes.

Import monetary values increase and houses have less incentive to cut costs, this will happen when the authoritiess of the GCC states allow their exchange rate to devaluate. That may do inflationary force per unit area and by fall ining Fixed Exchange Rate inflationary outlooks, that force per unit area will be given to be lower. Once the monetary values are fixed, the degree of rising prices is traveling to be stable and this is one chief undertaking of the Fixed Exchange Rate System. The fabrication houses who export will acquire a negative consequence when a rapid grasp in the exchange rate occurs. So the Fixed Exchange Rate will be an advantage for these houses. When the exchange rate is fixed and the inducement to theorize is really little therefore they speculate that money flow might take to confusion.

The Fixed Exchange Rate introduces subject in the economic direction section throughout the GCC states, as the burden of the ordinance to the equilibrium is thrown onto the domestic economic system of these states. GCC authoritiess will hold an inducement of non following inflationary policies. As a consequence to this, each economic system will go uncompetitive which will take to unemployment and jobs in balance payments.


Each authorities of the GCC states should hold big nest eggs of foreign currency militias in order to keep the fixed rate of the state ; such demands have chance cost.

Another possible disadvantage of the Fixed Exchange Rate could be its instability ; as the GCC states follow the fixed exchange rate they frequently follow different economic policies taking to rising prices. Inflation in GCC states have two different significances one could be really competitory with low rising prices and others tend to be less competitory with high rising prices. The uncompetitive states will be under force per unit area and may devaluate, therefore it will make more force per unit area on the currency itself every bit good as the authorities.

Loss of freedom in the internal policy is one more disadvantage. Exchange rate can rule policies such as ; involvement rate policies and many others that are set for the value of the exchange rate instead than the indispensable macro aims of the degree of unemployment and rising prices rate.

Fixed exchange rate does non frequently respond immediately to short enduring dazes. For case, if oil monetary values addition, an oil importer may confront a deficit of payment and as a consequent there is a inclination that the value decreases. Raising involvement rate is one of the most effectual ways to increase the value of a certain currency. Therefore an addition in money flow will happen and besides a decrease of inflationary force per unit area. If one of the GCC currencies fell below its boundaries the authorities will interfere and get down to purchase and sell other currencies merely on a short term step.

In the old essay, we discussed the issue of the Exchange Rate System in the GCC states, and how it is applied among them. We besides pointed out the three types of Exchange Rate Systems and discussed in item the virtues and de-merits of the Fixed Exchange Rate System which is used in the GCC states.

The Advantages were: Fixed Exchange Rate reduces hazard in international trade, it reduces the inducement to put in export, import monetary values increase and houses have less incentive to cut costs, inflationary outlooks will be given to be lower and it introduces subject in the economic direction section.

On the other manus, the disadvantages were: Governments have to keep big proportions of militias, it sometimes can be unsteady due to the high competition, loss of freedom in the internal policy, and Fixed Exchange Rate does non immediately respond to short enduring dazes.

Sing the challenges, they are influenced by the demand and supply of an economic system. However, there are several factors which affect the demand and supply and these are: Inflation, involvement rate, guesss, alteration in fight, comparative strength of other currencies and balance of payments. And the biggest challenge was that the GCC states ‘ currency is being affected unnecessarily as it is pegged to the dollar, while the dollar ‘s value is worsening.

Furthermore, the essay undertook the issue of currency brotherhood in footings of its benefits and the obstructions that are confronting the GCC states to organize a future pecuniary integrating.

Last, we have besides carried out a primary research and we presented the questionnaires ‘ consequences and remarks which are related to the currency brotherhood subject in the terminal of the essay.


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