Macroeconomic Trends in the Gulf Cooperation Council Countries.
The gulf cooperation council which was constituted as the cooperation for the Arab states of the gulf is a union of various governments in the Persian Gulf region meant at harmonizing economic integration and political cooperation among the member states. The members have their headquarters in Saudi Arabia but the formation of a single monetary and economic hub has not been as successful as anticipated. The confederation gained popularity amongst the political leadership following the Bahraini protests when the UAE and Saudis sent their forces into the country to help suppress the protests.
The objectives of the formation included the harmonization of legislature regarding religion, trade, commerce, finance, and administration. The union would also conduct join research ventures and form a unity in the military operations covering the region. The area has the second highest GDP in the world owing to oil and natural gasses as growth is stimulated by savings accumulated from the sale of the petroleum products.
- Our economic analysis will not focus on all the Gulf cooperation council but will instead focus on two member states, the United Arab Emirates and Saudi Arabia.
- Money supply in the two countries has been on the rise indicated by the statistical graphs representing data collected from their respective bureaus of statistics and financial institutions. The changes witnessed from the graphs can be attributed to savings made from the second oil boom as well as revenues that continue to trickle in from the current sale of petroleum products. Furthermore, the economies of the two countries continue to diversify with transport, tourism and free trade agreements such as free ports driving the rise in currency circulating and equivalent reserves.
The trend is the same in both m1 and m2 measures of money supply for the two countries an indicator of strong economic performances and a sustainable economy. M1 which is a measure of cash held in the public and transaction deposits for corporations continued to increase tremendously over the period indicating confidence in the economy as business continues to expand and more enterprises continue to invest in different sectors of the two economies.
Subsequently, m2 which is a measure of currency circulating in the economy while savings, small deposits and cash equivalents also experienced tremendous growth over the last five years for the two countries. The increase in this measure for the two countries is driven by the confidence in investment opportunities, leading to savings and other equivalent depositories for the purpose of future investment.
Despite the increase in supply of cash over the last couple of years, the economies have continued to perform against the norm and display reducing inflation rates. The trend does not conform to the expected outcome where an increase in money supply usually leads to increased inflation.
The extra ordinary trend can however be attributed to the occurrence of factors such as substantial increases in output, economic growth and the recovery of a depressed economy. The reduction in revenues from oil prior to the second oil boom led the countries to an economic slowdown and the increased money supply is now translating to increased output. As a result, the inflation indices in the two countries continue to decrease while money supply continues to grow.
- To increase currency in circulation, the central banks can reduce base lending rates thus making financing cheaper and more available to the people through lower interest rates. The central bank can also reduce the minimum bank deposit reserves it requires the banks to maintain with it or offer a discount window where banks can borrow from the central bank to meet short-term cash shortages.
- One of the most common ways of increasing legal tender among the public is by increasing the levels of national spending. As a result of the increased currency in circulation, more money will now be chasing fewer goods leading to cost push inflation thus increasing the price of commodities.
In the long run however, suppliers will produce more goods to meet demand or other producers will get into the market with the aim of making supernormal normal profits from the high demand of the products. The long term effect of the move will be a shift in the equilibrium of the market with prices expected to reduce minimally in line with increased suppliers of the products.
- Demand for oil and other petroleum products is expected to start rising again as the prices continue to favor the consumer. The drastic drop in its price now means that it is one of the cheapest sources of energy and thus more people will replace other sources of energy with petroleum products. Contrary to other commodities where reduction in prices are quickly corrected as hoarding takes place, the prices of oil have continuously gone down over the period. Consequently, distributors are looking to sell off the stock to protect themselves from further loses and as such hoarding will not correct the dropping prices. The prices are therefore expected to continue dropping until an equilibrium is established or supply is reduced in the market. The reduction is however expected to cause substantial reduction in retail prices of other commodities heavily reliant of oil for operations.