Introduction
The strength of the national economy is determined by various aspects and market indicators, including GDP growth, the level of foreign trade, and many other criteria. One of the significant factors to consider is the currency’s stability and its relevance to the international market. Regarding the countries of the MENA region, in which a number of states are included, local currencies are different, which is explained by the states’ independence, despite their joint participation in trade unions. Creating a single currency in this region could help strengthen trade ties and build a free economic zone. At the same time, some challenges could arise caused by distinctive foreign exchange reserves of different countries and, therefore, distinctive contributions to the overall development system. Analyzing the available literature and developing an appropriate methodology can help identify the outcomes of such an economic transformation. This work is aimed at identifying the potential consequences of introducing a single currency for the entire MENA region, including the advantages and disadvantages of this solution.
Literature Review
Individual economic indicators should be analyzed to identify the readiness for introducing a single currency. The World Bank Group (2022, p. 90) offers relevant statistics; according to the current data, “consumer inflation in the region remains below its longer-run average”. The exceptions are Lebanon and Iran, “with still negative output gaps” (World Bank Group, 2022, p. 90). In the CSC states, at the end of 2021, the inflation indicator was about 1%, while in the middle of the year, it was higher than 3% (World Bank Group, 2022, p. 90).
Regarding interest rates, the countries of the MENA region do not show high parameters. Monetary authorities can keep this indicator low due to low inflation and deficient demand (World Bank Group, 2022). At the same time, interest rates vary depending on the countries’ economic sustainability; for instance, in 2020, in Kuwait, the figure was 4.1%, while in Egypt, in the same year, the parameter reached 11.4% (Lending interest rate, 2022). These differences are crucial to take into account when planning a unification reform.
Concerning the unemployment rate, the situation is relatively tense because this parameter shows stable growth. In 2020, the unemployment rate in the MENA region was 10.6%, while in the previous year, it was 9.5% (Unemployment, 2021). Individual countries show positive developments, such as Saudi Arabia and Egypt (World Bank Group, 2022). However, the overall situation in the region leaves much to be desired.
From the perspective of creating a common currency in the region, findings from academic sources offer different justifications and forecasts. For instance, in their study of this opportunity, Alshehry and Slimane (2004) noted that fiscal conventions created challenges due to individual countries’ distinctive fiscal laws. This barrier, however, was smoothed out by the states’ structural similarity of the economic models, which made it possible to adapt appropriate control tools and build an effective monetary integration strategy (Alshehry and Slimane, 2004). Arif and Shabbir (2019) are more skeptical about the prospect of a common currency in the MENA region. According to the authors, the costs of such an initiative could outweigh the potential economic benefits (Arif and Shabbir, 2019). The need to adopt a number of related aspects, particularly labor laws, visa agreements, interest rates, and other criteria, complicates this transition; in addition, the researchers mention people’s psychological attachment to their national currencies, and shifts may be accompanied by a negative perception of the change (Arif and Shabbir, 2019). Therefore, despite the convenience from an economic standpoint, individual deterrents and barriers complicate the transition to a single currency in the MENA region.
Creating a single currency will unequivocally strengthen economic integration and help optimize regional trade ties. Nevertheless, individual countries express reluctance to take such a step, as evidenced by the findings of Martini et al. (2016). The authors note that some states, particularly the UAE and Oman, which occupy high positions in the ranking of countries in the MENA region in terms of economic indicators, abandon the idea of transitioning to a single currency, which makes monetary reform impossible (Martini et al., 2016). A likely reason for this resistance may be due to their developed national economies that may weaken under the influence of the transition to a new currency and related changes, for instance, the need to adapt tax policies to other countries interests. Moreover, oil trading, as one of the key sources of income for some states in the region, largely determines the associated risks. According to Mensi et al. (2017, p. 479), “changes in oil prices when expressed in domestic currencies depend closely on changes in the dollar exchange rates of those currencies”. In other words, the transition may cause investor concerns, which is undesirable.
In academic literature, an economic gap between the countries of the region is the most common reason why introducing a single currency is an irrational solution for individual states. Omair (2018) compares the GDP performance of some countries, and based on these data, not all economies are ready for reform. For instance, at the time of the study, the GDP of Saudi Arabia was $679 billion, while that of Bahrain was $34 billion, which was 20 times less (Omair, 2018, p. 108). When comparing the situation in the MENA region with that in the European Union, where the single currency is supported by the majority of member countries, Sriraman, Sunilkumar, and Pillai (2020) note some distinctive features. The EU has more small countries with poorer economic performance than some Arab states. Adopting a single currency in Europe was driven by the ease of trade and welcomed by most citizens, while in the MENA region, the focus on oil trading shifts the interests in favor of strengthening local currencies against the dollar (Sriraman, Sunilkumar, and Pillai, 2020). Thus, the validity of unifying the region’s monetary system is in question.
Given the findings from the reviewed sources and current economic indicators, introducing a single currency in the states of the MENA region does not seem reasonable due to the distinctive economic development of the participating countries. To highlight the advantages and disadvantages of unifying the monetary system, the study can be carried out on the basis of a theoretical framework designed to analyze the available information in the context of individual countries’ readiness for such a reform. As an additional evaluation criterion, a comparison of the potential implications of this transition on economic development between the MENA region and the EU will be made. Identifying the individual features of the reform and their effects, including policy implications, will make it possible to draw conclusions regarding the validity of the change.
Methodology
A quantitative study will be performed to research the issue regarding the rationality of introducing a single currency in the MENA region. As a design, a quasi-experimental approach will be applied where a single currency will be the independent variable, and the economic performance outcomes of the countries in the region will be the dependent ones. The principle of such a study involves identifying the relationship between the variables with an emphasis on measuring how the dependent variable influences the independent ones.
As the economic parameters are involved, the level of GDP, interest rates, unemployment rate, and inflation will be reviewed as the most significant macroeconomic indicators. The theoretical framework used in the proposed study is offered by Arif and Shabbir (2019) and addresses the dimensions related to the prospects for a monetary union. It contains more criteria to take into account and, in addition to the above variables, includes parameters related to the implications of integration – political, financial, labor market, institutional, and fiscal implications of integration (Arif and Shabbir, 2019). By evaluating these dimensions, one can find out how prepared the target countries are to adopt the relevant reform and whether the potential effects of monetary integration are justified in the context of the above implications.
In addition to the findings from academic sources, empirical data will be collected by collating national survey data on the prospects for single currency adoption. Options for monetary reform have been discussed in the MENA region since the beginning of the 21st century (Alshehry and Slimane, 2004). One of the prerequisites for this was introducing a single currency in Europe, which allowed adapting local states to the general principles of trade, transport, economic, and other relationships. Agustiar (2018) examines the history of monetary reform in the European Union and notes that, despite the proximity of the countries that came to an agreement, many of them felt a semblance of an economic shock, but subsequent growth showed the urgency of changes. Adapting this experience to the states in the MENA region can help identify specific implications and potential impacts on the economic performance of these countries.
Evidence
Given the considered facts and the research mechanism, introducing a single currency in the MENA region cannot be unambiguously successful and unproblematic for all participants without exception. For instance, in his analysis of making the euro the common currency for the European Union, Agustiar (2018, p. 228) states that “only 71 percent of 14 European countries were nominated as prime converged and converging countries”. One of the main constraints to take into account is the distinctive economic performance of individual countries in the MENA region. Although many local states have a high level of development, which is largely due to oil trade and, therefore, high investor activity, some countries do not have the same resources. Moreover, the flows of enrichment of national treasuries also differ. For instance, in North African countries, tourist flows are significantly higher than in some Asian states. Conducting the monetary reform in question may be unprofitable for those trade areas where the dollar, the most stable world currency, circulates constantly and serves as one of the main tools for accumulating profits. Therefore, distinctive development indicators are significant deterrents to take into account.
A quasi-experimental design can help reveal how the monetary reform in question might affect specific economic performance. When considering the aforementioned dimensions, particularly political, financial, labor market, institutional, and fiscal ones, for different countries in the MENA region, they will be distinctive. For instance, Saudi Arabia which has a low unemployment rate, loyal tax policies, and low-interest rates for the population, and the transition to a single currency with other countries will not negatively affect the economy. For comparison, Iran, in which these same parameters are at a significantly less developed level, may experience an economic shock caused by the need to adapt the economy to the updated conditions and spend additional funds on restructuring the resource base. From this follows the conclusion that the more stable and developed the national economy is, the lower is the risk of severe fluctuations and challenges associated with the implementation of the monetary reform.
At the same time, another position can also be applied to the perspective in question. Saudi Arabia and Iran are the leaders in terms of oil reserves in the MENA region. Pegging the national currency to the dollar as a stable and global currency allows trading to be successful, while changes can lead to negative economic shifts due to the low convertibility of the new currency. Therefore, many individual factors explain the respective outcomes of the potential reform for the different states of the region.
Policy Implications and Conclusions
The assessment of the findings and the review of the economic performance of the countries of the MENA region suggests that introducing a single currency is not a potentially successful solution for several reasons. Firstly, in view of different developmental outcomes, states will experience the distinctive impacts of such reform. This will affect, first of all, the countries with insufficiently high GDP and high inflation. Secondly, the trade features of the region largely determine the peg of local currencies to the dollar. This means that in the case of introducing a single currency, the risks of loss of profit arise due to the inability to earn through interaction with investors at the same level. This also applies to other sources of treasury replenishment, for instance, recreational resources. Thirdly, and finally, individual deterrents can be severe barriers to successful reform. Fiscal policies differ from country to country, and to create a background for the effective introduction of a new currency, a significant number of tax regulations will need to be revised, which may be impractical.
When summarizing all the findings and conclusions, one can note that, even despite the potential convenience of monetary circulation in the MENA region, many factors speak against the rationality of the reviewed reform. The inability of individual countries to meet significant economic shifts is one of the main rationales. Moreover, given distinctive development results, some states’ contributions to the monetary system’s reform may be unfair. Special principles of trade relations with investors determine the well-established nature of market principles, where oil sales largely define financial trends and fluctuations. As a result, in the near future, introducing a single currency in the MENA region can hardly be seen as a potentially successful solution that can satisfy the economic interests of all participating countries.
Reference List
Agustiar, M. (2018) ‘The single currency for Islamic nations: do heterogeneities matter?’, Journal of Islamic Monetary Economics and Finance, 4(2), pp. 223-236.
Alshehry, A. S. and Slimane, S. B. (2004) ‘On the optimality of GCC monetary union: asymmetric shocks assessments’, Review of Economics & Finance, pp. 49-62.
Arif, A. and Shabbir, M. S. (2019) ‘Common currency for Islamic countries: is it viable?’, Transnational Corporations Review, 11(3), pp. 222-234.
Lending interest rate (%) – Middle East & North Africa (2022) Web.
Martini, J. et al. (2016) The outlook for Arab Gulf cooperation. Santa Monica: Rand Corporation.
Mensi, W. et al. (2017) ‘Oil and foreign exchange market tail dependence and risk spillovers for MENA, emerging and developed countries: VMD decomposition based copulas’, Energy Economics, 67, pp. 476-495.
Omair, F. M. (2018) ‘Feasibility study on the implementation of a Unified Currency in the Gulf Cooperation Council’, Journal of Economics Bibliography, 5(2), pp. 107-121.
Sriraman, V. P., Sunilkumar, C. T. and Pillai, M. R. (2020) ‘Economic implications of currency rate fluctuations in international financial markets’, PalArch’s Journal of Archaeology of Egypt/Egyptology, 17(9), pp. 8720-8739.
Unemployment, total (% of the total labor force) (modeled ILO estimate) – Middle East & North Africa (2021) Web.
World Bank Group (2022) Global economic prospects. Web.