DUTIES OF CENTRAL BANK
The main duties of any central bank is to formulate and implement monetary policies on behalf of the government, act as a banker to the government and produce currency notes and coins for the country(Capie and Wood,2003). However duties and goals of central bank of specific country may differ depending on the laws and economic conditions of that country.
DUTIES OF UNITED ARAB EMIRATES CENTRAL BANK
Some of the duties of the central bank of United Arab Emirates are the following:
- Exercise the privilege of issuing currency on behalf of the government
DUTIES OF UK CENTRAL BANK
- Ensures price stability so as to maintain public confidence and also ensures that the price increase is in accordance with the government inflation target.
- It also act as the government banker and lender of last resort to the commercial banks
- Issues currency in England and Wales (Ajami, 2006).
DUTIES OF CENTRAL BANK OF EUROPEAN UNION
- Authorizing central banks in the euro zones to issue euro banknotes (Ajami, 2006).
- Formulating and implementing monetary policies for the Euro zone so as to maintain price stability in the region.
- Ensures that banking system in euro zone countries are supervised adequately by the central bank of respective country (Ajami, 2006).
- Ensures that euro zone’s exchange rates are stable by buying and selling foreign currencies when necessary.
DUTIES OF US FEDERAL RESERVE
- Act as central bank of united state of America (Ajami,2006)
- Provide financial services to financial institutions and government.
Monetary policy is a process by which monetary authorities’ controls money supply mainly by increasing or decreasing interest rate so as to boast economic growth and maintain desired level of inflation. The monetary authority which is mainly central bank in most countries increases interest rate when they want to reduce money supply and increases interest rates when they want to increase money supply in the economy.
United Arab Emirates has employed expansionary monetary policies in the recent past so as to boast its economic growth. The Government of the UAE has reduced the interest rates tremendously over the years by maintaining low window rate and bank reserve ratio so as to acquire desired level of economic growth and ensure price stability.
The government of the United Arab Emirates also issues bonds to its citizens so as to finance its huge developmental budget it has enrolled over the years. The Government plans to spend the money it receives from selling of the bonds to build infrastructures like roads, railways and schools and pay back the loans from the returns of the said infrastructures.
Monetary sovereignty is the power of a country to exercise exclusive control over its currency (Gondolfo, 1998). It is the power to design for themselves their banknotes and also the amount of the currency to issue. A country like united state has high degree of monetary sovereignty, while countries that are members of European Union have surrendered much of their monetary sovereignty to the central bank of European Union (Ajami, 2006).
UK is a member of European Union as they got the membership in 1973, but it does not use the Euro because they opt out of the treaty that led to formation of Euro (Ajami, 2006). The UK government is reluctant to adopt Euro because they feel that in order to achieve the desired level of economic growth they need to have an exclusive control over their interest rates; they also feel that if they adopt the euro the large liabilities of the European countries could put an extra debt burden on British taxpayers (Ajami, 2006).
TRADING PARTNERS
Main trading partners for GCC
Main trading partners of European countries
Website used: www.tradingeconmics.com
COUNTRIES THAT ARE IN EUROPEAN UNION AND USES EURO
Australia Finland Luxembourg
Belgium Germany Malta
Cyprus France Slovenia
Estonia Greece Slovakia
Italy Ireland Spain
For a country to join Euro zone the following criteria must be met.
1. Government deficit should not exceed 3% of the GDP (Cappie and Wood, 2003). This was aimed to regulate the debt of the member countries because countries liabilities affect all the members as a whole.
2. Total government debt should not exceed 60% of the total GDP and if it does it must be declining substantially and reached around 6o% (Cappie and wood, 2003).This was to ensure that the member countries will not inherit a huge debt from the applicant nation.
3. The country must have maintained foreign exchange stability for at least the last two years. It was aimed to maintain balance of payment of the union and also to have adequate foreign exchange reserve (Ajami, 2006).
4. The long term interest rate of the state should not be more than 2% of the average interest rate of three member states which has best record in maintaining price stability (Ajami, 2006). This was to ensure that the value of euro will not be affected due to incoming nation.
Monetary union is where two or more countries come together and agree to use one currency; it is also referred to as currency union (Capie and wood, 2003) .While a custom union which GCC is currently engaged in is a type of trade block which is composed of free trade area with a common external policy(Capie and wood,2003). The main aim of forming custom union is to establish closer economic and political ties and to ensure economic efficiency.
UAE and other GCC countries should form monetary union so as to boast economic growth. From the above analysis of the main trading partners of the UAE and other GCC countries we have found out that they have potential of forming monetary union like the one of European Union.
One of the benefits of the monetary union is transaction cost saving, the larger the bilateral trade among members of the GCC the larger the cost that will be saved from using a single currency (Ajami, 2006). As we have seen GCC largely trades with outside world as compared to the intra-regional trade and therefore they set to benefit a lot from single currency.
The six countries also enjoys stable exchange rate regime which will help them in their quest to form monetary union. All the countries involved does their major transaction with US dollars because their main imports are oil which is traded in US dollar and United state is also a main trading partner for all the countries. Therefore they pegged their currencies to US dollars (Ajami, 2006). Since the effect of exchange risks are significant the formation of monetary union will promote trade in this region.
After formation of monetary union member countries will benefit from widen scope of collective bargaining power that will give them a stronger bargaining position when negotiating with their main trading partners and other economic blocs (Ajami, 2006).
Monetary union will also boast intra regional trade because the use of a single currency will reduce trading cost between countries thus increasing the member countries’ GDP (Ajami, 2006).
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REFERENCES
Capie, F., & Wood, G. E. (2003). Monetary unions: Theory, history, public choice. London: Routledge.
Ajami, R. A. (2006). International business: Theory and practice. Armonk, N.Y: M.E. Sharpe.
Gandolfo, G. (1998). International trade theory and policy: With 12 tables. Berlin [u.a.: Springer.
