A day-dream of the Islamic world
By Prof. SABIR
Sep 10 - 16, 2001
The demand for one common currency for Muslim
countries is gradually gaining ground. The dogma seems to have
fascinated Muslim rationalists, who off and on issue statements
supporting it as an anti-dollarization device.
Dr. Mahatir Mohammed, Prime Minister of Malaysia, is
one of the most vocal advocates of financial oneness among Muslim
countries. Recently, in his address before the Malaysian Parliament he
urged upon the Muslim countries to adopt a single currency, which,
according to him, would reduce their dependence on dollar, and help
increase the trade between them. The observers, by and large, eulogized
the P.M's single currency philosophy matching it with the advent of
Al-Baraka, a director of a Saudi financial group
operating in Malaysia, himself being an ardent supporter of a single
currency for the Islamic world, expressed certain reservations by way of
hinting at some unspecified obstacles in the way of its implementation.
However, he thought the Islamic Conference Organization could be of
immense help in ground-breaking. Simultaneously, he observed that the
volume of trade between Muslim countries is negligible, while the major
trade partner of the most countries is the USA.
Since a debate on the issue has been set off, and as
a call has been given to initiate the spadework, it is high time an
objective analysis of the proposition is offered.
When two or more countries agree to a jointly managed
monetary and economic policy, they are said to have been integrated into
a monetary union. Minimum prerequisites of a monetary union are:
Single Effective Currency: There must be
either one currency operating as legal tender in all the member
countries or several currencies which are fully convertible among
themselves at fixed exchange rates, thus acting as a de facto
Single Effective Exchange Rate: There has
to be one exchange rate between the currency of the union and each
foreign currency. This necessitates one exchange rate policy for all the
member countries which, in turn, needs to have one exchange control
One Monetary Policy: Monetary policy is
devised to control: (a) money supply; (b) exchange rates, (c) rates of
interest, and (d) inflation rates. One monetary policy for all the
member countries is the nucleus of an effective monetary union.
Not all the monetary unions formed in the past
withstood the test of the time. Quite a few of them failed. It would be
a useful study to look into the causes of their failure before harping
on the need of one more such union.
An objective analysis of the operational disciplines
of some of the past unions dwells upon the following as the causes of
(i) Non-existence of a strong partner for
administering centralized control on the entire operation, especially
during the crisis — The example is that of the Colonial New
England Union which collapsed when small partners started resisting
economic supremacy of Massachusetts, and, in violation of the agreement,
over-issued their currencies.
The other side of the picture is equally significant
and thought provoking. Strong dominating partnership of Germany, France,
and Belgium have been mainly responsible for the success of Zollverein,
CFA Franc Zone, and the Belgium-Luxembourg Union respectively. These
dominating partners assumed the role of de facto leader,
controlling the economic and the monetary policies of their respective
(ii) One common currency without a common
monetary policy, or a common monetary policy without a common monetary
authority — Latin Monetary Union collapsed due to this deficiency.
This was also one of the reasons for the disintegration of the East
African Currency Area.
(iii) Bimetallic currency standard with the
official exchange rate between the two currencies varying from that in
the open market — Latin Monetary Union ended owing to this
(iv) Dumping in one or more member states
of the debased and the low-valued subsidiary coins, being legal tender
across the union — Latin Monetary Union and the Scandinavian
Monetary Union suffered from this loophole.
(v) Fixed official price of gold in the
wake of the depreciated paper currencies issued without adequate gold
reserves — This led to heavy purchases of gold in cheap currency
at the official price, which was below the open market rate. The
Scandinavian Monetary Union had the brunt of this 'gold romance' .
Evaluating of the potential of the proposed Islamic
Monetary Union (IMU) in the context of the track record of the monetary
unions of the past would not be a futile exercise. Let us, therefore
examine its viability in the light of the aforesaid.
Strong Dominating Partner: A strong dominating
partner is the driving force behind an effective union. Who qualifies to
assume this role in the Muslim world? On the contrary, we belong to the
lot who can go to the extent of accepting disintegration of the country
rather than to accept the upper hand of other countrymen with different
political affiliations. We seem to be the believer of the saying that no
sheath can accommodate more than one sword but at the cost of the sword
and the sheath itself.
This feature had been non-existent in the EMU also.
The "bad tempered argument", chiefly between President of
France, Chancellor of Germany, and the Prime Minister of Netherlands,
over an already settled issue of the presidency of the to-be-established
European Central Bank, which overshadowed for 12 hours the 2nd./3rd. May
l998 session of the summit at Brussels was tantamount to a sign of
Observers from all over the world concluded that
dividing the term of the first president clearly breaches the treaty's
spirit. It has, on the one hand, damaged the bank's credibility as an
independent entity, and, on the other hand, tarnished the image of Mr.
Duisenberg, once the unanimous incumbent of the office of president.
They asked the question, "if it takes 12 hours of hard pounding to
pick one man for a job, what are the chances of future summits sorting
out far bigger — and more controversial — matters?" The IMU, if
established, would come across identical situations and similar
questions too often. The salvage of the Union will obviously lie in how
these questions are answered.
Road to Political Integration: Another important
question that haunts the minds of the well-wishers of the Muslim world
is, can a group of countries adopt a single monetary policy and a single
currency and yet keep most other areas of policy decentralized?
Unfortunately, the apprehension that eventually it is bound to culminate
into a political union looks impossible to dispute.
There is also no denying the fact that subscribing to
a currency unification move is tantamount to foregoing some sovereignty
— the sovereignty to regulate the monetary policy in conformity with
the prevalent economic conditions. Thus, the advantages associated with
a single currency lose much of their charm when weighed against the loss
of: (i) independent monetary policy; and (ii) the discretion of changing
the exchange rate.
The impact of this loss aggravates manifold if
the country or the region is likely to suffer from "asymmetric
shocks", e.g. unusual disproportionate economic upheavals, which
are not uncommon in our target countries. This poses yet another
terrible question. If a country is deprived of the power of regulating
its monetary policy or devaluing its currency to combat an economic
crisis, what other benefits can compensate it for this loss?
It is owing to these constraints that critics have
gone as far as to apprehend "the single currency could lead to a
war", or, it could be nothing short of a "political
Optimal Currency Area Theory: The Theory
identifies three alternate responses to asymmetric shocks. These are
based on the assumptions that: (i) asymmetric shocks are few and far
between; (ii) economies of member countries have similar cycles and
similar situations; (iii) flexibility of wages is more or less uniform;
and (iv) transfer of fiscal resources between member states is smooth
Muslim countries hardly meet any of these conditions
with the result that any unusual economic shock in any member country
would pose a threat to the union. It leads to conclude that the economic
conditions of each individual country would be the deciding factor,
which also means that the effects of the unified single currency unit (Uscu)
on one member country or countries would not necessarily be the same as
on another member country or countries.
Interest Rate: Single monetary policy may not be
cost-effective, especially if the changes in the rate of interest affect
different economies differently. Muslim countries pursuing
non-interest-bearing modes of financing have not been able so far to go
beyond renaming of 'interest' as 'mark-up'.
Black Money and its Impact on Integrated Monetary
System: Black money, whatever its currency, will remain black even
after it is converted into Uscu Thus, the conversion itself will
not assist money launderers, as the money in its new form also will
remain tainted. However, it will take money launderers a step farther
down the line to concealment. Criminals who now operate in various IMU
member countries will not, after integration, need to convert between
those countries' currencies. Consequently, the risks of disclosure on
the exchange of large sums of cash will become extinct.
Certain probable member countries of IMU have less
stringent exchange control regulations as compared to other probable
states in the union. Money launderers who deal in a number of currencies
would, therefore, be tempted to shift their activities from the former
to the latter. Certain economists have proposed that laws restricting
cash transactions between national currencies of member countries and
the unified single currency of the union (Uscu, in this case)
should be enacted to have an effective check against the black money.
However, effectiveness of such laws may be anybody's guess because of
the huge quantum of the black money involved.
Forged Currency Notes and Lack of Standard Printing
Quality: Until our Uscu becomes widely recognizable, there
are chances that forged notes circulate with little restraint. People
may not be accustomed to recognizing the security features of the new
bank notes. They may not only be agreeing to accept forged notes but may
also be inclined to reject legitimate notes as fakes. A wave of distrust
and doubt will prevail throughout. With low literacy level in Muslim
countries, this problem may be more intensive.
Further, the printing of currency notes undertaken in
different countries is exposed to quality-variation risk. Strict and
uniform quality control would entail higher cost and complex
Trade Volume and Foreign Debt: It is claimed that
with the unified currency the trade between the member countries would
increase and dependence on dollar would reduce. This is the same claim
that was made at the time of the formation of EMU and introducing of
Euro. What has been ignored in this context is the fact that the trade
between EMU countries was much more than what it is between the Muslim
countries. Take the case of Malaysia itself. Its more than 80% business
is from U.S.A. Of the remaining 20%, less than 25% is dispersed among
Muslim countries, which too is of volatile nature.
The major share of the foreign trade of the
developing countries — most Muslim countries fall under this category
— is from USA. The bulk of the remaining is from Euroland.
Over $800 billion Gulf money is reported to be
invested in Western Countries. As far Pakistan is concerned, more than
half of her two-way trade is with the USA and the European countries.
Foreign debts are also denominated in US dollars
because of which the influence of IMF on national economic, fiscal, and
monetary policies of the developing countries is increasing day in, day
Financial markets of Muslim world are also operating
much below the international standards. To attract foreign capital to
these markets in sizeable quantity on terms favourable to them is still
a Herculean task.
Level of technological advancement achieved by Muslim
countries is not enviable by any standards. Hence, the Muslim countries
will remain dependent for their needs for the most of the capital goods
and sophisticated services on non-Muslim world.
If the above facts are analyzed, the situation that
emerges is not very much in favour of the monetary integration of the
Muslim countries, without which to aspire for a unified currency
virtually remains a daydream.
Religious Affinity: No monetary measure can
subsist in the name of religious affinity alone. Heavy withdrawals from
banks in Pakistan on the eve of Zakat deduction should be an eye opener.
What we would, therefore, suggest is that religious feelings of
believers should not be exploited while talking on issues, such as,
"elimination of interest", or, "unification of
currency", or, "deduction of Zakat", and so on. Instead,
such sophisticated issues should be handled with professional acumen
after doing adequate homework.