Common currency for Muslim countries: A viable option?

Imagine, Muslims all across the world have one single currency. No more currency exchange for Hajj, Umrah or sending remittance from the Gulf. Divided by borders, united by currency. It seems like a good idea on paper, albeit with some scepticism.

On March 5, Prime Minister Sheikh Hasina suggested to a delegation of D-8 trade ministers led by Turkish Deputy Minister of Trade Mustafa Tuzcu that they should have one, to facilitate trade and commerce among them. So, the big question is: is it viable?

In a monetary union, the member countries share a single currency, having the same monetary policy and exchange rate. A currency union or a monetary union is an intergovernmental agreement that involves two or more states sharing the same currency. 

A few such monetary unions like Euro or CFA Franc exist in the real world. The most well-known example of a common currency is the Euro. Nineteen European countries, making a group named Eurozone use it as their currency. 

Like the Euro, a monetary union should be regarded more as a political project than an economic one. Due to distant geographical locations, diversity in culture, and a lack of leadership, the OIC countries adopting a common currency is a fairly unique challenge.

The case for common currency

A common currency facilitates trade. The trade payment between Muslim countries at present is cleared with the vehicle currency - the US dollar. The fluctuating exchange rates affect trade payments. If the Muslim countries had a common currency they would not need to depend on the US dollar and could make transactions directly with it.

Before delving more into whether it might be viable, we need to know the current trading trend among OIC countries.

According to Bangladesh Bank's Quarterly Report on Remittance Inflows in Bangladesh 2023, a combined 52.89% came from Gulf Cooperation Council (GCC) countries in the first quarter of 2023. According to OIC's annual trade report, 2.49% of Bangladesh's total export and 27.9% of total import occurred with OIC countries in 2021.

As per the same report, the trade volume among Muslim countries reached about $4.2 trillion in 2021. The main actors in this trade are Saudi Arabia, United Arab Emirates, Turkey, Egypt, Malaysia, Indonesia, Iraq, Bangladesh, Nigeria, and Qatar.

The COVID-19 pandemic impacted intra-OIC trade, which experienced a decrease of 21% between 2019 and 2020. But it bounced back next year to reach $748.34 billion in 2021. This had been possible due to the resilience of some OIC economies exporting energy, food, and manufactured products.

As per OIC's official site, OIC's Secretary-General Mr. Hissein Brahim Taha said in 2022, "It is my hope and prayer that this trade fair will contribute effectively towards moving intra-OIC trade from 18% seen in 2021 to 25% by 2025."

So tradewise, an argument can certainly be made for a common currency.

Can the OIC emulate the Euro?

The Euro provides us with a real example. Today, the Euro is the second largest reserve currency and the second most traded currency in the world after the US dollar. With its emergence, the financial market grew in the region. The turnover rate increased more than double for the member countries as compared to pre-union period, a study titled 'Common currency for Islamic countries: Is it viable?' reveals.

Nonetheless, due to significant economic disparity and geographical discontinuity, comparing the OIC and the EU may not be appropriate. As of 2022, the EU's GDP is nearly twice that of the OIC, though the EU comprises only 27 nations while the OIC comprises 57. And unlike the moderate disparities of EU countries, OIC countries are all over the place regarding population, economy, politics, development and economic output. 

"There has to be some superpowers who will work as the central forces. In the case of the European Union, it's the big players like Germany and France. However, there are no such dominant Muslim nations that will lead," prominent economist and Executive Director of Policy Research Institute (PRI) Dr Ahsan H Mansur told The Business Standard. 

Moreover, the OIC countries should not be over-enthusiastic about the so-called success of the Euro. Because it is also a cautionary tale. The Euro has faced its share of crises, from the sovereign debt fiasco to tensions between wealthier and poorer countries.

Nonetheless, a study titled 'The Single Currency For Islamic Nations: Do Heterogeneities Matter?' paints a hopeful picture about a common currency. It argues that economic and geographic heterogeneities are not the main obstacle to forming a currency union. The findings of the study estimate that 63% of pairs of countries in the OIC are ready to form a currency union.

The Challenges

First of all, to adopt a common currency, the countries should be neighbours, like the EU. But the OIC members are scattered across the globe, including countries from Asia, Middle East, and North Africa. And they have a diverse cultural practice.

It's not an easy call for the OIC countries. 

"It's almost impossible to combine so many countries with such diversity. It will be difficult to promote free trade, let alone introduce a common currency. Even ASEAN couldn't do it yet, it may take decades more," Dr Mansur said.

The OIC countries are heterogeneous with respect to economic, political, ethnic, social and cultural realms. They can be classified into three groups—  least developed, middle-income and the oil-exporter group. There are rich countries like Qatar and UAE, as well as poor countries like Yemen and Somalia.

"We proposed that the Gulf Cooperation Council (GCC) should include their neighbour Yemen but even that was not possible. Yemen is too poor to join them," said Dr Mansur.

Some of the poorest and most war-ravaged countries in the world are Muslim. Yemen, Syria, Lebanon, Sudan, Somalia, Mali — all these countries are mired in endless conflicts. 

We saw how the Eurozone came under stress because some of the member countries were underperforming than the rest. In the case of OIC, one can only imagine what may happen if war-torn, conflict-ridden countries are joined with more stable economies. The rich ones will have to pay too big a price, and no one will agree to do that. 

Secondly, countries should have similar preferences with respect to interest rates. However, the policy interest rate varies among the Muslim countries. As of January 2024, the rate is set at 8 percent by Bangladesh Bank. For Malaysia and Kuwait, it is 3% and 4.25%, respectively. For Pakistan and Nigeria, it is 22% and 18.75% respectively.

Thirdly, in case of a common currency, countries such as Qatar, Kuwait have to devalue their currency, and countries such as Bangladesh, Pakistan have to appreciate their currencies. The difference among currency valuation is simply too immense for Muslim countries, as theirs are some of the strongest and also some of the weakest. It would jeopardise monetary policies of both the countries with strong currencies and the countries with weak currencies.

Fourthly, trade integration is another pre-condition to adopt a common currency - to eliminate tariff and non-tariff barriers to mobilise capital and labour. Before introducing the Euro, the European countries removed visa restrictions among them. Unfortunately, high tariffs are one of the major barriers against achieving higher intra-OIC trade.

According to a study titled 'Common currency for Islamic countries: Is it viable?', the expected cost may overshadow the expected benefit in case of currency union in the Muslim world. 

A common currency union may lead to disparities and tensions among rich and poor countries. As evidence, Germany has excelled economically by adopting the Euro, while Portugal and Greece fell into severe crises. 

Under a common currency, the resource-rich countries may progress faster than their poorer counterparts, and given the share of rivalries and conflicts among some of the OIC member states, such unrest may trigger larger complications. 

A major drawback of having a common currency is the high sensitivity to national sovereignty. Member states have to give up fiscal and monetary autonomy. During an economic downturn, a country with a common currency might not be able to devalue its currency to boost exports, as it would have to consider the collective needs of the entire region.

But the Muslim countries are not likely to do that. Psychological and emotional attachment exists with the national currency. For example Dinar, Dirham, Riyal etc are historically rich currencies and bear the nation's identity. Switzerland and Norway never joined the European Union to preserve their monetary sovereignty.

Then there is geopolitics. Due to the complex relationship shared with the US by the Muslim countries, it is likely that any attempt to weaken the US dollar's stronghold will meet strong US resistance and intervention. After all, the petrodollar is one of the pillars of US global might, and a common Islamic currency will significantly weaken the petrodollar's influence. 

"Yes, the West may exert some pressure, if the Muslim nations intend to unite and introduce a common currency. It's obvious that they would like to keep some countries in their favour. However, it's not the major concern. The thing is that it's simply not viable," said Dr Mansur.

If we narrow down the discussion to D-8, the eight developing muslim countries, that's not viable either. Though the D-8 group comprises only eight countries and all are developing economies, they are located far from one another. Also the same question arises: Who will be the central force?

So, at some point in the future, progress towards a common Islamic currency may occur. But at present, it is still a distant dream. 

Given it is not possible to introduce a common currency, how can the Muslim countries improve trade? 

"That can be done. The nations have to make a secretariat to discuss trade policy. They have to set a common framework. Rich nations have to make some compromise for the poor ones," said Dr Mansur.