Gulf rupee: When the Reserve Bank of India played central banker in West Asia

 Even after Indian independence, the rupee was the legal tender in a few Persian Gulf states. It was replaced with the Gulf rupee in 1959 to curb gold smuggling.

When an Indian traveller wanted to visit certain Persian Gulf sheikhdoms in the 1950s, there was no need to stock up on foreign currency before the journey since the Indian rupee was the legal tender in these countries. For almost all financial transactions, the United Arab Emirates (then known as the Trucial States), Kuwait, Bahrain, Oman and Qatar used the rupee. The system was put in place by the British when they ruled India. But the arrangement suited the Reserve Bank of India as well, as the Gulf countries would purchase the rupees with pound sterling, against which the Indian currency was pegged.

By virtue of the system, India had economic clout in the Persian Gulf states that were still British protectorates and years away from a major oil boom. However, smugglers and other criminals saw it as an opportunity to make money from the average Indian’s desire to hoard gold.

Indranil Mukherjee/AFP

The modus operandi was quite simple. Smugglers would send young men to the Gulf on ostensible business trips with wads of rupee notes. There, gold would be purchased with the smuggled rupees and brought back to India. This would inevitably create an excess of Indian currency in the Gulf, leading to the extra rupees being sold back to the RBI, which lost valuable foreign exchange.

As is the case now, gold smugglers were very innovative in their methods to bypass Indian Customs officials. A well-known and often-repeated anecdote among the first generation of Malayali migrant workers in the Gulf tells the story of a man who was asked by an acquaintance to take a clock back to Bombay from a Gulf country. The unsuspecting young man carried the clock, inside which gold biscuits were neatly hidden, and was arrested and prosecuted in India.

“While the smuggling had been a problem for many years, in 1957 and 1958 the problem rose to alarming proportions and took a large toll on India’s reserves of foreign exchange,” Peter Symes, an Australian researcher and expert on paper money, wrote in a 1999 article.

A New York Times report from April 1959 stated that India had to pay the equivalent of $92.4 million in sterling for rupees presented through traders and banks in the Persian Gulf in 1957 alone. The report estimated that $69.3 million went to the region from India in exchange for smuggled gold in the first nine months of 1957.

Launch of the Gulf rupee

By 1959, India faced a major foreign exchange crisis thanks to the thriving gold smuggling business, losing hundreds of millions in sterling.

“To obviate or at least mitigate malpractices, which such an arrangement could give rise to, a separate series of notes exclusively for circulation in the Gulf (Kuwait, Bahrain, Qatar, and the Trucial States) were issued by the Indian Government and the Reserve Bank of India in the 1950s,” according to the RBI.

On May 1, 1959, Indian President Rajendra Prasad gave his assent for the Reserve Bank of India (Amendment) Act 1959, after it was passed by both houses of the Parliament. The law allowed the Indian government and RBI to issue special notes that were intended to be circulated only in the Gulf region. This currency, which had the same value as the Indian rupee, was known as the Gulf rupee or External rupee.

One Gulf Rupee. Wikimedia Commons [CC0 1.0]

“The Ministry of Finance drew up the reform after months of secret consultations and after obtaining the approval of the British Government, the Bank of England and the rulers of the sheikhdoms,” the New York Times reported after the Lok Sabha passed the bill.

Shrouded in secrecy, as was the case with the 2016 demonetisation in India, few members of the ruling party knew that this reform was being planned. The task was entrusted to Morarji Desai, then the minister of finance. The bill was introduced in the Lok Sabha on April 27, 1959.

“The introduction of the amendment to the Reserve Bank of India Act, to the Indian parliament, caused some consternation to the members of parliament, as it was proposed without any warning,” Symes wrote. “The Government of India had tried to introduce the amendment with a degree of haste so that they could reduce the window of opportunity for people who might take advantage of the proposed issue of special notes and increase the smuggling activity in the immediate future. However, following a delay of a day or so in which the opposition was allowed to review the measures, the amendment to the Act was passed with little difficulty.”

The Gulf rupee notes retained the contemporary design but were different in colour and carried the prefix “Z”. The notes were issued one, ten and hundred denominations and were redeemable only at the Bombay office of issue.

Holders of regular Indian currency notes in the Gulf were given six weeks to exchange them for the new currency or sterling. The transition to the new notes was fairly smooth and regular rupee notes were no longer accepted in the Gulf. Innovative gold smugglers, however, found other ways to satiate the Indian appetite for the precious metal. At the time of the passing of the bill, Indians were believed to be privately hoarding up to $2 billion in gold.

Haj notes

Indian pilgrims also took rupee notes when they went on the Haj pilgrimage, where they could freely exchange them for Saudi riyals. The Indian government had initially allowed Saudi banks and traders to exchange these rupees for sterling in Bombay, but fears persisted over smugglers using this route to buy foreign exchange.

In response to this threat, the Indian government began to issue special Haj rupee notes for pilgrims going to Mecca and Medina. The notes in ten and hundred denomination had the word HAJ inscribed on the obverse. Another way to distinguish them from normal rupee notes was the serial number that was prefixed with the letters “HA”.

The Haj rupee was exchanged at par to the Saudi riyal in the early 1960s. (A Saudi riyal is now worth almost 20 rupees.) Haji Siddique Mohammed, a 79-year old retired railway employee from Mangalore, remembers using the Haj rupee during a pilgrimage in 1963. “We got the Haj rupee from the Haj Committee of India, before boarding the ship for Jeddah,” Mohammed told this writer. “I managed to preserve a couple of notes, but they were unfortunately lost when I moved out of my official quarters after retirement.”

Devaluation of the rupee

The special notes for the Haj and the Gulf stayed in circulation until the mid-1960s but were slowly being phased out in some countries. This was at a time when Indian economic growth was slow, and the Gulf nations were in the early stages of a boom. Kuwait introduced its own currency as early as 1961 and a few years later, Bahrain followed suit.

The end of the Gulf rupee was, however, precipitated by an important development in India. In June 1966, Indian Finance Minister Sachindra Chaudhuri, with the blessings of Indira Gandhi, announced a devaluation of the rupee. Overnight the exchange rate of the dollar rose to Rs 7.5 from Rs 4.76. Although this decision surprised many, rumours were doing the rounds for several months.

A World Bank team that had visited India in 1965 proposed the idea of devaluation of the rupee to get the economy moving. Media reports of the time suggested that devaluation was one of the West’s preconditions for increasing aid for India’s fourth five-year plan. The decision prompted members of the opposition and the business community to accuse the government of bowing to pressure from the United States and multilateral lending institutions.

The devaluation created a stir in West Asia, with some rulers asking the British government to intervene, since the original arrangement to rely on the Indian rupee was put in place by the British. Such requests were turned down.

Qatar and Dubai withdrew the Gulf rupee from circulation within months of the devaluation of the Indian rupee, with both states temporarily using Saudi riyals. They would subsequently use Qatar and Dubai riyals, which had the same value of the pre-devaluation Indian rupee. Most of the Trucial States followed suit, but Abu Dhabi decided to use the Bahraini dinar, which had an exchange rate of 10 Gulf rupees.

A bank in Al Ain, southeast of Dubai. Dubai withdrew the Gulf rupee from circulation within months of the devaluation of the Indian rupee in 1966. Credit: WAM/AFP

“Consequently, following the introduction of the Qatar and Dubai riyal, the Qatar and Dubai Currency Board made a claim to the Reserve Bank of India for the total amount of sterling originally sent to cover the rupees held by Qatar and Dubai, and not the lesser value of what the Gulf rupees were actually worth,” Symes wrote.

The RBI would deal with each of the Gulf states separately when it came to the settlement of the sterling reserves that it held.

The RBI-issued currency survived in Oman until 1970 and was mostly accepted as legal tender only in the country’s ports. In May 1970, the Saidi rial (named in honour of the House of Al Said) was introduced as a currency in Oman and replaced the Gulf rupee. The new currency was exchanged at par with the sterling. Gulf rupees were exchanged for 21 rupees to the riyal and were redeemed in Bombay by the Omani government. The country’s present currency the Omani rial became the legal tender in 1972.

The Haj and Gulf rupee notes were withdrawn by the RBI in the early 1970s and are now a much-sought after collector’s item. Auctions conducted by Spink & Son have managed to get bids from 120 pounds and VAT for a 10 Gulf rupee note to 44,000 pounds for a 100 Haj rupee note. Collectors and enthusiasts warn of several fake notes being sold for high prices on different e-commerce websites.

Five decades after the Gulf and Haj rupees have ceased to exist, India continues to enjoy strong business and cultural links with Persian Gulf states but the idea of the country getting back the economic clout that newly-independent India enjoyed in West Asia does not look realistic.

Ajay Kamalakaran is a writer and independent journalist, based in Mumbai. He is a Kalpalata Fellow for History & Heritage Writings for 2021.

(Source: Scroll)

How Mozambique’s smuggling barons nurtured jihadists

Attacks by young Islamist militants in northern Mozambique are fuelled by a mix of poverty and corruption, writes Joseph Hanlon.

In the most recent attack, 10 people were decapitated with machetes in Palma district in the country's northerly Cabo Delgado province.

More than 300 people have been detained by the police and army since the first attack in the port town Mocimboa da Praia on October 2017.

Coastal northern Mozambique has a long history of trade and movement of people with the rest of East Africa, and people in this area are traditionally Muslim.

The army has increased patrols in northern Mozambique since the attacks began last year

The offshore discovery of one of the largest natural gas fields in Africa in 2010 triggered dreams of wealth, but so far there has been little impact locally.

Gas will not be produced in the region until 2022 and there will be no serious government revenue until 2028 or later.

There is currently offshore exploration work being done and onshore construction of infrastructure. But as is common with mega-projects of this kind, few local opportunities have materialised.

Youth unemployment therefore remains very high, as in the rest of Mozambique.

Growing cells
In 2015, poorly educated and marginalised young men, many of them itinerant street traders in Mocimboa da Praia, formed small groups and began to organise around a rudimentary form of Islamic fundamentalism.

In the wake of the attacks, some mosques have been destroyed in
Cabo Delgado by the authorities

They blamed both the mosques and the Mozambican state for their plight, and decided to challenge both.

Groups marched into local mosques wearing shoes and carrying knives as an intentional sign of disrespect of what they saw as "degenerate Islam". Local people called them "al-Shabab", simply local Arabic for youth, or just "the Shababs".

The small cells realised the need to look outside both for weapons and religious training, and found surprising allies.

Smuggling networks
Mozambique has become increasingly corrupt in recent years and its coastal north has become a major centre for ivory, timber, heroin and ruby smuggling - with the involvement of police and other government officials.

Mozambique is home to the world's biggest ruby and pink sapphire deposits

Local smuggling barons incorporated the militant young men into their networks and paid them well.

The nearby border with Tanzania is not controlled and there has always been a movement of people. This has increased with more people smuggling - mainly from Kenya, Somalia and the Great Lakes through Mozambique to South Africa.

There were already young Tanzanian men in the Mocimboa da Praia street trading community who became part of the groups.

After the 2012 killing in Kenya of Muslim cleric Aboud Rogo Mohammed (accused of supporting al-Shabab in Somalia), his followers came under pressure and moved south.

They built a presence in Kibiti, Tanzania, and crossed the Ruvuma River into Cabo Delgado by 2015.

Mozambique's jihadists are believed to have been influenced by the followers
of the late radical Kenyan cleric Aboud Rogo Mohammed

Using incomes made from smuggling, religious networks, and people-traffickers, the extremist cells paid to send young men to Tanzania, Kenya and Somalia for military and Islamic training.

The income also helped bring radical clerics to Mozambique.

Within Mozambique, they hired a sacked policeman and two dismissed border guards to provide military training.

Guerrilla tactics
A study of these groups based on a month of fieldwork by Mozambican Islamic cleric Sheik Saide Habibe and researchers Salvador Forquilha and João Pereira was reported in Maputo on 22 May.

The structure remains one of small cells, of 10 to 30 people, who are linked but only loosely, the study found.

Most of the attacks appear to have been done by a single group.

This loose guerrilla format makes it difficult for the army and police to find these small groups.

There is now a large presence of army and riot police in three districts of Cabo Delgado. They have been accused of heavy handed tactics and of killing local people.

Two helicopters and a navy ship shelled the village of Mitumbate near Mocimboa da Praia on 23 and 24 December 2017 with at least 50 casualties.

Villagers were accused of supporting the young Islamist militants.

The shelling was in response to an ambush of a riot police convoy on 17 December, which was going from Mocimboa da Praia to Mitumbate, in which the riot police's national director of reconnaissance was killed.

The growing role of young Islamic fundamentalists and incidents like mosque invasions had been reported to local and provincial police and officials since 2015.

But the response has been to turn a blind eye - partly not to rock the boat and jeopardise their own jobs by giving bad news to their superiors, and partly because the young militants have the support of the smuggling barons.

Jihadists' tactics have been compared to those of ex-rebel group
Renamo during a 16-year civil war

Some commentators have pointed to the attacks' similarity to common guerrilla tactics, and also to the actions of the Renamo guerrilla movement in Mozambique when it first started in the late 1970s.

There is no overt political agenda and the first step is to establish a presence through fear, including atrocities such as the recent beheadings.

Final goal
At the same time, they need to recruit new members and gain local support, and this is apparently being done through family links.

But the final goal is to encourage overreaction by the government, which they hope will turn communities against the government and toward them.

All of that appears to be happening in coastal Cabo Delgado.

The scenic environs of Mocimboa da Praia have been home to a number of attacks

Meanwhile, Mozambique will have municipal elections on 10 October and national elections in 2019.

Frelimo, which has governed since independence, is facing a growing backlash, in part because of the lack of rural development and the failure to create jobs - exactly what is at the heart of the Islamist youth militancy.

Although Cabo Delgado has always voted overwhelmingly for Frelimo, the opposition - both Renamo and Mozambique Democratic Movement (MDM) - has also done well in these coastal areas.

Only time will tell whether the impoverished region's lack of development, jobs, growing corruption and heavy-handed response to extremism will help the opposition in the polls.

It could also be the toxic recipe needed to help grow these nascent extremist groups.

ps: Joseph Hanlon is a visiting senior fellow at the London School of Economics and editor of Mozambique Political Process Bulletin

(Source: BBC)