JEDDAH, 8 June 2008 — A leading international rating agency, Fitch, has said the Gulf common currency, expected in 2010, will help reduce prices of essential commodities in the Gulf Cooperation Council states. The use of a common GCC currency will reduce the member states’ cost of global trade transactions to a great extent, the Fitch said in a report, adding that companies and consumers would benefit as a result of fall in prices.

Charles Seville, an associate director of Fitch who prepared the report, said the common currency would give GCC countries greater flexibility in dealing with external pressure.

“When the prices of oil go up, the value of the currency will also go up,” Al-Eqtisadiah business daily quoted him as saying. Seville also observed that GCC countries with a common religion and heritage are in a good position to establish a currency union that will boost their economies. “A flexible currency will help the GCC adopt monetary policies that are suitable to the region’s situation,” he said.

The report came ahead of a meeting of the governors of GCC central banks, to be held in Doha tomorrow. The meeting, according to GCC Secretary-General Abdul Rahman Al-Attiyah, will discuss the group’s basic monetary law. GCC leaders are likely to endorse the law during their upcoming summit in Muscat.

GCC countries have decided to introduce a common Gulf currency at the beginning of 2010. All member countries except Oman have agreed to establish the currency union as scheduled but Oman wants more time. The currency union will reduce inflation rates in GCC countries.

According to a previous report issued by Fitch Ratings, inflation in the GCC will rise further in the absence of effective policy tools to prevent it. Inflation is already in double digits in Oman, Qatar and the UAE and close to 10 percent in Kuwait and Saudi Arabia, leaving only Bahrain with a modest inflation rate of around five percent.

GCC inflation is at its highest in over 30 years. “As in the seventies, some of the region’s increased oil wealth is feeding through into higher prices, and with policy tools limited, inflation will rise further before it starts to fall,” said Richard Fox, head of Middle East and Africa Sovereign Ratings.

Inflation in Saudi Arabia and Oman has been more affected by rising food prices. With at least some commodity prices now moderating and housing costs less of a factor, inflation may abate later this year, one analyst said. By contrast, in Qatar and UAE, lower inflation must await improved property supply.

Deciding on exchange rates for the new currency when it is introduced could be a major sticking point if inflation in the region remains as high and erratic as it has been in recent months. Valuing a new currency against existing currencies is difficult if the relative values of the existing currencies are constantly in flux.

Fitch considers the upsurge in inflation the biggest threat to the single currency project timetable. Seville hoped that improved real estate supply, moderation in food prices and more restrained government spending would start to reduce inflation later this year.