Qatar studying 'major' currency change

by Dylan Bowman and Reuters on Wednesday, 30 January 2008

MAJOR CHANGE: Al-Ibrahim said Qatar could move without other GCC members. (Getty Images)Qatar is studying the possibility of a "major" change in monetary policy, which could include depegging its riyal from the flagging US dollar, the ruler's economic advisor said on Wednesday.

Ibrahim Al-Ibrahim said significant change was needed to address record inflation in Qatar, which hit 14% last year.

Al-Ibrahim said the government was looking at several policy options to reduce inflation, one of which was dropping the riyal's dollar peg.


"We are studying all kinds of possible ways to price our exchange rate or to price our currency," he told newswire Reuters. "A basket is possible."

Al-Ibrahim said Kuwait's decision to break ranks with its neighbours in May last year and link its dinar to a basket of currencies did not go far enough.

However, he stressed that Qatar wanted to make any decision in collaboration with other GCC member states, but left the door open for the Gulf state to move on its own if necessary.

"Kuwait really did it very little," Al-Ibrahim said. "Change should be major change, minor change won't solve the problem... Really, we would like to do everything we can through the GCC."

When asked if Qatar could act unilaterally, he said: "I think we can."

He said officials would make foreign-exchange policy recommendations to the government this year, without saying exactly when.

Gulf states' peg to the dollar forces them to track US monetary policy at a time when the Federal Reserve is cutting interest rates to stimulate the economy.

Qatar has slashed its deposit-facility rate by 150 basis points in four moves since September 18, tracking the Fed, which has reduced rates by 175 basis points.

It is the second time in a week Al-Ibrahim has raised speculation Qatar is seriously considering severing its ties to the dollar in an effort to bring down inflation.

The economic advisor said in comments published on Tuesday that Qatar was studying linking the riyal to a basket of currencies, stating that "pegging the riyal to only one currency has many disadvantages".

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Analysts described Al-Ibrahim's remarks as "sensible" and the clearest indication yet that Qatar could depeg from the dollar in order to tackle inflation.

"The comments are very sensible. Any currency reform needs to be substantial," said Marios Marathefis, Standard Chartered's regional head of research. Gulf states should allow their currencies to appreciate by 20% against the dollar, he said late last year.

Simon Williams, senior economist at HSBC, said: "The comments are a very strong sign that the Qatari authorities are seriously examining all of their policy options to deal with inflation, including monetary reform."

Countries across the Gulf are coming under increasing pressure to depeg or revalue their currencies due to the fall in the dollar, which has been blamed for driving up the cost of imports from places such as Europe.

"Inflation is definitely affected by a reduction in the dollar, but the major contributors are the very high rate of growth of the economy, coupled with the high rate of government expenditure," Al-Ibrahim told Reuters.

He said a Qatari plan to sell bonds to absorb liquidity would give the central bank more control over money supply.

"We have made a lot of efforts to affect the price of raw materials in building, for instance, and we are doing a lot of laws, mainly consumer protection laws, that really reduce inflation," Al-Ibrahim said.

The government is considering increasing salaries and subsidising food, he said on Tuesday.