CNBC: Qatar may dump the dollarSubmitted by Jim Brown on Thu, 01/31/2008 - 16:28
Dropping Qatar dollar peg a policy option
Published Date: January 31, 2008
DUBAI: Qatar is looking at possibly dropping its peg to the dollar, among other policy options, to tame record inflation, and would prefer to make any change in concert with its Gulf partners, the ruler's economic adviser said. Any change, such as Kuwait's move last May to drop its peg in favor of a basket of currencies, should be "major", Economic Adviser Ibrahim al-Ibrahim told Reuters yesterday.
Qatari officials would make foreign-exchange policy recommendations to the government this year, he said, without saying exactly when. "We are studying all kinds of possible ways to price our exchange rate or to price our currency," said Ibrahim, who heads Qatar's General Secretariat for Planning. "A basket is possible.
Qatar is constrained in its fight against inflation because the dollar peg forces it to track US monetary policy at a time when the Federal Reserve is cutting interest rates. It has slashed its deposit-facility rate by 150 basis points in four moves since Sept 18, tracking the US Federal Reserve, which has reduced rates by 175 basis points.
Kuwait is the only Gulf Arab oil producer to have dropped its peg to the dollar as the region struggles to control rising inflation at a time when the United States is cutting interest rates to stimulate its economy. "Kuwait really did very little," Ibrahim said by telephone from the Qatari capital, Doha. "Change should be major; minor change won't solve the problem.
Kuwait has allowed its dinar to rise almost 6 percent since May 19, the day before it dropped the peg. The dinar tracks a basket made up mainly of dollars. A basket in which currencies other than the dollar have a greater weight would likely give a greater upward impetus against the dollar to a currency pegged to it.
Really, we would like to do everything we can through the GCC and we want to put our ideas to the GCC," Ibrahim said. Qatar, the world's largest exporter of liquefied natural gas, is a member of the six-nation Gulf Cooperation Council, an economic and political bloc that is preparing for monetary union. "As a small country, we cannot float our currency ... it has to be tied," Ibrahim said. Still, when asked if Qatar could act unilaterally, he said: "I think we can.
Inflation in Qatar was 13.73 percent in September, just below a record but still the highest in the region. "We are aware of the difficulties we are facing regarding inflation, and fighting it is the major thing," Ibrahim said. "Changing the currency is one of the aspects." The General Secretariat for Planning-of which Ibrahim is the secretary-general-the central bank and an inflation committee, are studying how Qatar could change its exchange rate policy, including revaluing the currency, Ibrahim said. I
brahim said he hoped to offer Qatari Emir Sheikh Hamad bin Khalifa Al-Thani policy proposals this year, he said. "I have a lot of influence but I am not a decision-maker," Ibrahim said.
Definitely, we are looking at it seriously," Ibrahim said about exchange rate policy. "The government is willing to look into these alternatives and let us evaluate these." Ibrahim 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," he said. "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," he said. - Reuters