Dollar Peg to Stay

Qatar

Economic News

22 Jul 2010
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Qatari officials have moved quickly to downplay suggestions that the emirate is about to sever its currency link with the US dollar, denying media reports that the peg could be removed as soon as the beginning of April.



Qatar has repeatedly said it had no plans of following Kuwait's example and going it alone in dropping the peg between the riyal and the dollar, preferring to move in consensus with the other states of the Gulf Cooperation Council (GCC).



However, on March 12 an international news agency ran a story citing an unnamed senior official from the Qatari Central Bank saying a decision would be taken in April to either cut the link with the dollar or revalue the riyal.



"Everything will be clear by the end of this month because our fiscal year ends on March 31, so by April the central bank will make an announcement," the article quoted the official as saying.



The article also quoted Prime Minister Sheikh Hamad bin Jassim bin Jabr Al Thani's recent comment that he was "studying all options" concerning the currency peg.



The article came the same day as the dollar hit new lows against both the Japanese yen and the euro, the currencies of two of Qatar's biggest trading partners.



Following the release of the story, Qatari officials hastened to deny a possible move to de-peg.



Abdullah bin Hamad Al Attiyah, Qatar's deputy prime minister and minister of energy and industry, said the same day the country had no immediate plans to sever the dollar link or to act without the full concurrence of its GCC partners.



"All Gulf countries should be together," he said during an interview with local media. "No country can go alone outside a strong economic bloc."



The following day Sheikh Abdullah Saud Al Thani, the governor of the Central Bank, also denied the media speculation.



"The view of the Central Bank of Qatar until the moment is there is no change in policy about depegging from the dollar," he said on the sidelines of a meeting with officials of the European Central Bank in Germany. "We are still pegging the riyal against the dollar and we will continue at the moment."



However, Al Thani's use of the phrase "at the moment" could be telling, indicating that while a decision has not been made, the question of whether to cut the link with the dollar is being given earnest consideration.



The peg between the Gulf currencies and the US dollar has been widely blamed for fueling price rises, nowhere more than in Qatar, where inflation hit a high of 13.74% in the fourth quarter 2007. Perhaps up to one-third of Qatar's inflation is caused by the link to the dollar, with prices of non-dollar imports being driven up due to the pegging of the two currencies.



In an interview with an international news agency in February, Sheikh Hamad said the Qatari riyal was undervalued by up to 30%.



Though reluctant to cut the dollar link, Qatar has been trying to rein in inflation through other means. On March 4, the government announced a two-year freeze on rent increases on all leases signed after January 1, 2005. The move was taken after rents increased by an average of 27.7% last year.



The freeze replaced a 10% cap on increases put in place by the government that had failed to curb the blowout in rent rises. Analysts predict that the freeze could lop as much as 40% of Qatar's inflation rate, though it remains to be seen if it will be more effective than the cap it replaces. Were the freeze to be combined with a decoupling of the dollar peg, Qatar's inflation rate could plummet.



While hints have been dropped and flags, false or real, have been flown over severing the link with the dollar, it appears that Qatar is unwilling to take the step just yet. However, if depegging gains further support in other capitals of the Gulf, it is unlikely that Qatar will protest too loudly.

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