Recently, the OBG conducted an exclusive interview with Abdulla bin Khalid al-Attiya, the governor of the Qatari central bank. With the resultant discussion covering many aspects of finance and banking within the country, the OBG is proud to present extracts from this interview in the following briefing.
OBG: Qatar's interest rates are high by world standards, despite falling slightly last year with the softening of US interest rates. Does the central bank have a plan to lower interest rates over the long term in order to stimulate project financing and other aspects of economic development?
AL-ATTIYA: Since the Qatari riyal is fixed to the US dollar, domestic interest rates are influenced by the US dollar's rates. Recently, the high demand for credit from the public and private sectors caused the Qatari riyal rate to escalate above the US rate. This was happening while inflation rate levels were subdued.
The financial needs of the local economy were met from international financial markets with a lower cost structure after Qatar received an A+ rating from Standard & Poor's. I believe Qatar's rating should be even higher.
OBG: Will interest rates rise again in 2004, as the US pursues a tighter interest-rate policy?
AL-ATTIYA: The domestic interest rate will go higher if the US Federal Reserve tightens its monetary policy. In addition, domestic liquidity has a key impact on the interest rate level and structure. This is the macroeconomic outlook, although microeconomic factors certainly play a role in determining the cost structure of individual banks.
OBG: The Qatari riyal has been firmly pegged to the US dollar for several years. Is any changed expected in the present currency regime?
AL-ATTIYA: In the near future there is no plan to change it. A negative aspect of such a policy is the influence of the US-dollar rate level on domestic rates. It becomes a vehicle for import inflation if the US dollar exchange rate depreciates against the currencies of our main trading - that is, import - partners. Because of the US dollar's convertibility as well as its status as the world's major reserve currency, Qatar fixed its currency to the dollar.
Importantly enough, the sale of oil and gas in the global market is denominated in US dollars, which represents a substantial share of Qatar's total government revenues.
OBG: Do you have to deal with any currency pressures on the peg?
AL-ATTIYA: In discussing the single-currency process with the central bank governors of the GCC (Gulf Cooperation Council), we did decide that the US dollar is the main anchor for the GCC. In the future, that should be evaluated from time to time.
For now, the US dollar accounts for 60% of world currency reserves, so it's easier for settlement. Practically all countries in the world are dollar-based. The only exceptions are the euro, the pound sterling and the yen. A good proportion of our imports are in US dollars too. So it makes sense.
OBG: Would there be any advantage to replacing the dollar with the euro as the anchor for the Qatari riyal?
AL-ATTIYA: We import from Euroland more than from US-dollar zones. The euro is still in a maturing stage. It has had a successful launch, and it is worth looking at it.
Something for us to consider might be a mixed basket of reserve currencies. If we went to a single GCC currency, then a more inclusive, less US-based monetary policy could, to some extent, reduce inflationary pressure. Also, it does create credibility. This would also be true for our Qatari currency.
At the same time, a mixed basket has its own risks. Euroland is a surplus area, whereas the US is in deficit and needs funds. But the US economy is more resilient and dynamic.
In fact, despite the peg policy, we already do have euros, pounds sterling and other currencies; non-US currencies make up about 40% of our reserves.
OBG: How will ongoing economic diversification affect the Central Bank's considerations in setting monetary policy?
AL-ATTIYA: We have a classical objective: to stabilise prices, maintain financial stability and support growth. We manage our policy indirectly. For example, the government will diversify, and we will support this. But, we only set regulations. For example, we can encourage tourism, but not tell banks to lend to the tourism sector.
We promote a free-market economy through financial stability. I am against intervention in the market. The market should be competitive and dynamic. Companies here can borrow from local and international financial markets.
OBG: What is the current status of plans for a unified GCC currency?
AL-ATTIYA: The GCC member countries have agreed in principle that economic integration is the right way. And we have agreed on a basic framework: keeping the US dollar anchor; removing barriers from trade; and establishing a customs union, with an external tariff of 5%. Discussions at this point only involve the current six GCC members: Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates.
Next, there are three major issues:
First, we need to agree on adherence measures, for example on government borrowing as a percentage of GDP, domestic borrowing as percentage of GDP. This framework is something we have asked the European Central Bank to come and study, and we expect them to deliver those results in a month's time.
Second, we need to put in place an institutional framework. For example, will there be one central bank board?
Third, we need to fix the new currency against the dollar, or a basket. This is not determined yet, though most favour the dollar.
Once these issues are resolved, we would proceed to set the value of the new currency, so that each member state's currency will be fixed to the new currency. Exactly like what happened in Europe.
Once we fix our local currency to the GCC currency, whether based on a basket or on the US dollar, then we will enter a transition period, in which the prices of goods and services balance out among the various existing currencies. Each will enter its own cost structure. Meanwhile, to ensure security during this transition period, we will need to take measures to eliminate speculation.
OBG: What obstacles will have to be overcome for greater economic integration to be achieved within the GCC?
AL-ATTIYA: We must be aware of the risk of a shock - such as lower oil prices. In such instances, we all suffer, but the suffering is different from one country to another. We have to find ways and means to avoid this. Tax and customs barriers will help.
There are both positive and negative consequences, but the GCC arrangement has a positive role over the long term. With more internal GCC trade, competition will mean prices go down. And policy unity will give us more bargaining power worldwide.