Should the Qatari Riyal be pegged to the American Dollar - Research Paper Example

Should the Qatari Riyal be pegged to the American Dollar? Since 1980, the Qatari Riyal has been pegged to the US dollar at 3.64. The dollar peg has provided Qatar a stable macro-economic policy and a corner stone for economic strength and security. For generations, it has provided safety against obvious instability common in some emerging energy markets, and guarded it from the unsteady swings that might weaken the country’s economy (“US Dollar under Riyal Pressure”). The dollar peg helped the newly emerging nations to increase exports through profit investments in the US (“To Peg or Not to Peg”).

However, the dollar peg and the country’s open capital account had resulted in high inflation levels in 2008 generally caused by three issues: (1) Higher worldwide food and commodity prices — Qatar imports majority of its food and commodities; (2) The economy faced housing capacity restraints as domestic expenditures amplified, housing being a non-tradable good; (3) The decline of the currency coupled with its tie to the US dollar had worsened inflationary strains. Inflation averaged approximately 15 percent in 2008, i.e. elevated a great deal more than in other Gulf countries.

In 2009, global prices of food and commodities have considerably reduced and housing costs and leases dropped as well, in spite of the continuing immigrant influx. Inflation pressures worsened as the depreciation in the American dollar persisted. Regardless of this, Qatar still continued to be pegged to the US dollar (Matabadal). Marios Maratheftis, Standard Chartered Bank’s Head of Research of the Middle East, North Africa & Pakistan asserted: "Qatar, like other Gulf countries, has a strong relationship with the US and they are not about to abandon a friend in need" (Bakr).

Qatar government officials believed that the declining US economy did not affect the country’s economy because their chief trading partners are not in the US but mostly in Asia and Europe. But the dollar depreciation indeed caused Qatar’s inflation rate to increase by 15% (Bakr). As the dollar continued to devalue, Qatar and other GCC countries maintained their investments in huge reserves of a declining currency as they are pegged to the dollar (“To Peg or Not to Peg”). With the ongoing inflation, Qatar is pressured to tackle the market dilemma while still keeping alliance with the US, thus the decision to consider revaluing its Qatari riyal by 20% to fight inflation and to stifle anticipations on inflation.

What raises inflation is speculation about it, thus it needs to be controlled in careful revaluation. Creating a capital market would use up Qatar’s excess liquidity and would improve the country’s economic intensification (Bakr). The International Monetary Fund (IMF) encouraged Qatari officials to prioritize projects on the country’s infrastructure to alleviate commodity and food supply blockages and high inflation. The IMF likewise emphasized the necessity for sustained attempts to augment energy filtration and absorption capacities and expand the country’s economy aside from the production of exportation of hydrocarbons (“Qatar Economy and Trade”).

The current US economic chaos had revived rumor on whether the Qatar Central Bank (QCB) would think of dropping from the dollar peg. While some Gulf Cooperation Council countries had showed support for the peg, others were uncertain. The unpegging debates increased momentum during the time when the GCC universal currency progress was initiated (“US Dollar under Riyal Pressure”). Since the introduction of the euro, the American dollar destabilized and devaluated by 24 percent. In the Doha summit, panic heaved among some members of the Organization of Petroleum Exporting Countries (OPEC), economic professionals and global investors that triggered a common petition to peg their currencies to different currencies other than the US dollar and to price their oil and energy products in different currencies as well.

Such debates pressured Qatar Central Bank (QCB) to regard the dollar unpegging as the primary solution (“To Peg or Not to Peg”). Because Qatar was in a no-win situation, it could not decrease interest rates the same way the US Federal Reserve did attributable to the soaring local liquidity and inflation. This would cause a broad divide between US and Qatari interest rates. The ensuing alternatives would be to control liquidity or to increase interest rates provided that inflation stayed constantly elevated.

Raising interest rates would thus promote considerations on unpegging the riyal from the dollar (“To Peg or Not to Peg”). A ‘variable-geometry scheme’ could be executed, as suggested by Anais Faraj, the Executive Director for the Middle East at Nomura Investment Banking. In the scheme, it would be upon the discretion of every GCC country to partake in every policy; however some could work together more closely than others. This would allow Qatar to go on with plans to disengage from the dollar peg (“To Peg or Not to Peg”).

There would be a mounting need to de-peg its currency as Qatar remains a witness to the solid ascent in its inflation. The chief issue will linger on two options: to keep the dollar peg and endure the current inflation until monetary union; and to de-peg now before it is too late in order to relieve the present tensions until such time when a monetary union is ready (“To Peg or Not to Peg”). On the other hand, Qatar Central Bank’s (QCB) Governor, Abdullah Saud Al Thani, recently declared that unpegging from the dollar is not an option he sees today and in the future.

There is certainty that Qatar can keep inflationary issues controlled at the same time as preserving the old monetary peg, in spite of the weakening US dollar. Al Thani further asserted that the QCB’s financial policy is centered on short-term inter-bank interest rate management with a vision to the peg continuance, and in the least, the dollar dwindling may not harm or cause any inflation pressure in Qatar even in a minor inflationary atmosphere. With the consumer price index (CPI) slightly increased by 1.

9% up until July 2011, Al Thani forecast the Qatari economy to boost by 15.7 percent in 2011 (“US Dollar under Riyal Pressure”). Chief Executive Officer of the Doha Bank Group, Seetharaman, clarified the reason unpegging would not be an alternative for the Central Bank: Qatar’s profits prime resource and its existing economic input are largely derived from the hydrocarbons, oil and natural gas transactions. With Qatar’s most important international ventures in American dollar denominations, the Qatari riyal is safeguarded from currency threats (“US Dollar under Riyal Pressure”).

Works Cited Bakr, Amena. “Qatari Riyal needs 20 per cent revaluation to combat inflation.” AME Info. 14 February 2008. Web. 13 March 2012 Matabadal, Ashwin. “Country Report: Qatar.” Rabobank Economic Research Department. October 2009. Web. 13 March 2012 “Qatar Economy and Trade.” QFINANCE. 2011. Web. 13 March 2012 “To Peg or Not to Peg.” Qatar Financial Centre Authority. n. d. Web. 13 March 2012 “US Dollar under Riyal Pressure.” Qatar Today. 4 October 2011. Web. 13 March 2012