Qatar Should Consider More Flexible Exchange Rate – Central Banker
As the World Cup draws closer, Qatar's fiscal spending, its only policy tool, may become difficult to restrict.
May 21, 2013 4:23 by Reuters
“If we are left out with one policy instrument (fiscal), and if that policy instrument is rigidly fixed then this factor (rigid fiscal policy) along with the newly added potential challenges posed by the shale fuel production, merit a consideration for more flexible exchange rate policy,” Alkhater said.
The International Monetary Fund expects Qatar’s inflation to edge up gradually to reach 5.0 percent in 2017 and 2018.
Qatar, the world’s top liquefied natural gas exporter, had already been questioning merits of the peg in 2008-2009.
In 2008, the Emir’s adviser Ibrahim al-Ibrahim called for the peg to be abandoned as Qatar reeled under a record 15 percent inflation. But as capital flows dried up, the QCB was able to break free from tracking U.S. interest rate cuts despite the peg, slashing inflation and stabilizing the money market rate.
Ibrahim said in 2009 that oil producers should be more willing to discuss the viability of dollar pegs as the greenback slid to 15-month lows against a basket of currencies.
“Instead of being targeted and hence stripped of your policy toolkit, the exchange rate itself can be used as an economic policy instrument to combat inflationary pressures,” Alkhater said, adding that would also allow the government to have more room for spending with less worries about inflation.
He cited the example of Singapore’s currency regime – whereby the Singapore dollar trades against a basket of trading partners’ currencies in an adjustable band – as an inspiration for Qatar as well as Saudi Arabia, Kuwaitand Bahrain, which plan to form a currency union in the coming years.
“We could have a model that is suitable for us which may consist of a basket of not only our trading partners, but also financial partners’ currencies, since our revenues in foreign currencies are now more diversified than before, in addition to the oil price as well,” Alkhater said.
“The Singaporean experience has proven to be successful in anchoring expectation and maintaining low and stable inflation. Therefore, it is not only viable for a small-open economy to have a flexible exchange rate and independent monetary policy, but it is also sometimes desirable,” he said.
Out of six Gulf Arab oil producers only Kuwait does not peg its currency to the dollar. The Kuwaiti dinar trades against a basket of undisclosed key trading partners’ currencies after Kuwait dropped its dollar peg when inflation shot up in 2007. However, the basket is believed to be heavily dollar-dominated.
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