QCB chief highlights dollar peg challenges for Qatar

The Qatar Central Bank has broken ranks with other monetary authorities in the Gulf region to express its first public concern about the longstanding policy of linking its currency to the US dollar.

While reaffirming that the central bank intends to maintain the Qatari riyal’s peg to the dollar, QCB Governor HE Sheikh Abdullah bin Saud al-Thani departed from his previous endorsement of the peg by highlighting some of the problems it has caused for Qatari policy-making.

“There are some challenges while operating under fixed exchange rates,” Sheikh Abdullah said in an e-mailed response to questions from Zawya Dow Jones. “With the fixed anchor, we have to maintain our stance of policy consistent with that of the US which may not be always justified based on our own domestic considerations.”

Qatar needed to cut interest rates for domestic reasons in 2010 and 2011, a time when the US Federal Reserve was holding its interest rates steady, he said.

Qatar, like most of the central banks in the oil-rich Gulf region, has pegged its currency to the US dollar for more than a decade. Saudi Arabia, the UAE, Oman and Bahrain also maintain dollar pegs, while the Kuwaiti dinar is linked to a basket of currencies in which the dollar is predominant.

Despite recent weakness in the dollar and the move by Standard & Poor’s last year to downgrade the US credit rating, Gulf states have refrained from voicing concerns about their currency pegs to the dollar, the currency in which their oil exports are denominated. While the currency link provides stability for oil and gas exports, a weaker dollar tends to push up the prices of imported goods for the Gulf Co-operation Council states, triggering inflationary pressures.

Sheikh Abdullah said the QCB decided to keep the Qatari riyal peg to the dollar after assessing the benefits of the current regime, and would continue to keep the situation under review.

“We continue to reiterate our faith in the pegged exchange rate regime after carefully weighing the benefits against the costs,” he said. “Nevertheless, we will continue to review the situation in the light of evolving international and domestic macroeconomic developments,” he added. Sheikh Abdullah said it may be too early to conclude that the dollar has entered a weakening phase. The US currency has rebounded against the euro this year, as the eurozone crisis has deepened.

“The US dollar is reflecting a two-way movement and a definitive trend on its gradual weakening is yet to be fully ascertained,” Sheikh Abdullah said.

As a result, “it may be premature to come to a conclusion about the losses from pegging the Qatari riyal to the US dollar,” he said.

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