Question

How independent the Monetary policy of Qatar?

Answer 1

Qatar could adopt a monetary policy more independent of the United States if that proves necessary to combat economic sanctions by its Gulf Arab neighbors, a Qatari central banker said.

Like most Gulf Arab oil exporters, Qatar pegs its currency to the U.S. dollar, putting pressure on its central bank to imitate interest rate moves by the U.S. Federal Reserve.

But last month’s decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport ties with Qatar has changed the economic environment for the country.

Asked if the central bank now needed to conduct a more independent monetary policy to deter possible capital flight, Khalid Alkhater said by phone from Qatar: “That depends on an internal assessment at the central bank.

“However, it is technically possible should the monetary authority decide to do so...such as raising the interest rate on deposits in addition to other precautionary measures.”

Alkhater, an architect of Qatar’s monetary policy during the 2008 global financial crisis, is currently on sabbatical leave from the central bank while doing research at Britain’s University of Cambridge.

He stressed that his views did not necessarily reflect the official line of the central bank.

But if Qatar does diverge from U.S. monetary policy, it would not be doing so for the first time, he noted.

In 2008, Qatar’s central bank decided not to follow an unprecedented string of rate cuts by the Fed that brought its policy rate close to zero. Instead, Qatar kept its own deposit rate much higher at 2 percent for over two years, helping to stabilize the money market and reducing double-digit inflation.

“The situations now and then are similar,” Alkhater said, without elaborating on what a more independent Qatari monetary policy should look like now.

The central bank last changed monetary policy in June, raising the deposit rate by 25 basis points to 1.50 percent, after the U.S. Federal Reserve lifted rates by the same margin.

SANCTIONS

The dependence of Qatari banks on foreign loans and deposits may be the aspect of the economy most vulnerable to sanctions, although the country has hundreds of billions of dollars of financial reserves that could be used to support its banks.

“We do have deposits from Saudi Arabia and the UAE in the range of $15 billion to $20 billion with a one-year range of maturity,” Alkhater said. “We do not expect it to roll over. The amount is very small and manageable.”

Alkhater added: “I suggested among other measures that if the blockade countries withdraw their deposits or freeze Qatari assets, we retaliate by doing the same. The government can also increase its deposits with local banks if needed.” He did not say if authorities were likely to adopt his suggestions.

Qatar could also benefit from measures adopted in the past by central banks around the world to deal with capital outflows, such as strengthening prudential regulations and guaranteeing customer deposits up to a certain limit, Alkhater said.

Despite the Qatari riyal’s peg of 3.64 to the U.S. dollar, the riyal traded slightly lower between offshore banks in the weeks after the diplomatic crisis erupted, but Alkhater said this was not a worry.

“The Qatari riyal offshore markets are not that significant since supply of the riyal in these markets is very limited. They shouldn’t be a source of much worry, but only to the extent that they can affect the spot market,” he said. “There is no reason to make any change to the peg.”

Qatar’s inflation climbed to an annual 0.8 percent in June from 0.1 percent in May as the sanctions raised some import costs.

“Prices could see an increase in some of the items affected by the sanctions due to re-routing of supply lines, shipping costs, or price increases from the sources,” Alkhater said.

“This is generally a cost-push inflation in the possible range of 1 percent or slightly above...There is not much room to pressure the economy through trade sanctions and the effect will be limited,” he said, noting that there was little cross-border trade between Gulf Arab countries.