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Inflation puts Qatar dollar peg back under the spotlight

Qatar: Thursday, June 12 - 2008 @ 17:01

Most analysts place the blame for the soaring rates, which official figures put at 14.75% for the quarter ending in March, close to the 14.81% record set in March 2007, on the high price of oil and the flailing US dollar.

A recent poll by Reuters shows the rate could average at 13.8% for the year, which would rank it as the highest in the Gulf.

Although the fact that the current figure reflects a continuing increase for the third consecutive quarter means that the final annual figure could finish even higher.

Short of a regional solution, Qatari authorities have taken a raft of measures to try to lessen the financial impact on the local economy.

Prime Minister Sheikh Hamad bin Jassim al-Thani told a meeting of Qatari businessmen this week that the government would focus on reducing inflationary effects by implementing a series of price controls.

Price freezes

For a three-year period the price of raw materials such as steel and cement will be frozen, while diesel costs will be subsidised.

‘Contractors can now work without having any fears about any price rise in construction materials. Any future price rise of such materials will be born by the state during the three-year freeze,’ Sheikh Hamad said, without giving specifics on the plans.

This initiative directly targets the price hikes being witnessed in the construction industry, one of the most active in the world currently, as resource shortages force contractors into paying vastly inflated prices for the basics amid strong competition.

The announcement also comes only days after neighbouring Saudi Arabia announced a massive reduction in its exports of similar raw materials.

The move to extend the diesel subsidy for another year, unveiled at the same meeting, will come at an estimated cost of $384m.

The government can afford this, as the world’s biggest exporter of liquefied natural gas in a time of record revenues. But it is not an end solution – rather it acts as a patch, alongside measures such as rental caps, raising public sector wages, cutting import duties and raising local bank reserve requirements – all of which are also being undertaken across the GCC.

‘Inflation will keep rising, despite measures such as these,’ Doha Bank Treasury Manager Jose George told AME Info. ‘Price freezes and subsidies help but they just won’t work alone.’

Interest rate cuts

The problem, as has been well publicised, is the current weakness of the US dollar, and the fact that the peg is forcing linked GCC economies into matching the Fed’s interest rate cuts – at precisely the time that oil revenues are flooding more money into the local economies.

Despite this, Qatar and the other pegged currencies are standing united on their firm stance that the currencies will not be revalued.

‘We have no short- or mid-term plans for the revaluation of the riyal or de-pegging from the dollar,’ Sheikh Hamad said. This is despite speculation early in the year that the riyal was at least 30% undervalued.

Nor did the recent visit by US Treasury Secretary Henry Paulson do anything to indicate that there might be a possible change. Citing policy on the peg as a ‘sovereign matter’ while in Doha, Paulson echoed the US administration’s firm stance on the dollar.

Indeed, Kuwait’s de-pegging to a basket of currencies in 2007 has not noticeably reduced its inflation rate, which officially grew to 9.5% in January.

GCC common currency

Analysts now predict that this being case, the next major change to local economies will be with the introduction of the common currency.

Although this was originally scheduled for 2010, that deadline now looks set to be extended by a number of years.

‘Yes, I think that now we will keep the peg until the common currency is introduced,’ says George. ‘But that looks likely to be extended. It’s hard to say by how long at this stage, maybe until 2011, maybe longer, but there will be a slight delay.’

While the final monetary agreement may be signed as early as this year, settling the minutiae of circulating and legislating the currency is likely to take at least three to four more years. During which time consumers in Qatar look set to carry on bearing the brunt of the inflationary forces.

The short term outlook does look a little rosier however. This week the dollar rose to a three-month high on the international markets after the Fed hinted at an end to interest rate cuts and President Bush spoke of the administrations commitment to a strong dollar.

Whether this is enough to help stabilise Qatar’s inflation remains to be seen.

See also:
GCC businesses learn to live with inflation
Qatar chases untapped real estate markets

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Thursday, June 12- 2008 @ 17:01 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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