* Fiscal policy to become rigid ahead of 2022 World Cup
* Cites Singapore currency regime as an example to follow
* Peg to basket of trading partners, oil an option
By Martin Dokoupil
DUBAI, May 21 (Reuters) - Qatar and other Gulf states should
consider moving to a more flexible exchange rate from
long-entrenched pegs to the U.S. dollar, to better manage
inflation risk in the next decade, a senior Qatar central bank
official said on Tuesday.
He cited Singapore's currency regime as an example that Gulf
states could adopt.
Gulf Arab monarchies embraced fixed exchange rate regimes to
stabilise their currencies and import low inflation from
overseas. But their economic cycles have diverged from the
United States in recent years as Asia became the Gulf's dominant
trade partner.
"We in the GCC need more than an outdated four-decade old
simple uni-instrument, uni-tool macroeconomic policy framework,"
Khalid Alkhater, Central Bank (QCB) Director of Research and
Monetary Policy, said in a prepared speech seen by Reuters.
"This framework was suitable for the earlier stages of
development. However, the world has changed," said Alkhater, who
has recently completed a scientific research study on the topic,
adding it did not necessarily reflect the QCB's official view.
Alkhater is due to speak at the Doha Forum later on Tuesday.
Any change to currency pegs to the dollar would be a
sensitive issue in the Gulf Arab region, which has strong
political and economic ties with the United States. Comments
diverging from the official line are very rare.
Qatar adopted a currency peg after gaining independence from
Britain in 1971. It has kept the riyal pegged at 3.64 riyals to
the dollar since 2001, when it replaced pegging it to special
drawing rights (SDR) used in 1975-2001.
A more active monetary policy may now be needed as Qatar
plans to spend $140 billion on infrastructure, partly to prepare
for hosting the 2022 World Cup soccer tournament.
As the World Cup draws closer, Qatar's fiscal spending, its
only policy tool, may become difficult to restrict due to the
tournament building commitments and pre-planned diversification
programmes, Alkhater said.
"We could potentially face a threat of a buildup of
inflationary pressures over the next 10 years. Hence, we need
additional macroeconomic stabilization instruments, namely
monetary policy and exchange rate," Alkhater said.
Inflation in Qatar climbed to 3.7 percent on an annual basis
in April, the highest level since at least 2009, fuelled by
rising rental costs. Bank credit expanded by 32 percent on
average last year, the fastest rate since the global crisis
started in 2007/8.
"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.
CURRENCY BASKET
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, Kuwait and 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.
(Editing by Susan Fenton)
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