QATAR CONSIDERS MAJOR CHANGE IN MONETARY POLICY

UNCLAS SECTION 01 OF 02 DOHA 000213

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EFIN PREL INRB QA
SUBJECT: QATAR CONSIDERS MAJOR CHANGE IN MONETARY POLICY



1. (U) Summary: Reversing all previous official statements,
Qatar's Prime Minister indicated March 12 that Qatar might
change the peg of its currency from the dollar in an attempt
to constrain spiraling inflation. However, he said the
government would not make such a major policy change
unilaterally and would opt to change Qatar,s monetary policy
in concert with other Gulf Cooperation Council countries.
Contradicting the head of government, Qatar's Deputy Central
Bank Governor downplayed March 13 any depegging from the
dollar or revaluation of Qatar's currency in a statement to
the press. While it is still not clear if Qatar will revalue
its currency in the near future, if it does so, the action
would likely come in early April, coinciding with the start
of a new fiscal year. What is certain is that Qatari
officials are not speaking on the currency issue with one
voice. End Summary.

Key Officials Discuss Monetary Policy Change
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2. (U) Ibrahim Al Ibrahim, economic advisor to the Amir, has
remarked in the media in the past month that pegging
Qatari riyal to only one currency, the U.S. dollar, has many
disadvantages, especially if the U.S. adopts monetary
policies that are in conflict with those of Qatar. In an
address to businessmen and bankers, for example, this
influential and respected advisor said countries belonging to
the Gulf Cooperative Council (GCC),which he described as
heavyweights in the world of investment and trade, should not
link their currency to any other country's currency. Al
Ibrahim, however, justified maintaining the dollar peg for
the time being as necessary to preparing for the launch of a
common Gulf currency. In a separate interview in the
Financial Times, Al Ibrahim said the official position is "We
won't delink but that doesn't mean forever; it means for the
foreseeable future."


3. (U) Subsequent recent remarks by the Prime Minister and
Minister of Foreign Affairs Hamad bin Jassim Al Thani (HBJ)
strengthened the probability of an imminent change, most
likely in early April, following the closing of the books on
the government's fiscal year on March 31. The Prime Minister
said March 11 he believed the Qatari riyal is currently
undervalued by around 30 percent and that revaluation is
being considered, among other measures, to tackle inflation.
However, Qatar's Prime Minister urged GCC states to bridge
differences over a single currency, saying monetary union
could avert possible unilateral revaluations. In contrast to
the Prime Minister, Deputy Central Bank Governor Fahad bin
Faisal Al Thani said March 12 that there was "no plan" to
depeg the riyal from the dollar. Instead, he stated that the
Bank plans to keep the peg at its current 3.64 riyals/dollar
for "the time being."

Measures to Tackle Consequences of Dollar Devaluation
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4. (U) Revaluation of the Qatari currency or a complete
severing of it from the dollar in favor of a basket of
currencies would mark the third move by the government of
Qatar to tackle monetary problems blamed on a devaluating
dollar. In October 2007, Qatar announced that the country's
sovereign wealth fund, the Qatar Investment Authority, had
cut its exposure to the dollar by more than half from 99 to
40 per cent. Earlier, the Qatar Central Bank increased its
holdings of gold to 158.1 million Qatari riyals ($43.4
million) from 44.3 million riyals in order to diversify away
from the weakening dollar.

Sharp Break from Long-standing Policy
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5. (U) Al Ibrahim,s remarks broke sharply with Qatar,s
long-standing commitment to the peg. Until recently, the
top-ranking economy-related officials, including the Prime
Minister, Minister of Finance and Central Bank Governor,
repeatedly reiterated that the country would maintain the
peg and that this policy is in the interest of Qatar,
because preserving the credibility of the regime helps the
country attract investment. The Qatari riyal has been fixed
at 3.64 to the U.S. dollar since June 1980. This de facto
peg was formalized in 2001, replacing the formal peg to
the Special Drawing Rights (SDR) rate, and providing a
stable platform for the economy. The peg also minimized the
role of monetary policy in managing short-term liquidity.
According to Al Ibrahim, who heads a government body that
charts economic development, rising inflation starting in
2004 fueled by rapid economic growth prompted a review of
Qatar,s monetary policy. He regularly notes that prices in
Qatar soared 157 percent between 2003 and 2007, and rents
and prices of building materials prices have gone up more

DOHA 00000213 002 OF 002


than 200 percent over a short period of time, forcing some
resident families to leave the country for good.

Another View...
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6. (U) Some government and private economists have taken
issue with the positive assessment on revaluation, arguing
a revaluation at this time might not be in the best
interest of Qatar's economy for the following reasons:

- At a time when Qatar is competing for capital, a
revaluation would make the country more expensive and
consequently less appealing to foreign investors;

- A revaluation would lead to higher export prices, and
exports like petrochemicals would become less competitive,
thereby hurting the country's efforts to diversify away
from oil and gas;

- A revaluation might lead to a series of revaluations; if
the dollar reverses its plunge and begins to surge again,
Qatar,s monetary authority would need to devaluate its
currency, which would cause the currency regime to lose all
credibility;

- The policy change might not reduce inflation. Inflation
in Qatar is mostly driven by the lack of affordable
housing, which cannot be addressed by currency
appreciation;

- Finally, a revaluation would likely reduce the riyal value
of Qatar,s hydrocarbons revenue, which accounts for more
than 60% of GDP and roughly 85% of export earnings and 70% of
government revenues. Currency appreciation would also result
in less available local currency when converted from U.S.
dollars. In addition, a revaluation would significantly
reduce the value of Qatar,s foreign assets in U.S. dollar
denominated investments. The last thing Qatar needs now,
these critics argue, is a reduction in its income while the
government is spending huge amounts of money on health,
education and large infrastructure projects - and allocating
more money to its sovereign wealth fund.

Comment
--------------


7. (SBU) The recent public (and contradictory) comments by
key officials lead us to believe the government is on the
verge of deciding whether it will revaluate Qatar's
currency against the dollar at the change of the fiscal
year in April, which private and government experts believe
would be both practical and timely. Fundamentally, we
sense there has been a strategic shift in political
calculations surrounding inflation, as the senior
leadership now appears to view persistent inflation as an
increasing threat to social harmony between the large and
growing expatriate population and the increasingly small
Qatari minority. Should U.S. policymakers wish to dissuade
Qatar from the leadership's revaluation course, offering
viable solutions to Qatar's current inflation problem will be
key. Ultimately, it would probably take a phone call from
Treasury Secretary Paulson to HBJ to cause the GOQ to take
pause.

Bio Note
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8. (SBU) Besides serving as economic adviser to the Amir,
Ibrahim Al Ibrahim is also vice-chairman of the board of
directors of RasGas and a member of the boards of Qatar
Petroleum, Qatargas, and Industries Qatar. He was recently
appointed secretary general for development and planning
and is also a member of a committee set up by the Amir to
evaluate ways to tackle inflation. Prior to working in
Qatar, Ibrahim was an associate business professor at the
University of Hawaii, director of economic development at
Arab Petroleum Exporting Countries, and senior economist at
Oxford Institute for Energy Studies. He holds a PhD in
business administration from New York University.
RATNEY