Govt studies new steps to cut inflation

Govt studies new steps to cut inflation
Published: GULF-TIMES Tuesday, 29 January, 2008, 02:39 AM Doha Time

By Anwar Elshamy

QATAR yesterday signalled that it would consider de-pegging the riyal from the dollar or revaluing the currency in its battle to contain soaring inflation.
“Qatar is a tiny state, which has to peg its currency either to a leading international currency or a basket of currencies. However, pegging the riyal to only one currency has many disadvantages, especially if that country adopts monetary policies that clash with ours. For that reason, pegging to a basket of currencies is preferred by experts,” Ibrahim al-Ibrahim, economic adviser to HH the Emir, said.
Speaking at a seminar at the Qatar Chamber of Commerce and Industry (QCCI), al-Ibrahim, who is also a member of the Inflation Combating Committee, said the government had been studying a range of measures to address inflation.
“These include de-pegging from the US dollar, revaluation of the riyal, increase in salaries and subsidising food items,” he said. However, he emphasised that there was no urgency either in de-pegging or revaluing the currency as both are “problematic moves”.
Al-Ibrahim said the huge government expenditure was the main reason behind the high inflation and the authorities were determined to bring it down.
“Our expenditure has been too huge compared to the ability of the economy to assimilate it. We are trying to reduce expenditure without hurting basic services like education, healthcare and infrastructure,” he said.
“The government seeks to limit expenditure as one of the moves. The Qatar Central Bank will be involved in the government moves to combat the rising inflation by issuing bonds.”
He said the government was very much aware of the burden of inflation on the residents. “If the current measures proved to be inadequate, we will seek others.”
Answering a question, the official said Qatar would keep the riyal pegged to the US dollar for the time being.
“De-pegging from the dollar is not an easy option. We are conducting studies on de-pegging but this does not necessarily mean that we will do that. We firstly need to have financial institutions which can effectively deal with the repercussions of any such move.”
He said the revaluation of the riyal should be considered in the long term.
“Pegging to the dollar should not be a taboo. I believe that the exchange rate of the riyal should be reviewed on the long term in a way which takes into account the current developments. When a single Gulf currency is launched, the situation will be different and the member countries will have more freedom to move in this area,” he explained.
On the rising cost of living in Qatar, he said that prices had increased by 57% during the last four years.
“High inflation became acute only after 2003. Inflation has been triggered by an increase in imports, salaries and high demand for real estate.”
He admitted that inflation rates were high and that the measures taken so far had proved ineffective in bringing it down. “Though we are trying hard to curb inflation, the problem is still persistent. To fill the shortage of supply in real estate, we have come up with the Barwa project to provide apartments at affordable rents.”
The official pointed out that all government departments had not been able to meet the challenges arising out of the phenomenal growth achieved by Qatar during the last few years.
“We need to increase the efficiency of all the government departments so that they can deal with the inflation problem effectively.”
On the nation’s vision for development, al-Ibrahim, who is also chairman of the General Secretariat for Developmental Planning, said the plan for development had been completed and it would be approved soon.
“Regretfully, Qatar had no development vision in the past. But we have now completed the preparation of the country’s development plan which takes into consideration the future of the country and its residents,” he said.
*Qatar’s banks increased domestic lending by an annual 76% in October, compared with 66% in September, as money poured into the economy from oil and gas sales, adds Bloomberg.
M2 money supply growth, an indicator of future inflation, increased to 33% in October from 29% in September, the central bank said in data posted on its website yesterday.
“Those are big numbers, and probably not good news for inflation,’’ said Giyas Gokkent, head of research at National Bank of Abu Dhabi, the emirate’s second-largest bank by market value. ``They have plans to issue bonds to soak up some liquidity and they recently increased the reserve requirement. They may increase it further.’’
Qatar has the highest inflation among its Gulf Arab neighbors, with price-growth accelerating to 13.7% in the third quarter.