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Sun 7 Dec 2008 07:02 AM

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Qatar urged to cut ties to US dollar

Economist linked to central bank says currency reform needed to stop exchange rate distortions.

Qatar should reform its currency to prevent exchange rate distortions caused by the riyal's peg to the dollar, an economist linked to Qatar's central bank said in a column published on Saturday.

"High and rising inflation in Qatar has caused the dollar peg system to become increasingly unstable," Syed A. Basher, a research economist at the central bank, said in the column reflecting his personal views, published in the daily Gulf News.

Basher said that from 2002 to the first half of 2008, the Qatari riyal depreciated about 29 percent in nominal terms against a basket of seven most important trading partners' currencies.

"This is simply because since the start of 2002 the US dollar has been depreciating against major vehicle currencies [e.g. euro, yen, and British pound]; thus due to the fixed exchange rate between the Qatari riyal and US dollar, the riyal is also depreciating against these vehicle currencies," he said.

"Ideally, in a stable economic environment both nominal and real exchange rates should move together," Basher said, adding that the two rates had moved in opposite directions because Qatar had a lower inflation than its trade partners.

"Based on this evidence, we can see that the existing exchange rate system in Qatar is unsustainable and thus immediate exchange rate reform is needed to align the riyal's nominal and real exchange rates," he said.

"For the last five years the Qatari economy has been enjoying resilient growth and a robust current account surplus, and therefore the nominal exchange rate must rise [appreciate] to insulate the real economy from shocks such as inflation." (Reuters)

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