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How the establishment of Qatari riyal has contributed to economic growth.

Dr Abdulaziz A al-Ghorairi is senior vice-president and group chief economist at Commercial Bank.

By Dr Abdulaziz A al-Ghorairi

The development of the banking system in Qatar has been integral to country's rapid economic growth in a variety of ways. This week, we will focus on an important part of Qatar's economic infrastructure: the establishment of the Qatari riyal as our national currency.

It is easy to forget that like many other Gulf states, Qatar did not have its own national currency until relatively recently. The Indian rupee was the currency used up until the mid-1950s, when it was replaced by the Gulf rupee issued by the Reserve Bank of India and equivalent to the Indian rupee. In 1965, a Gulf Currency Agreement was signed by the rulers of Qatar, Dubai, Abu Dhabi and Bahrain in order to unify the currency of the region but due to delays in implementation, Qatar and Dubai took measures to evolve their own currency and signed the Qatar-Dubai Agreement in 1966.

The currency came to be known as the Qatar-Dubai riyal and a board was set up to take charge of the issuance and redemption of bank notes and coins. The merger of Dubai with the United Arab Emirates and the creation of the Dirham in 1973 resulted in the dissolution of the Qatar-Dubai Currency Board and the assets and liabilities were transferred to the Qatari government. The Qatar Monetary Agency (QMA) was subsequently established and Qatar began issuing the Qatari riyal separate from Dubai in May 1973.

The creation of QMA (later inherited by the Qatar Central Bank) coincided with a huge influx of oil revenues due to the quadrupling of oil prices in 1973, giving QMA a position of prominence and it made use of the new economic situation effectively by developing methods and procedures to control the banking sector and develop the economy.

The pegging of the Qatari riyal to the US dollar in 1975 has limited Qatar's monetary policy to mirroring that of the US Federal Reserve. Since 1980, Qatar has maintained its peg to the US dollar at QR3.64 per US dollar. As the US dollar began its appreciation, the riyal has also appreciated against the currencies of almost all Qatar's trade partners. However, also because of the currency peg, Qatar has imported significant inflationary pressures from abroad when the US economy deteriorates and the dollar declines. The Qatari government and QCB are limited in their power against such an eventuality as long as the riyal is pegged to the US dollar.

What Qatar loses in monetary policy autonomy and imports in US inflation, it gains in the advantages and confidence that come with stability. A fixed exchange rate has kept the riyal stable, reassuring investors, and the QCB Governor HE Sheikh Abdullah bin Saud al-Thani has stated that the dollar peg provides a credible anchor for monetary policy as almost all of Qatar's export contracts and invoicing are done in US dollar and so a stable exchange rate renders stability to Qatar's foreign export earnings, the main component of government revenue. To conclude, although linkage to US dollar has at times appeared unfavourable to Qatar, the management of the country's financial system has proved over the years to be effective and helped maintain a steady and impressive growth of the economy.

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Publication:Gulf Times (Doha, Qatar)
Geographic Code:7QATA
Date:Jun 19, 2016
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