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September 9, 2017

Qatar: The cost of supporting terrorists

Dr. Mohamed Elmasry

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According to a Bloomberg News survey of economists in mid-August, Qatar's economy will expand at the slowest pace since 1995, as the impact of the Saudi Arabia - led boycott is felt on trade and investor confidence.

On June 5, Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut ties with Qatar, accusing it of destabilizing the region through its ties to Islamist extremists -  including the Muslim Brotherhood, al-Qaida, and ISIS.

The four countries in addition to Iraq, Syria, Yemen and Libya suffered from Qatar-supported terrorism since 2011.

In 2013 and 2014 Qatar signed an agreement with Saudi Arabia to stop that support, but negated that promise soon after.

Qatar’s economy will lose billions of dollars—an $80 billion trade exchange advantage in the Gulf region will be withdrawn because it is directly linked to Saudi trade.

With the embargo encompassing transport, Qatar carriers are facing the loss of at least 50 flights with Saudi Arabia alone.

Moreover, the boycotts are having a ripple effect throughout the Qatari economy, according to economist Dr. Salim Bajaaja.

“Saudi severing of ties with Qatar, which consequentially resulted in other influential boycotts, will reflect negatively on Doha’s economic movement—the embargo is a major economic setback as it freezes services previously provided by GCC countries,” Dr. Bajaaja said.

The embargo is also affecting Qatar imports of materials that are largely used to support local infrastructure, resulting in rising costs, which could cripple Qatari development.

Dr. Bajaaja noted that the boycott will end related projects, increasing Qatar’s expenses and creating a deficit in the Qatar's budget for 2017, building up debt.

Moreover, imports and foreign deposits have plummeted and interest rates soared, exacerbating a broader slowdown, due to lower global energy prices.

Qatari banks are facing funding pressure, as foreign customers worried about Doha’s intensifying spat with its Arab neighbors withdraw deposits.

In an August 15, 2017 report, The Wall Street Journal said that Qatari banks are facing pressure with funding sources, especially with the withdrawal of foreign deposits due to the concern of foreign customers over the Qatari crisis.

Qatar's foreign deposits fell by eight percent in July to $43 billion, after falling by a similar rate in June, according to Qatar Central Bank's monthly data.

Deposits from outside the country accounted for about 20 percent of total bank deposits in July, down from more than 24 percent in May.

Qatari bank loans from banks abroad fell to about $12.7 billion in June as opposed to $14.2 billion in May. As a result of reduced deposits, Qatari banks have been turning to the government to make up the shortfall, but the government has asked local banks to resort to international markets for funding and only go to the government as a last resort. At the same time, the government is also bleeding cash: it has withdrawn 60 billion Qatari Riyals (USD 16 billion) from its deposits and borrowed 10 billion Qatari Riyals (USD 2.65 billion), as of early August.

Meanwhile, several banks, and foreign exchange companies in the Gulf have refused to exchange Qatari riyals and have also stopped accepting them, following the economic blockade announced by Saudi Arabia and its Arab allies.

On 30 June, it was reported in the press that several British banks announced that they stopped trading the Qatari Riyals.

The currency blockade has caught many people off guard as foreign exchanges in many countries have also refused to exchange riyals, citing a lack of demand for the currency. Rating agencies have lowered Qatar's credit rating and put it on "negative watch" as a result of the boycott.

Qatar will face higher costs in other areas, too.

The government has been borrowing at home and abroad to help finance some $200 billion of infrastructure spending as it prepares to host the World Cup soccer tournament in 2022. A drop in Qatari bond prices in mid-August suggested the borrowing will become more expensive - possibly slowing some projects.

The damage to the Qatar economy as a result of the boycott is having a ripple effect, according to economist Fadel Bouneenen.

Mr. Bouneenen said the boycott will force Saudi companies operating in infrastructure projects in Qatar to exit or stop work. But it is in the financial markets – which affect all other economic activity - where Qatar is immediately feeling the effects of the boycott, according to Mr. Bouneenen.

“The economic impact of this boycott will affect local currency and challenge central bank’s reserves to maintain the dollar-pegged price, especially as opportunists cast speculations on future rates in hopes of cashing in on them.”

He added that the Central Bank of Qatar will be limited, especially after severing cooperation established with regional central banks, the Saudi Arabian Monetary Agency and the UAE Central Bank.

By early July Qatar's stock market had sunk as much as 3.1 percent, bringing its total losses to 11.9 percent since 5 June. The Qatari Riyal exchange rate against the US dollar has been severely affected as the Qatar Central Bank pegged the Qatari Riyal at 3.64 as of 5 July.

Despite Qatari government officials continuously posturing in the international media, claiming to “stand their ground” against the pressures of the boycott, with the effects of the initial damage to the Qatari economy taking hold, it's not surprising that efforts are being made behind the scenes to end the boycott.

On June 6th 2017, The US State Department said Qatar had made progress on stemming the funding of terrorists but that there was more work to be done.

Then a little more than a month later – in mid-July - US Secretary of State Rex Tillerson announced an agreement with Qatar targeting the financing of extremist groups

Secretary Tillerson, who went to the Middle East in an effort to help resolve Qatar's impasse with Saudi Arabia, the United Arab Emirates, Bahrain and Egypt, said the Doha government had been "reasonable" in the ongoing dispute.

But despite both Washington and Doha hailing the deal, Qatar's four Arab neighbors described it as "insufficient" and warned that commitments made by Qatari authorities "cannot be trusted."

A joint statement carried by the Saudi state news agency SPA said the four states would "carefully monitor the seriousness of Qatari authorities in combating all forms of financing, supporting and harboring terrorism.

Meanwhile, in its annual "Country Reports on Terrorism", released in mid-July, The US Department of State praised Qatar's "strong partnership" in the fight against "terrorism". The report also stated that Qatar has made "significant progress" in combating "terrorist" financing but "terrorist financiers within the country are still able to exploit Qatar's informal financial system".

Time for sure is not on the side of Qatar.

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