Qatar plans to issue local currency sovereign bonds with three- and five-year maturities this year as part of efforts to build a yield curve for its debt market, an International Monetary Fund official said on Monday.

"They are going to issue three- and five-year domestic government bonds in 2013. They did not mention the timing of the issuance but there will be more than one issuance and the objective is to build a domestic sovereign yield curve," A.Prasad, the IMF's mission chief for Qatar, told Reuters.

He said the government did not disclose any specific amounts or other details of the bond sales to the IMF, which concluded regular consultations with Qatar earlier this month.

The bond issues could be a big step in the efforts of the tiny, gas-rich state to attract investment to its debt market, helping fund its massive infrastructure building plans while increasing its attractiveness as a regional financial centre.

Qatar has issued local currency bonds before: in January 2011, the central bank (QCB) issued a QR50 billion ($14 billion), three-year bond directly to local banks as a step to drain excess money from the banking system.

However, "the previous bonds were one-off issuances, and there has been no secondary market trading. Now, they want to build the domestic bond yield curve, so the new issuances will be tradable instruments," Prasad said.

Central bank officials could not be reached to comment. Prasad said the timing of this year's bond issues was likely to revolve around maturities of previously issued debt, so that Qatar could refinance the debt.

Some QR19 billion worth of short-term government notes of up to one year are set to mature this year, according to Thomson Reuters data.

Qatari authorities did not mention any plans for issuing dollar-denominated sovereign debt in 2013, Prasad said.

In recent months, Qatar-related debt denominated in dollars has drawn strong demand from international investors; majority state-owned Qatar Telecom saw heavy bids for a $1 billion bond sale last week.

This year's sovereign riyal bonds could attract similar interest given the riyal's peg to the US dollar and the possibility they would offer a higher return than dollar bonds.

An IMF report this month found the riyal was "undervalued" in terms of its real effective exchange rate against a range of other currencies; this is not likely to prompt Qatar to change the peg - especially since the IMF predicted the undervaluation would narrow over the medium term - but the inherent firmness of the riyal is positive for investors.

A big issue for Qatar's small but wealthy domestic economy is how to prevent big flows of money from destabilising the banking system.

In addition to the bond issue in 2011, the central bank launched monthly auctions of 91-, 182- and 273-day Treasury bills in May and August that year to soak up excess funds.

As a result, available liquidity dropped to a mere QR5.8 billion at the end of 2011 from QR73.2 billion a year before, the QCB has said.

But liquidity began building again last year with bank deposits soaring to a record QR448.9 billion in November, a 30.5 per cent jump from a year ago, latest QCB data show.

Loose liquidity has pushed the average three-month interbank lending rate down to 0.76 per cent in November, the lowest since June 2011, from a March peak of 1.75 per cent. Meanwhile, funds parked at the QCB's low-yielding deposit facility more than doubled in May-November 2012 from the previous seven months.

The QCB has been draining a constant QR4 billion in its monthly T-bill auctions, but the IMF says the central bank must now start managing liquidity fluctuations more finely through more flexible open market operations.

"We have recommended to the QCB that...if there are liquidity movements and fluctuations in the short term, it would be useful to have a reverse repo instrument to absorb liquidity; they see merit in these suggestions," Prasad said.-Reuters