While the Saudi-led campaign to starve Qatar's citizens may end up short of the target, with both Turkey and Iran volunteering to provide needed staples to the isolated Gulf nation while local entrepreneurs have started a cow paradropping campaign to offset the decline in milk imports, a more pressing problem has emerged: Qatar's financial system is running out of dollars. As Bloomberg reports, several Qatari banks have boosted interest rates on dollar deposits to shore up liquidity as the Saudi-led campaign to isolate the gas-rich Arab state intensifies.

To boost their hard currency reserves, Qatar banks are now offering a premium of as much as 100 basis points over LIBOR to attract dollars from regional banks, some 80 bps higher compared to the rate they offered prior to last week's crisis. A similar picture is visible on the 3-Month QIBOR, or Qatar Interbank Rate, which has surged to 2.3% as of Tuesday.

According to the central bank, at the end of April, Qatar's banks held 21.4% of their customer deposits in foreign currency. Non-resident deposits made up 24% of the overall deposits of 781 billion riyals ($213 billion). A separate estimate from SICO Bahrain, Qatari banks have around 60 billion riyals ($16.5 billion) in funding in the form of customer and interbank deposits from other Gulf states. Most of this could eventually be withdrawn if the crisis continues.

Adding to concerns of a monetary blockade, Bloomberg also reports that some banks in neighboring countries have been cutting their exposure to Qatar amid concerns of a widening of the blockade.

In a Tuesday report, Capital Economics' Jason Tuvey wrote that while banks are unlikely “to be thrust into a crisis,” borrowing costs “look set to rise and banks are likely to become more cautious with their lending,” “If local banks struggle to rollover their external debts, they could be forced to shrink their balance sheets and tighten credit conditions." For now the local central bank has said that Qatar's banking system is functioning without disruption, although market indicators suggest liquidity stress is rising. Likewise, Qatar National Bank, the biggest lender in the Middle East, said it didn’t see any “significant” rate increases since the standoff began, according to statement emailed to Bloomberg on Tuesday.

The good news for Qatar - the world's wealthiest nation on a GDP/capita basis - is that it has enough financial firepower to withstand a prolonged financial siege, and defend its currency and economy, Finance Minister Ali Shareef Al Emadi told CNBC in an interview broadcast Monday. Al Emadi played down the impact of the crisis on the country, saying the plunge in Qatari assets last week was a “normal” reaction to the standoff.

While so far there has been no suggestion that Qatar would commence liquidating its reserves, investors have already begun selling Qatari assets and speculating against the riyal, concerned how long Qatar can weather the crisis without having to devalue its currency or sell any of its global holdings. Qatar’s 12-month riyal forwards closed at 588 basis points against the dollar on Monday, the highest level since at least 2001, according to data compiled by Bloomberg. Rates eased slightly to about 500 basis points on Tuesday.

Despite the spike in interbank rates, S&P is confident that Qatari banks are strong enough to survive the pullout of all Gulf money and then some. The ratings agency ran two hypothetical scenarios of capital flight, and concluded that Qatar’s lenders could survive the withdrawal of all Gulf deposits plus a quarter of the remaining foreign funds the banks keep. Still, that did not prevent S&P from lowering Qatar’s long-term rating by one level to AA- last week.

Separately, Reuters reports, that the dollar shortage has also spread over to money exchange houses in Qatar on Sunday, making it harder for worried foreign workers to send money home.

"We have no dollars because there is no shipment or transportation from the United Arab Emirates. There is no stock," said a dealer at the Qatar-UAE Exchange House in Doha's City Center mall. "The shipment is blocked from the UAE" the dealer added, although it was not quite clear if it was physical cash that was being transported.

Other exchange houses in Doha also told Reuters they had no supplies of dollars. At Qatar-UAE Exchange, dozens of people - some of the foreigners who comprise nearly 90 percent of the population of 2.6 million - waited quietly in line to change money or make remittances to their home countries.

"I spoke with my wife this morning. She said, 'Send your savings to me now.' I am not panicked but my family are scared," said John Vincent, an air-conditioning repairman from the Philippines.

"I sent 2,000 riyals ($550) home but I have some more savings left here in Qatar. I will see what the situation is in coming days before I decide what to do."

Sudhir Kumar Shetty, president of UAE Exchange, which has eight branches in Qatar, said his firm was continuing to handle remittances and currency buying as usual in that country. He said the firm hadn't seen any major change in remittance volumes due to the diplomatic tension. But he added that dollar supply was not meeting demand in Qatar and attributed this partly to flows of the U.S. currency from other Gulf countries being disrupted. "Everywhere, all the banks and exchange houses, there are no dollars. All the exchange houses are trying to get currencies from other countries," the dealer at Qatar-UAE Exchange said, adding that his firm was hoping for a shipment from Hong Kong.

For now most Western banks with a presence in Qatar have continued business as normal, partly because they did not want to lose out on billions of dollars of building projects which Qatar plans before it hosts the soccer World Cup in 2022. But other Western banks have halted new Qatar business including interbank and syndicated lending, while continuing to service existing business, banking sources said, declining to be named because of political sensitivities.

"Everybody is shocked - they're not worried about Qatar's credit, they're worried about compliance and the risk that the local sanctions could be escalated to an international level," said one foreign banker in the region.

In a worst case scenario, bankers expect Qatari banks to borrow from the central bank's repo facility if they become short of funds. However, central bank rules limit the size of the repos to 2% of each bank's private sector deposits. Bankers speculate the central bank may lift this cap although the central bank did not respond to Reuters requests for comment.