## cr1789

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### Oil and Non-Oil Revenue in Qatar
- Hydrocarbon expansion and dependence:
  - Natural gas production increased from "2.2 million tons per year in 1997" to "92 million tons in 2013".
  - Qatar is the "world largest liquefied natural gas (LNG) exporter" and accounts for "one third of the global LNG trade".
  - Hydrocarbon exports represent "on average 80 percent of the country’s exports of goods and services over the past twenty years."
- Hydrocarbon revenue shares:
  - Average share of hydrocarbon revenue in total government revenue:
    - "89.2 percent" in 1994-2003.
    - "86 percent" in 2004-2013.
  - Non-oil (non-hydrocarbon) revenue shares:
    - Qatar: estimated to have "remained at about 30 percent in 2016".
    - UAE: non-hydrocarbon revenue "accounted for more than 50 percent of government revenue in the 1990s" and is "estimated at about 54 percent" in 2016.

### Fiscal Environment, Revenue Measures, and National Development Strategy (NDS)
- Fiscal shocks and balances:
  - "Total fiscal revenues declined by 25 percent in 2015, compared to 2014."
  - Total fiscal revenues are "estimated to have further declined by 58 percent in 2016, compared to the previous year."
  - Central government fiscal balance:
    - "Surplus of 12.3 percent of GDP in 2014."
    - "Surplus of 1.2 percent in 2015."
    - "Turned into a deficit (for the first time in fifteen years) estimated at 9 percent of GDP in 2016."
  - "The fiscal deficit has been financed mainly through domestic and foreign borrowing."
- Revenue measures implemented and planned:
  - Fuel pricing:
    - Gasoline price increased by about 30 percent in 2016, compared to 2015.
    - Fuel prices are being assessed and adjusted on a monthly basis.
    - Fuel price measure generated additional savings of about QR 1 billion (or 0.2 percent of GDP) in 2016, according to authorities’ estimates.
    - An overall figure: "1.5 billion (or 0.3 percent of GDP) of additional revenues in 2016."
  - Other measures:
    - Excises on tobacco and sugary drinks planned for 2017.
    - Increase some public fees and charge for public services (including vehicle plates).
    - Committed to implementing VAT at a rate of 5 percent, starting in 2018; VAT drafting and preparation underway; tax department to take form of an independent agency under the ministry of finance.
- Fiscal context for NDS:
  - First NDS (2011-16) premised on average oil price assumption of US$86; oil price averaged about US$88 during this period.
  - Second NDS (2017-22) fiscal environment: oil prices are projected to average about US$57 during 2017-22.
  - Authorities announced intention not to draw down sovereign wealth fund savings; need to enhance collection of non-hydrocarbon revenues to finance the second NDS.
  - Second NDS focus: enhancing competitiveness, productivity and private sector growth; improving education quality; increasing productivity; promoting private sector role.

### Fiscal sustainability and Permanent Income Hypothesis (PIH) analysis
- PIH framework used to assess long-term fiscal sustainability and intergenerational equity.
- Baseline and gaps:
  - Under baseline assumptions, savings would be broadly adequate by 2021 to maintain constant real per capita spending.
  - Gap between projected non-hydrocarbon primary fiscal balance and the non-hydrocarbon primary fiscal balance consistent with intergenerational equity estimated at 6 percentage points of non-oil GDP in 2016.
  - Targeted optimal non-hydrocarbon primary fiscal balance estimated at about 26 percent of non-hydrocarbon GDP in 2021; achieving this implies non-hydrocarbon revenue will have to double by 2021 compared to 2016.
- Downside oil price scenario:
  - If oil prices remain around the 2016 average level ("about $43 per barrel") over the near and medium term, fiscal balance would deteriorate significantly relative to staff baseline projections.
  - Under the downside scenario, the gap between the non-hydrocarbon primary fiscal balance and its optimal position is estimated at 4 percentage points of non-oil GDP by 2021 (compared to 1 percentage point under the baseline).

### Tax system structure and current tax revenue composition
- Major features:
  - No personal income taxation.
  - No tax on profits of business entities wholly-owned by Qatari individuals.
  - Broad-based consumption tax non-existent; few excise duties mainly on tobacco and alcoholic products (also subject to higher import duties).
  - Corporate income tax and customs duties constitute the pillar of Qatar’s tax system.
- Corporate income tax details:
  - Charged only on non-Qatari and non-GCC companies.
  - Taxable income from non-oil companies taxed at flat rate of 10 percent.
  - Rate higher for oil-related activities at 35 percent (minimum; precise rate specified in individual contracts).
  - Income tax law includes a withholding tax applying to certain payments to non-residents not connected with a permanent residence in Qatar.
- Customs:
  - GCC Common External Tariff (CET) single rate of 5 percent, with a large range of exemptions.
- Tax revenue magnitudes:
  - For fiscal year 2014/2015, tax revenues represent about 10 percent of total (general) government revenue.
  - Overall, tax revenues estimated to represent around 5 percent of GDP in 2015.
  - Taxes from oil and gas activities represent almost 90 percent of total tax revenue in 2015.
  - Corporate income tax accounts for the large share of total tax revenue.

### Opportunities to enhance non-hydrocarbon revenues
- Fuel price policy:
  - Fuel prices remain low in Qatar compared to international prices and some GCC peers.
  - Recommendation: align domestic prices with global oil prices and move toward an automatic adjustment mechanism allowing domestic fuel prices to systematically evolve with global oil market developments.
  - Complement with targeted support measures for vulnerable households affected by fuel price hikes.
- Corporate income tax and tax base:
  - Exemption of domestic and GCC companies from income tax reduces tax revenue.
  - Corporate income tax rates relatively low compared to some GCC countries.
  - Aligning tax rates with other GCC countries and broadening the tax base to include GCC companies could generate additional revenue; adopting a broader business tax system (including corporate and individual businesses) could generate up to 2 percent of GDP of additional fiscal revenues (see the 2016 GCC tax paper cited in source).
- Other taxes and duties:
  - Social security: employee’s contribution rate is 5 percent (same as UAE); employer’s contribution rate is slightly higher in Kuwait, Oman, and the UAE.
  - Stamp duty on transfer of land or property: currently payable at rate of 0.25 percent of the value of the property in Qatar; rates are 1.5 to 3 percent in Bahrain, and 3 percent in Oman. Government recently considered increasing the stamp duty rate.
- Additional sources:
  - None of the GCC countries, including Qatar, levies taxes on personal income; introduction of a personal income tax could be a potential additional revenue source.

### Reform agenda and design principles for tax reform
- Short- and medium-term reform steps highlighted:
  - Further adjustment and automatic linking of domestic fuel prices to global prices.
  - Implementation of excise duties on tobacco and sugary drinks (planned for 2017).
  - Implementation of VAT at a rate of 5 percent (committed, starting in 2018).
  - Broadening corporate income tax base and adjusting rates, potentially including GCC companies.
  - Exploring introduction of personal income tax and raising existing duties (e.g., stamp duty).
  - Implement targeted support measures for vulnerable households affected by tax and price adjustments.
- Policy design principles and institutional needs:
  - Introduce new taxes in the short term with low rates to signal commitment to a more developed tax system.
  - Ensure transparency and communication; sequence reforms to allow businesses and individuals time to adjust; underpin reforms with necessary infrastructures.
  - Pay attention to potential impacts on economic activity:
    - Increasing corporate tax rates and/or broadening the corporate income tax base can discourage private investment.
    - Introducing a personal income tax could have distributional effects and reduce net disposable income, potentially lowering private consumption.
  - VAT and excise outcomes depend on the tax base; minimize exemption/zero ratings where possible; use targeted measures if needed to protect the most vulnerable.
  - Building capacity and institutions will be challenging if the tax base is significantly broadened because of dealing with a larger population of taxpayers.

### Financial stability and banking liquidity overview
- Macro-financial context:
  - Qatar faces lower oil prices from a position of strength but with remaining financial risks.
  - Deficit financing in 2016 contributed to liquidity pressures and tightening monetary and financial conditions.
  - December hike of the Fed’s policy rate is an additional drag on activity; increases in foreign liabilities have raised inward spillover risks.
- Banking sector soundness indicators (Sep-16):
  - Regulatory Tier 1 capital to risk-weighted assets: 15.0 percent (Sep-16).
  - Non-Performing Loans/Capital: 1.2 (Sep-16).
  - Nonperforming loans to total loans: 1.2 percent (Sep-16).
  - Bank provisions to nonperforming loans: 109.2 (Sep-16).
  - Return on assets: 1.3 (Sep-16).
  - Return on equity: 11.4 (Sep-16).
  - Liquid assets to total assets: 27.8 (Sep-16).
  - Loans as a percentage of customers deposits: 114.9 (Sep-16).
  - Foreign currency assets to liabilities: 81.6 (Sep-16).
- Key liquidity developments and vulnerabilities:
  - Banking sector remains healthy and well-capitalized but liquidity buffers have decreased since 2013.
  - Foreign funding of commercial banks reached about 34 percent of total liabilities in November 2016, with a shift toward shorter-term liabilities.
  - Aggregate loan-to-deposit ratio is relatively high at 114.9.
  - Banking sector liquidity significantly dependent on hydrocarbon sector flows; correlation between deposits/credit and hydrocarbon prices persists.
  - Bank assets in Qatar amount to about 200 percent of GDP.
  - QCB perception survey: more than 50 percent of respondent banks believed liquidity and credit risks will increase in 2017; more than 70 percent considered deposit withdrawals from wholesale depositors a major liquidity risk.
- Recent liquidity dynamics:
  - Private sector credit: 10.4 percent y-o-y in November 2016.
  - Interbank market transactions lower in 2016; total absorption of liquidity decreased from almost QR 42 billion in 2014 to QR 7 billion by end-October 2016.
  - Treasury bills injected QR 8 billion in 2016 (end-October); treasury bonds absorbed QR 11 billion; QR 1.6 billion held through reserve requirements (the lowest in recent years).
  - Banks offset lower government deposits by attracting nonresident deposits and increasing wholesale funding; foreign liabilities increased substantially in 2016.

### Liquidity management tools, regulations, and proposals
- Main instruments used by QCB:
  - Reserve requirement ratio (RR):
    - Calculated over the average of commercial banks’ foreign and domestic deposit held during the previous month.
    - Required reserves unremunerated, maintained daily; RR raised between September 2007 and April 2008 from 2.75 to 4.75 percent and has remained unchanged since then.
  - Qatar Money Market Rate (QMR) standing facility.
  - Treasury bonds and T-bills extensively used in 2015 and 2016.
  - Repurchase agreements (Repos):
    - QCB enters into repos with commercial banks—backed by government securities—but does not conduct reverse repos; designed only to inject liquidity.
    - Repo rate equal to QMR credit rate since 2011; in December 2016, repo rate reduced to 2.25 percent from 4.5 percent and maturity changed from 14 to 7 days.
  - Public deposit management:
    - Government and semi-government institutions accounted for almost 34 percent of total resident deposits in December 2016.
    - Government deposits not under direct control of QCB and generally not part of QCB’s liquidity management framework.
  - Macroprudential instruments (MaP):
    - Implemented as part of Basel III (leverage ratio, liquidity coverage ratio).
    - Personal lending regulation ceilings:
      - Ceiling for individual loans to Qatari citizens: QR 2 million and 6 years.
      - Ceiling for non-Qatari residents: QR 400,000 and 4 years.
    - 2016: maximum ceiling for net open positions set at 25 percent of capital and reserves for U.S. dollars and 5 percent of capital and reserves for other currencies.
    - A new loan-to-deposit ratio requirement announced to be set at 100 percent by end-2017; remains under discussion.
- Recommended policy actions (implicit in text):
  - Strengthen liquidity forecasting frameworks to manage evolving pressures, especially under scenarios of further reductions in government deposits and US policy rate increases.
  - Monitor and manage reliance on short-term foreign wholesale funding given higher costs and profitability pressures.
  - Use combination of monetary instruments (QMR, T-bills/bonds, repos) and macroprudential tools to contain liquidity risk and limit reliance on wholesale funding.
  - Coordinate public deposit management and fiscal financing plans with QCB’s liquidity framework.

### Local Currency Government Securities Market Developments (Box 1)
- Market purpose and institution:
  - Developing local currency debt market priority to reduce reliance on foreign funding and prepare for FIFA 2022 World Cup.
  - Domestic debt management responsibility de facto assigned to QCB; institutional framework between MoF and QCB not published.
- Instruments, maturities, and issuance practice:
  - Local currency government debt mainly Treasury bonds and Treasury bills.
  - T-bills introduced in 2011; quarterly T-bond auction introduced in 2013.
  - Maturities used: medium (3 years) to long-term (10-years).
  - Both conventional and Shariah-compliant securities issued; rates fixed by QCB.
  - Sukuk represent about one third of the total.
  - Secondary market is not very active.
- Treasury Bonds issued (QR Million) — issuances since 2013:
  - 2013 Total: 17,200
    - Conventional total 11,475; Sukuks total 5,725.
    - By maturity: 3-year 4,000; 5-year 3,125; 7-year 7,225; 10-year 2,850.
  - 2014 Total: 22,000
    - Conventional total 13,975; Sukuks total 8,025.
    - By maturity: 3-year 7,450; 5-year 7,725; 7-year 3,700; 10-year 3,125.
  - 2015 Total: 32,000
    - Conventional total 17,000; Sukuks total 15,000.
    - By maturity: 3-year 19,200; 5-year 10,900; 7-year 1,900.
  - 2016 Total: 16,000
    - Conventional total 12,000; Sukuks total 4,000.
    - By maturity: 3-year 8,000; 5-year 8,000.
  - Outstanding and aggregation:
    - Outstanding from pre-2013 issuances: 24,276
    - Maturity of bonds issued since 2013: 8,000
    - Outstanding as at end December 2016: 103,476
    - Note: Outstanding as at end December 2016 derived as outstanding from pre-2013 issuances plus issuances since 2013 minus maturities since 2013.
- Auction and secondary market features:
  - Auctions subject to limited amounts on offer; initial offers: QR 2 billion for three-month maturity and QR1 billion for six and nine-month maturities.
  - Adjustments to offered amounts made as liquidity conditions evolved.
  - All banks eligible to bid; multiple price bid auction; no limit on bid size by a single bank.
  - Since December 2011, all T-bills must be listed at Qatar Exchange (QE); secondary trading on QE required; over-the-counter trading not allowed.
  - Three-six-nine-month T-bills issued to Islamic banks not tradable but can be used as collateral with QCB for repo transactions.
  - Foreign investor trading in secondary market negligible.
  - Secondary market regulated and supervised by the Qatar Financial Market Authority.
- Liquidity forecasting and management notes:
  - T-bill issuances have been successful in absorbing liquidity in the past; yields increased as liquidity pressures intensified.
  - Cancellation of auctions in Q1 2016 led to a decline in yields; yields rebounded when auctions reestablished.
  - Liquidity forecasting is essential to determine size and timing of liquidity operations; central bank balance sheet forecasting required.
  - Main autonomous supply determinants to forecast:
    - Net foreign assets (NFA): major component; dependent on central bank FX sales/purchases and government FX inflows from hydrocarbon exports.
    - Government deposits: multi-treasury account system; movements significantly alter liquidity.
    - Currency in circulation: short-term transactional drivers and seasonal patterns.
  - Demand side of reserves:
    - Required Reserves (RR) based on previous month’s deposit balances.
    - Excess Reserves (ER) driven by low interest rates, bank liquidity practices, and precautionary buffers.
  - Accurate, timely data and regular review of forecast errors critical for liquidity forecasts.

### Empirical link between lending rates and liquidity indicators (sample 2007–2016)
- Sample and model:
  - Sample of 13 Qatari banks (data available in Fitch) for 2007–2016.
  - OLS explains about 83 percent of bank-by-bank variation in lending rates (R-squared 0.83; N 33).
- Estimated effects (coefficients and standard errors):
  - Deposit rate: OLS 1.75 (0.236) **; GLS 1.84 (0.164) **
  - Log(assets): OLS -0.006 (0.003) *; GLS -0.007 (0.003) **
  - Loans to deposit ratio: OLS -0.039 (0.032); GLS -0.048 (0.02) **
  - Off balance sheet items to deposits ratio: OLS 0.002 (0.005); GLS 0.003 (0.0037)
  - Liquid assets to deposits ratio: OLS -0.002 (0.026); GLS -0.014 (0.014)
  - Loan loss provisions to total loans: OLS 2.55 (0.787) **; GLS 2.47 (0.641) **
  - Constant: OLS 0.11 (0.048) **; GLS 0.132 (0.03) **
  - Note: ** denotes significance at the 5% level and * denotes significance at the 10% level. Standard errors in parentheses.
- Interpretation:
  - Lending rates are very responsive to deposit rates.
  - Lending rates responsive to loan loss provisions and to the loan-to-deposit ratio.
  - Larger banks tend to have lower lending rates.
  - Lending rates do not respond in a statistically significant way to liquid assets ratio or off-balance sheet items.
  - Off-balance sheet activities represent a share of 48.5 percent of total banking sector assets.

### Policy recommendations and supervisory actions (Box 1 and liquidity sections)
- Transparency, governance, and debt strategy:
  - Publish legal basis for debt management policy and division of responsibilities between QCB and MoF.
  - Disclose debt management goals and instruments; publish an annual report presenting issuance results relative to stated strategies and targets.
  - Consider lengthening maturity profile of debt issuance to build a risk-free yield curve.
- Liquidity forecasting and data improvements:
  - Develop a liquidity forecast framework to manage timing and size of liquidity operations.
  - Strengthen coverage of balance of payments with respect to private non-bank financial account transactions.
  - Increase clarity on government transfers in and out of the sovereign wealth fund to improve liquidity forecast accuracy.
  - Improve transparency of fiscal accounts and data provision.
- Financial stability monitoring and funding risks:
  - Continue development of early warning systems (EWS) and Banking Stability Index (BSI).
  - Monitor buildup of liquidity risk related to short-term foreign borrowings funding medium- and long-term domestic lending.
  - Consider including off-balance sheet liabilities in prudential supervision framework.

*Prepared by Olumuyiwa S. Adedeji and Armand Fouejieu; March 3, 2017. Source: International Monetary Fund — cr1789 (Qatar).*

### 1. Oil and Non-Oil Revenue in Qatar and the UAE ____________________________________ 13

### 1. Oil and Non-Oil Revenue in Qatar and the UAE ____________________________________ 13

### A. Background and Context
- Hydrocarbon sector expansion:
  - Natural gas production increased from "2.2 million tons per year in 1997" to "92 million tons in 2013".
  - Qatar is described as the "world largest liquefied natural gas (LNG) exporter" and accounts for "one third of the global LNG trade".
  - Hydrocarbon exports represent "on average 80 percent of the country’s exports of goods and services over the past twenty years."
- Fiscal dependence on hydrocarbons:
  - Qatar is identified as "the most hydrocarbon-dependent economy among the GCC countries" based on hydrocarbon revenue shares.
  - Average share of hydrocarbon revenue in total government revenue:
    - "89.2 percent" in 1994-2003.
    - "86 percent" in 2004-2013.
  - Share of non-oil (non-hydrocarbon) revenue:
    - Estimated to have "remained at about 30 percent in 2016" in Qatar.
    - UAE: non-hydrocarbon revenue "accounted for more than 50 percent of government revenue in the 1990s" and is "estimated at about 54 percent" in 2016.

### B. Fiscal Environment and National Development Strategies
- Impact of oil-price shock on fiscal aggregates:
  - "Total fiscal revenues declined by 25 percent in 2015, compared to 2014."
  - Total fiscal revenues are "estimated to have further declined by 58 percent in 2016, compared to the previous year."
- Fiscal balances and financing:
  - Central government fiscal balance:
    - "Surplus of 12.3 percent of GDP in 2014."
    - "Surplus of 1.2 percent in 2015."
    - "Turned into a deficit (for the first time in fifteen years) estimated at 9 percent of GDP in 2016."
  - "The fiscal deficit has been financed mainly through domestic and foreign borrowing."
- Policy direction:
  - Authorities have initiated "fiscal revenue reforms" as part of fiscal consolidation, aimed at diversifying fiscal revenue sources given expectations of "oil prices will remain low in the medium term."
  - Measures taken include adjustments to utility pricing:
    - "The increase in some utilities prices. Prices of water and electricity have increased since October 2015 (for non-Qatari households and businesses), and price ranges are now indexed on consumption volumes."
    - "In addition, a new system of penalty has been established to reduce waste."
  - (Text notes authorities’ estimates on revenue generated by the utilities-price reform, but the figure is not provided in the supplied excerpt.)

### C. Key Findings and Implications
- Structural vulnerability:
  - High concentration of exports and fiscal revenue in hydrocarbons leaves Qatar highly exposed to hydrocarbon price shocks.
- Recent trend drivers:
  - The recent rise in the share of non-hydrocarbon revenue is primarily driven by a decline in hydrocarbon revenue following the sharp decline in oil price, rather than large absolute increases in non-hydrocarbon receipts.
- Policy priorities:
  - "Safeguarding Qatar’s wealth to ensure intergenerational equity" and ensuring resources for the second National Development Strategy require "increased mobilization of non-hydrocarbon revenues in the near to medium term, beyond what is already being planned."
  - "The possibility that oil prices could be lower than the levels assumed in the baseline support the importance of implementing the envisaged tax revenue measures."
  - "Exploring other sources of tax revenues in order to diversify the government revenue structure and build a stable tax revenue base is critical."

*Prepared by Olumuyiwa S. Adedeji and Armand Fouejieu; March 3, 2017.*

### 1.5 billion (or 0.3 percent of GDP) of additional revenues in 2016.

### 1.5 billion (or 0.3 percent of GDP) of additional revenues in 2016

### Revenue measures implemented and planned
- The increase in domestic fuel prices: Gasoline price has increased by about 30 percent in 2016, compared to 2015. Fuel prices are being assessed and adjusted on a monthly basis.
- Fuel price measure generated additional savings of about QR 1 billion (or 0.2 percent of GDP) in 2016, according to authorities’ estimates.
- Additional revenue measures expected in 2017 and 2018:
  - Excises on tobacco and sugary drinks are planned to be implemented in 2017, in line with other GCC countries.
  - The authorities plan to increase some public fees and to charge for some public services which were free until recently, including vehicle plates.
  - Qatar is committed to implementing the GCC agreement on introducing VAT at a rate of 5 percent, starting in 2018. Work on drafting the VAT law is underway. The tax department of the ministry of finance is taking steps to ensure smooth implementation, including technical preparation and logistical capacity. The tax department is hiring consultants with strong experience on tax reforms and especially on VAT. The tax department will take the form of an independent agency, but still under the authority of the ministry of finance.

### Fiscal context for the second National Development Strategy (NDS)
- The first NDS for 2011-16 was premised on an average oil price assumption of US$86 while the oil price averaged about US$88 during this period.
- The second NDS (2017-22) fiscal environment: oil prices are projected to average about US$57 during 2017-22.
- Authorities announced policy intention not to draw down accumulated savings in their sovereign wealth fund; efforts are needed to further enhance the collection of non-hydrocarbon revenues to finance the second NDS.
- The second NDS is expected to focus on enhancing competitiveness, productivity and private sector growth, including improving education quality, increasing productivity, and promoting private sector role in economic activity.
- Strategy includes diversifying government revenue structure and building a stable tax revenue base to shield the economy from undesirable fiscal revenue fluctuations.

### Fiscal sustainability and inter-generational equity (Permanent Income Hypothesis analysis)
- The permanent income hypothesis (PIH) framework is used to assess long-term fiscal sustainability and intergenerational equity.
- Under baseline assumptions, savings would be broadly adequate by 2021 to maintain constant real per capita spending.
- The gap between the projected non-hydrocarbon primary fiscal balance and the non-hydrocarbon primary fiscal balance consistent with intergenerational equity is estimated at 6 percentage points of non-oil GDP in 2016.
- To achieve the adjustment envisaged under the baseline, with the targeted optimal non-hydrocarbon primary fiscal balance estimated at about 26 percent of non-hydrocarbon GDP in 2021, additional non-hydrocarbon revenues will need to be mobilized (the level of non-hydrocarbon revenue will have to double by 2021, compared to 2016).
- Downside oil price scenario: Should oil prices remain around the 2016 average level (i.e. at about $43 per barrel) over the near and medium term, the fiscal balance would deteriorate significantly compared to staff baseline projections. Under such a downward scenario, the gap between the non-hydrocarbon primary fiscal balance and its optimal position is estimated at 4 percentage points of non-oil GDP (compared to 1 percentage point under the baseline) by 2021.

### Tax system structure and current tax revenue composition
- Qatar does not have personal income taxation and does not tax profits of business entities wholly-owned by Qatari individuals.
- Broad-based consumption tax is non-existent at present; only few excise duties are charged mainly on tobacco and alcoholic products (also subject to higher import duties).
- Corporate income tax and customs duties constitute the pillar of Qatar’s tax system.
  - Corporate income tax is charged only on non-Qatari and non-GCC companies.
  - Taxable income from non-oil companies is taxed at a flat rate of 10 percent.
  - The rate is higher for oil-related activities at 35 percent (this is a minimum, as the precise rate is specified in individual contracts).
  - The income tax law includes a withholding tax that applies to certain payments to non-residents that are not connected with a permanent residence in Qatar.
- The GCC Common External Tariff (CET) has a single rate of 5 percent, with a large range of exemptions.
- Tax revenues:
  - For the fiscal year 2014/2015, tax revenues represent about 10 percent of the total (general) government revenue.
  - Overall, tax revenues are estimated to represent around 5 percent of GDP in 2015.
  - Taxes from oil and gas activities represent almost 90 percent of total tax revenue in 2015.
  - The corporate income tax accounts for the large share of total tax revenue.

### Opportunities to enhance non-hydrocarbon revenues
- Fuel prices:
  - Fuel prices remain low in Qatar compared to international prices and some GCC peers.
  - Recommendation to align domestic prices with global oil prices and move toward an automatic adjustment mechanism allowing domestic fuel prices to systematically evolve in accordance with global oil market developments.
  - Appropriate and more targeted measures should be implemented to support the most vulnerable households likely to be strongly affected by potential fuel price hikes.
- Corporate income tax:
  - Exemption of domestic and GCC companies from income tax reduces tax revenue.
  - Corporate income tax rates are relatively low in Qatar compared to some GCC countries.
  - Aligning tax rates with other GCC countries and broadening the tax base to include GCC companies could generate additional revenue; adopting a broader business tax system (including corporate and individual businesses) could generate up to 2 percent of GDP of additional fiscal revenues (see the 2016 GCC tax paper).
- Other existing taxes:
  - Social security: gap between Qatar and other GCC members on social security tax rates; employee’s contribution rate is 5 percent (same as UAE); employer’s contribution rate is slightly higher in Kuwait, Oman, and the UAE.
  - Stamp duty on transfer of land or property is currently payable at rate of 0.25 percent of the value of the property in Qatar; this rate is 1.5 to 3 percent in Bahrain, and 3 percent in Oman. Recent consideration from the government to increase the stamp duty rate is noted.
- Additional sources:
  - None of the GCC countries, including Qatar, levies taxes on personal income. The introduction of a personal income tax could be a potential source of additional revenue.

### Reform agenda (direction)
- Fundamental reforms should be considered to diversify resources for public finance and re-evaluate long-standing practices.
- Specific reform steps highlighted in the text include:
  - Further adjustment and automatic linking of domestic fuel prices to global prices.
  - Implementation of excise duties on tobacco and sugary drinks (planned for 2017).
  - Implementation of VAT at a rate of 5 percent (committed, starting in 2018).
  - Broadening corporate income tax base and adjusting rates, potentially including GCC companies.
  - Exploring introduction of personal income tax and raising existing duties (e.g., stamp duty) where appropriate.
  - Implementing targeted support measures for vulnerable households affected by tax and price adjustments.

*International Monetary Fund — Selected excerpts from cr1789 (Qatar) PDF chapter section.*

### 0.8 percent of GDP.

### 0.8 percent of GDP.

### Tax reform and revenue diversification
- Findings and objectives:
  - Qatar’s tax system “so far does not include the large set of taxes found in similar countries.” Reforms will require strong political commitment, an efficient tax administration, coherent tax laws, transparency in implementation, and a longer-term perspective.
  - The current lower oil prices environment should be an opportunity to undertake fundamental tax reforms.
  - Reforming existing tax policy should aim at building an effective and simple tax system to strengthen tax collection and administrative capacity, and lay the foundations for a broader tax system and more diversified fiscal revenues.
  - Increasing non-hydrocarbon revenue is inherently related to economic diversification; as the economy diversifies and the private sector share in nonhydrocarbon activity increases, tax revenues are expected to increase following implementation of discussed tax measures.

- Policy recommendations and design principles:
  - Introduce new taxes in the short term with low rates to signal commitment to a more developed tax system (Besley and Persson, 2011).
  - Ensure transparency and communication: implement tax reforms at a pace allowing businesses and individuals time to adjust; underpin reforms with necessary infrastructures; clearly explain and communicate reforms; carefully prioritize and sequence the introduction of new taxes.
  - Pay particular attention to potential impacts on economic activity:
    - Increasing corporate tax rates and/or broadening the corporate income tax base can discourage private investment.
    - Introducing a personal income tax could have distributional effects and reduce net disposable income, potentially lowering private consumption.
  - VAT and excise revenue outcomes depend on the tax base; minimize exemption/zero ratings where possible.
    - If required, use targeted measures to support the most vulnerable affected by VAT introduction.
    - For excises on tobacco and sugary drinks, set rates that consider public health consequences while pursuing revenue goals (Petit and Nagy, FAD guidance note, 2016). Carefully define excise bases to avoid substitutions across similar products when rates are too high.
  - Building capacity and institutions will be challenging if the tax base is significantly broadened because of dealing with a larger population of taxpayers (Mansour, 2015).

### Conclusion on fiscal strategy and diversification
- Findings:
  - Qatar’s 2030 National Vision is implemented through five-year National Development Strategies (NDS) across four pillars: economic, social, human, and environmental development.
  - Qatar depends significantly on the hydrocarbon sector; main government revenues come from oil and gas receipts, royalties and taxes on oil-related activities. The sharp decline in oil prices has deteriorated the fiscal position.
  - Despite ample fiscal savings in the sovereign wealth fund, the deterioration poses challenges for long-term fiscal sustainability and for supporting the second NDS.
  - Authorities have adjusted the fiscal stance via expenditure cuts and efforts to increase non-hydrocarbon revenues. The main risk is the possibility of persistently lower oil prices and related macroeconomic implications.

- Policy priorities:
  - Diversifying government revenue sources should remain a fundamental objective.
  - Improve resiliency to oil price shocks by developing the non-oil sector and the tax system.
  - Existing taxes can be adjusted, and new tax measures should be considered as potential sources of additional revenue.
  - These efforts require a modern tax policy framework, efficient tax administration, and transparency in communicating the reform agenda.
  - Enhancing fiscal revenue diversification is key to promoting long-term fiscal sustainability and supporting the second NDS and Qatar 2030 vision.

### Financial stability and liquidity management: overview
- Purpose of the analysis:
  - Analyze banking liquidity implications of lower oil prices from a financial stability perspective.
  - Sections cover banking and liquidity developments, liquidity management instruments, liquidity forecasting needs, empirical relationships between bank lending rates and liquidity indicators, and policy recommendations.

- Macro-financial context and risks:
  - Qatar faces lower oil prices from a position of strength, but financial risks remain.
  - Fiscal prudence, improved diversification, and a strengthened policy framework built large buffers and resilience.
  - The fall in oil prices followed by fiscal consolidation has dampened non-oil growth and increased risks.
  - Deficit financing in 2016 contributed to liquidity pressures and tightening monetary and financial conditions.
  - The December hike of the Fed’s policy rate is an additional drag on activity; increases in foreign liabilities have raised inward spillover risks while nurturing robust risk appetite.

### Banking sector and liquidity developments
- Soundness and performance indicators (selected):
  - Regulatory Tier 1 capital to risk-weighted assets: 15.0 percent (Sep-16).
  - Non-Performing Loans/Capital: 1.2 (Sep-16).
  - Nonperforming loans to total loans: 1.2 percent (Sep-16).
  - Bank provisions to nonperforming loans: 109.2 (Sep-16).
  - Return on assets: 1.3 (Sep-16).
  - Return on equity: 11.4 (Sep-16).
  - Liquid assets to total assets: 27.8 (Sep-16).
  - Loans as a percentage of customers deposits: 114.9 (Sep-16).
  - Foreign currency assets to liabilities: 81.6 (Sep-16).

- Key developments and vulnerabilities:
  - The banking sector remains healthy and well-capitalized but liquidity buffers have decreased since 2013.
  - Foreign funding of commercial banks reached about 34 percent of total liabilities in November 2016, with a shift toward shorter-term liabilities.
  - Aggregate loan-to-deposit ratio is relatively high at 114.9.
  - The banking sector’s liquidity is significantly dependent on flows from the hydrocarbon sector; correlation between deposits/credit and hydrocarbon prices remains.
  - Bank assets in Qatar amount to about 200 percent of GDP, so oil price volatility can have significant real-economy impacts.
  - In a QCB perception survey, more than 50 percent of respondent banks believed liquidity and credit risks will increase in 2017; more than 70 percent considered deposit withdrawals from wholesale depositors a major liquidity risk.

- Recent liquidity dynamics:
  - Liquidity pressures emerged in 2014 and persisted with varying intensity.
  - Private sector credit remained robust at 10.4 percent y-o-y in November 2016 while resident and government deposits decreased substantially.
  - Banks offset lower government deposits by attracting nonresident deposits and increasing wholesale funding; foreign liabilities increased substantially in 2016.
  - Interbank market transactions were lower in 2016; total absorption of liquidity decreased from almost QR 42 billion in 2014 to QR 7 billion by end-October 2016.
  - Treasury bills accounted for QR 8 billion injected in 2016 (end-October), treasury bonds accounted for QR 11 billion absorbed; QR 1.6 billion held through reserve requirements (the lowest in recent years).

### Liquidity management tools and regulatory measures
- Main instruments used by QCB:
  - Reserve requirement ratio (RR):
    - Defined over the average of commercial banks’ foreign and domestic deposit held during the previous month.
    - Required reserves are unremunerated and must be maintained daily; banks penalized for failure.
    - RR was raised in several steps between September 2007 and April 2008 from 2.75 to 4.75 percent to absorb liquidity and moderate credit growth; it has remained unchanged since then.
  - Qatar Money Market Rate (QMR) standing facility:
    - Along with T-bills/bonds auctions, it is a main instrument used by QCB to manage liquidity.
  - Treasury bonds and T-bills:
    - Extensively used to accommodate liquidity in 2015 and 2016.
  - Repurchase agreements (Repos):
    - QCB enters into repos with commercial banks—backed by government securities—but does not conduct reverse repos; thus designed only to inject liquidity.
    - No active repo market; banks typically initiate at a predetermined rate set by QCB.
    - The repo rate was equal to the QMR credit rate since 2011.
    - In December 2016, the repo rate was reduced to 2.25 percent from 4.5 percent and its maturity changed from 14 to 7 days.
  - Public deposit management:
    - Government and semi-government institutions accounted for almost 34 percent of total resident deposits in December 2016.
    - Government deposits are not under direct control of QCB and generally not part of QCB’s liquidity management framework.
  - Macroprudential instruments (MaP):
    - Implemented as part of Basel III (leverage ratio, liquidity coverage ratio).
    - Personal lending regulation with differentiated ceilings for nationals and expatriates:
      - Ceiling for individual loans to Qatari citizens: QR 2 million and 6 years.
      - Ceiling for non-Qatari residents: QR 400,000 and 4 years.
    - In 2016, a maximum ceiling for net open positions was established at 25 percent of capital and reserves for U.S. dollars and 5 percent of capital and reserves for other currencies.
    - A new loan-to-deposit ratio requirement was announced to be set at 100 percent by end-2017; this ratio is being questioned by some banks and remains under discussion.

### Policy implications and recommended actions (implicit in text)
- Strengthen liquidity forecasting frameworks to manage evolving pressures, especially under scenarios of further reductions in government deposits and US policy rate increases.
- Monitor and manage reliance on short-term foreign wholesale funding given higher costs and profitability pressures.
- Use a combination of monetary instruments (QMR, T-bills/bonds, repos) and macroprudential tools to contain liquidity risk and limit reliance on wholesale funding.
- Coordinate public deposit management and fiscal financing plans with QCB’s liquidity framework, given the large share of government deposits in resident deposits.

*International Monetary Fund. cr1789 - 0.8 percent of GDP.*

### Box 1. Local Currency Government Securities Market Developments in Qatar

### Box 1. Local Currency Government Securities Market Developments in Qatar

### Market purpose and institutional framework
- Developing the local currency debt market is an important policy priority for Qatar to reduce reliance on foreign funding as Qatar advances its diversification agenda and prepares for the FIFA 2022 World Cup.
- The responsibility for domestic debt management is de facto assigned to QCB.
- The institutional framework for domestic debt management between the Ministry of Finance (MoF) and QCB is not published.
- QCB, in consultation with the MoF, is responsible for the design of the issuance plan and execution of the transactions.

### Instruments, maturities, and issuance practice
- Local currency government debt is mainly composed of Treasury bonds and Treasury bills (T-bills).
- T-bills were introduced in 2011 for management of short-term liquidity with a preannounced issuance calendar.
- Quarterly auction of T-bonds was introduced in 2013 for managing structural liquidity and to help form a yield curve for longer maturities.
- Treasury bonds have been issued domestically since 1999 for investment funding, liquidity management and market development.
- Maturities used: medium (3 years) to long-term (10-years).
- Both conventional and Shariah-compliant securities are issued. Rates are fixed by QCB.
- Both T-bills and T-bonds (except Sukuk) are listed at Qatar Exchange (QE) for secondary market trading.
- Sukuk represent about one third of the total.
- The secondary market is not very active.

### Domestic Government Bond Issuances and outstanding amounts (QR Million)
- Treasury Bonds issued in 2013 (QR Million)
  - Conventional: 3-year 2,550; 5-year 1,925; 7-year 6,125; 10-year 875; Total 11,475
  - Sukuks: 3-year 1,450; 5-year 1,200; 7-year 1,100; 10-year 1,975; Total 5,725
  - Total: 3-year 4,000; 5-year 3,125; 7-year 7,225; 10-year 2,850; Total 17,200
- Treasury Bonds issued in 2014 (QR Million)
  - Conventional: 3-year 5,550; 5-year 5,575; 7-year 1,750; 10-year 1,100; Total 13,975
  - Sukuks: 3-year 1,900; 5-year 2,150; 7-year 1,950; 10-year 2,025; Total 8,025
  - Total: 3-year 7,450; 5-year 7,725; 7-year 3,700; 10-year 3,125; Total 22,000
- Treasury Bonds issued in 2015 (QR Million)
  - Conventional: 3-year 10,100; 5-year 5,950; 7-year 950; Total 17,000
  - Sukuks: 3-year 9,100; 5-year 4,950; 7-year 950; Total 15,000
  - Total: 3-year 19,200; 5-year 10,900; 7-year 1,900; Total 32,000
- Treasury Bonds issued in 2016 (QR Million)
  - Conventional: 3-year 6,000; 5-year 6,000; Total 12,000
  - Sukuks: 3-year 2,000; 5-year 2,000; Total 4,000
  - Total: 3-year 8,000; 5-year 8,000; Total 16,000
- Outstanding and aggregation
  - Outstanding from pre-2013 issuances: 24,276
  - Maturity of bonds issued since 2013: 8,000
  - Outstanding as at end December 2016: 103,476
- Note: Outstanding as at end December 2016 is derived as outstanding from pre-2013 issuances plus issuances since 2013 minus maturities since 2013.

### Auctions and secondary market functioning
- Auctions of all maturities are subject to a limited amount on offer.
  - Initially, at each auction, an amount of QR 2 billion was offered for the three-month maturity and QR1 billion for the six and nine-month maturity each.
  - Since the emergence of liquidity pressures, these amounts have been subject to adjustments based on evolving liquidity conditions.
- All banks in Qatar are eligible to bid at the auctions and each bank can submit one bid for each maturity.
- The auction is organized as a multiple price bid. There is no limit on the size of a bid by a single bank.
- Results are posted on QCB’s website.
- Secondary market trading has been negligible.
  - Since December 2011, all T-bills have to be listed at the Qatar Exchange (QE) and secondary trading has to take place on QE; over-the-counter trading is not allowed.
  - The three-six-nine-month T-bills issued to Islamic banks are not tradable, but can be used as collateral with QCB for repo transactions.
  - Foreign investors are eligible to buy T-bills in the secondary market, via registered brokerage firms at the QE; trading by foreign investors has been negligible.
  - QE has established trading platforms for both T-bills and government bonds.
  - The secondary market is regulated and supervised by the Qatar Financial Market Authority.

### Liquidity management and forecasting
- T-bill issuances have been successful in absorbing liquidity in the past; as liquidity pressures intensified, yields increased.
- Cancellation of auctions in the first quarter of 2016 led to a decline of the yields; when auctions were reestablished, yields began to rebound.
- Liquidity Forecasting is essential to determine the size and timing of liquidity operations.
  - In 2013, T-bills auctions were offered at fixed amounts; as liquidity pressures emerged, amounts were adjusted according to evolving liquidity conditions.
  - Without appropriate liquidity forecasting, the central bank runs the risk of draining too much or too little liquidity, resulting in excess swings in interbank rates and potential financial stability problems.
- Liquidity management is based on a forecast of the balance sheet of the central bank: scope of interventions judged by the difference between supply and demand.
  - Supply side: autonomous supply factors (beyond central bank control) and policy factors (managed by the central bank).
  - Demand side: required reserves and excess reserves.
- Main autonomous supply determinants that need to be forecasted:
  - Net foreign assets (NFA): one of the most important components in terms of relative size and volatility. The net foreign asset position is determined by central bank foreign exchange sales and purchases with commercial banks. Government is the main supplier of foreign exchange as a large share of foreign currency denominated hydrocarbon export revenues goes to the government and some revenues are transferred to the sovereign wealth fund. Imports and remittance payments are main sources of demand for foreign currency. Private cross-border capital flows also play an important role. Detailed information about expected outcomes on the oil and gas exports is key.
  - Government deposits: The Qatari government operates through a multi-treasury account system. Movements of government deposits significantly alter the liquidity position in the system. Adopting a system to forecast the evolution of government accounts, with input from the finance ministry, will facilitate projections of government net disbursements.
  - Currency in circulation: in the short term, determined by number of transactions; strong seasonal component; in the long run depends on economic activity.
- Demand for bank reserves:
  - Required Reserves (RR): calculated based on previous month’s deposit balances and maintained on a daily basis.
  - Excess Reserves (ER): motives include low interest rate environment, less sophisticated liquidity management procedures in some banks, or precautionary buffers; patterns vary toward the end of maintenance periods.
- Obtaining accurate data is critical for quality of liquidity forecasts: use most recent balance sheet, advanced information on future movements, and regular review of forecast errors.

### The link between lending rates and liquidity indicators
- Analysis based on a sample of 13 Qatari banks (data available in Fitch) for 2007–2016.
- Key observations:
  - Despite cyclical variations, lending rates have not changed much since 2008.
  - Size of bank assets in the sample has not expanded since 2008, with a peak in 2011.
  - Deposit rates decreased until the oil price boom, then increased as banks competed for funding when the loan-to-deposit ratio increased.
  - Liquid assets have decreased, while provisioning has increased as low oil prices increased liquidity pressures and risks.
- Regression results (Table 5):
  - OLS explains about 83 percent of bank-by-bank variation in lending rates (R-squared 0.83; N 33).
  - Estimated effects (coefficients and significance):
    - Deposit rate: OLS 1.75 ** (standard error (0.236)); GLS 1.84 ** (0.164)
    - Log(assets): OLS -0.006 * (0.003); GLS -0.007 ** (0.003)
    - Loans to deposit ratio: OLS -0.039 (0.032); GLS -0.048 ** (0.02)
    - Off balance sheet items to deposits ratio: OLS 0.002 (0.005); GLS 0.003 (0.0037)
    - Liquid assets to deposits ratio: OLS -0.002 (0.026); GLS -0.014 (0.014)
    - Loan loss provisions to total loans: OLS 2.55 ** (0.787); GLS 2.47 ** (0.641)
    - Constant: OLS 0.11 ** (0.048); GLS 0.132 ** (0.03)
  - ** denotes significance at the 5% level and * denotes significance at the 10% level. Standard errors in parentheses.
- Interpretation:
  - Lending rates are very responsive to deposit rates since Qatari banks are mainly funded by deposits.
  - Lending rates are also responsive to loan loss provisions and to the loan-to-deposit ratio.
  - Larger banks tend to have lower lending rates.
  - Lending rates do not respond in a statistically significant way to variations in the ratio of liquid assets, or to off-balance sheet items.
  - Off-balance sheet activities represent a share of 48.5 percent of total banking sector assets.

### Policy recommendations and supervisory actions
- Transparency, governance, and debt management strategy
  - An independent debt office, the Office for Management of Credit Policies and Debt, has been established.
  - A transparent debt management strategy is still not in place; little information is publicly available beyond basic T-bill auction results.
  - The legal basis for debt management policy and operations and the division of responsibilities between QCB and the ministry of finance should be publicly disclosed to enhance good governance, transparency, and accountability.
  - Disclosure of debt management goals and instruments strengthens strategy effectiveness and credibility.
  - Best practice: publish an annual report presenting issuance results in light of stated strategies and targets.
  - Lengthening the maturity profile of debt issuance will help the emergence of a risk-free yield curve across the term structure to serve as a pricing reference.
- Liquidity forecasting and data improvements
  - Developing a liquidity forecast framework would enhance QCB’s ability to manage the timing and size of liquidity operations.
  - Strengthening coverage of the balance of payments with respect to private non-bank financial account transactions and more clarity of government transfers in and out of the sovereign wealth fund would improve liquidity forecast accuracy.
  - More transparency of fiscal accounts and better data provision will also help.
- Financial stability monitoring and funding risks
  - Financial stability risks are moderate but need careful monitoring due to macro-financial linkages amplifying oil price movements.
  - QCB is strengthening monitoring by developing an early warning system (EWS) and has constructed a Banking Stability Index (BSI) including soundness, fragility, liquidity, profitability and inefficiency.
  - Tight liquidity pressures forced banks to attract nonresident deposits and increase wholesale funding to sustain credit growth, increasing risks linked to global market conditions and foreign currency and maturity mismatches.
  - Macroprudential tools in place help; buildup of liquidity risk related to short-term foreign borrowings funding medium and long-term domestic lending needs careful monitoring.
  - Off-balance sheet liabilities ideally should be part of the prudential supervision framework to account for potential risks.

*Source: Qatar Central Bank*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1789.pdf_