## POLICIES TO DRIVE DIVERSIFICATION FOR QATAR

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---

### A. Introduction
- Qatar experienced rapid hydrocarbon-led growth and rising income per capita; investments in health and education have improved the Human Development Index.
- With substantial remaining hydrocarbon reserves, Qatar plans to raise natural gas production further by the mid-2020s.
- Qatar’s Second National Development Strategy recognizes room to diversify activity, exports, and revenues to manage temporary and permanent shifts in the economic environment.

### B. Why Diversification Is Important
- Key motivations:
  - Manage temporary shocks and prepare for permanent shifts in demand for hydrocarbons.
  - Decouple government expenditures from hydrocarbon revenues to reduce destabilizing oil price volatility.
- Preserved oil price dynamics from source:
  - Brent (oil) prices doubled to well above $100 from 2009 to 2011, and in 2016 they dipped back below $50.
- Long-term risks:
  - Natural gas reserves are expected to last for more than a century.
  - The value of reserves may be impaired before physical exhaustion if alternatives such as solar power or nuclear fusion emerge earlier than expected.
- Cross-reference:
  - See the accompanying Selected Issues Paper titled “Fiscal Policy in a Medium-Term Context and Fiscal Rules”.

### C. Financial Diversification
- Role of financial assets:
  - Prudent fiscal management has allowed assets held by Qatar Investment Authority (QIA) to reportedly cumulate to over $300 billion.
  - Returns on financial investments can provide revenues that do not directly rely on hydrocarbons.
- Correlation considerations:
  - Returns diversify revenues only if they do not move together with oil market developments; low or negative correlation insulates the general government balance from oil price shocks, while a large positive correlation increases sensitivity.
  - Correlation considerations could inform QIA’s strategic asset allocation.
- Domestic investment trade-offs:
  - Domestic investments facilitate economic diversification but entail foregone financial accumulation and associated returns; rigorous evaluation of public capital spending, particularly cost-benefit analysis, is recommended.
- Complementarity:
  - Real sector diversification must complement financial diversification; experience from the 2017 diplomatic rift accelerated momentum for economic diversification.

### D. Policies to Drive Real Sector Diversification
- Overall approach:
  - Structural reforms to unlock private-sector-led non-hydrocarbon growth plus sector-specific policies (industrial policies) can support diversification of exports and activity.
  - Careful cost-benefit analysis is needed for policies with significant fiscal elements.
  - Raising the non-hydrocarbon share will be challenging given planned substantial increases in LNG production, but there is room to broaden and deepen beyond hydrocarbons.

### E. Structural Reforms (Key areas)
- Objectives:
  - Create an environment enabling non-hydrocarbon growth led by the private sector.
- Typical pre-conditions cited:
  - Stable macroeconomic environment, predictable/simple legal framework, favorable business climate, appropriate incentives, low corruption, strong education system.
- Areas needing attention in Qatar:
  - Contract enforcement, insolvency and dispute resolution processes, and educational outcomes.
  - The Second National Development Strategy notes challenges such as the “lack of bankruptcy laws”, “cumbersome regulatory procedures” and an “ineffective litigation system.”
- Special Economic Zones (SEZs):
  - SEZs (e.g., Qatar Financial Center, Ras Bufontas, Um Alhoul, planned Al Karaana) can support diversification but should be temporary solutions until economy-wide regulatory improvements are implemented.
  - SEZs should not substitute for nationwide improvements in contract enforcement and dispute resolution.

### F. Industrial Policies and Sector Priorities
- Strategy focus:
  - Prioritize sectors that link with existing strengths and have potential to expand exports and innovate.
- International analogues and examples:
  - Malaysia: vertical expansion in upstream/downstream activities related to rubber and palm oil.
  - Mexico: horizontal diversification around automotive sector.
  - Singapore: clustered petrochemical leadership on an artificially constructed island.
- IMF diagnostics:
  - IMF (2018) finds Qatar’s non-hydrocarbon exports are smaller, less diversified, and less sophisticated than in countries with similar fundamentals; FDI inflows into Qatar have fallen in recent years; non-hydrocarbon exports are a smaller share of GDP than in GCC countries; exports are more concentrated than in some GCC countries.
- Priority sectors in the Second National Development Strategy:
  - Manufacturing, finance, professional and scientific activities, tourism, logistics, and information and communication.
- Specific opportunities highlighted:
  - 3D printing and agriculture in controlled environments (3D printing uses petrochemical-related inputs; agriculture relevant given high temperatures).
  - Further growth in finance (some Qatari banks have significant regional roles).
  - Targeted logistics leveraging strong air and shipping port infrastructure.
- Implementation guidance:
  - Emphasize focused opportunities for exports and innovation with links to existing strengths.
  - Clear, coherent communication of sector-specific strategies is necessary to harness entrepreneurial activity.

### G. Building Expertise and Clusters
- Rationale:
  - Investments in clusters can produce self-reinforcing knowledge acquisition and innovation (agglomeration effects across firms, workforce, and shared infrastructure).
- Examples in Qatar:
  - Industrial zone Mesaieed and logistics parks located near Qatar Petroleum (QP) and Hamad Port.
- Policy options:
  - Encourage related activities to develop in logical clusters; consider active policy approaches where appropriate.

### H. Targeted Incentives and Access to Finance
- Instruments in use:
  - Investors in priority sectors offered exemptions from income tax for up to ten years and land allocations with long-term leases.
  - Qatar Development Bank (QDB) provides preferential credit to Qatari SMEs and operates an equity funding initiative.
  - QP plans to encourage local suppliers backed by access to finance through Qatar National Bank.
- Recommendations:
  - Pair access to finance more systematically with sectors prioritized in the Second National Development Strategy.
  - Programs supporting innovation through early stage financing for small firms can help overcome elevated risks and long time horizons associated with new sectors.
  - While SEZs can locally address business-environment weaknesses, continue improving the economy-wide business environment.
  - There may be a case for well-targeted tax incentives and access to preferential financing when paired with broader reforms.

### Foreign partners and joint ventures
- Role:
  - Foreign partners and joint ventures can transfer technological and methodological advances; inviting FDI and entering joint ventures with foreign leaders helps enter new sectors and improve domestic technological capacity.
  - Public sector joint ventures may be needed when large investments are required; example: Qatar Petroleum increased its technological and investment capacity through joint ventures in the gas sector.
- Potential impact:
  - IMF (2018) estimates that structural reforms such as improved contract enforcement and minority protection could support FDI and increase economic growth in Qatar by as much as one percentage point.
  - Qatar’s Second National Development Strategy identifies FDI as an important contributor to diversification.
- Implementation recommendations:
  - Comprehensive communications campaign to ensure potential investors are aware of Qatari Investment Law No. 1 of 2019.
  - Explicitly communicate plans to facilitate access to finance in priority sectors.
  - Integrate foreign-invested enterprises into the Qatari economy to spread technological capacity gains.

### Human capital and targeted training for priority sectors
- Rationale:
  - Deliberate investments in human capital, targeted at priority sectors, are essential to build expertise and valuable know-how in advanced sectors.
- Evidence and international examples:
  - Productivity has been declining in Qatar; improving productivity through improved educational outcomes is important.
  - Technical training (apprenticeship programs) can be more valuable than other types of higher education in some cases (examples: Switzerland and Germany).
  - Singapore initially prioritized technicians, engineers, and local managers before expanding to doctoral-level scholarships.
- Sequencing guidance:
  - Well-sequenced, focused, and ambitious long-term plans (Singapore example) can enable diversification even with a small population and shallow labor pool.

### Ensuring discipline: risks and enforcement mechanisms
- Risk:
  - Industrial policy can support rampant inefficiency and create rents for a few business owners and ‘national champions’, yielding little broader economic impact.
- Two enforcement mechanisms:
  - Export markets:
    - Use export performance as an objective external benchmark; withdraw support where sustainability seems unachievable.
    - Note WTO constraints: Qatar should design policies mindful of rules that prohibit subsidies with direct export conditionality and domestic content requirements.
  - Domestic competition:
    - Avoid special benefits to individual firms; call on independent experts, support many attempts, and withdraw support if insufficient progress.
    - Historical examples: Japan and Korea supported multiple industrial groups that competed; decentralized U.S. implementation aided development of general-purpose technologies.

### Conclusions and policy recommendations (diversification)
- Strategic priorities:
  - Continue diversification to manage temporary shocks and prepare for long-term shifts.
  - QIA’s asset allocation strategy should not ignore Qatar’s significant dependence on hydrocarbon revenues.
  - Continue rigorous evaluation of public capital spending due to important opportunity costs (foregone financial accumulation and associated returns).
- Structural reforms needed:
  - Improve contract enforcement, processes for dealing with insolvency and disputes, and the quality of education.
  - SEZs can be helpful short-term but are not a substitute for economy-wide business environment improvements.
- Sector-specific strategies:
  - Identify specific opportunities for growth linked to current strengths, with scope for exports and innovation.
  - Clearly communicate strategies to invite entrepreneurial participation.
  - Two main lessons from international experience:
    - Build expertise in specific clusters: encourage clustering, ensure access to finance for priority sectors, integrate innovative foreign ventures into the economy, and target human capital investments to sector-specific skills. Acquiring expertise takes time; follow focused, realistic priorities while being ambitious long run.
    - Use export markets and competition to hold recipients of support accountable: withdraw support in absence of progress; use export success as an external benchmark; encourage sectors rather than specific firms to preserve competition.

### Key statistics and factual figures
- IMF (2018) growth increase potential from reforms: as much as one percentage point.
- Qatari Investment Law: No. 1 of 2019 (foreigners can invest in any sector excluding banks, insurance, and commercial agencies, even outside SEZs).
- Qatar’s infrastructure program: US$200 billion.
- Qatar Investment Authority (QIA) accumulated savings: more than US$300 billion as at end-2018.
- Hydrocarbon revenues averaged about 90 percent of total revenues during 1990–2018.
- Hydrocarbon revenues were about 34 percent of GDP.

---

### The ministry of finance (MoF) continues with efforts to modernize budget

### Overview
- MoF is preparing a three-year forward-looking budget and medium-term fiscal framework that is reviewed annually and used to guide the budgeting process and rationalize expenditure, including expenditure ceilings on current and capital expenditures.
- After issuing the State’s financial system in 2015, MoF developed a 3-year forward-looking financial framework (2017–2019), which includes overall estimates of state revenues and expenditures (Qatar Second National Development Strategy, 2018–2022).

### Medium-Term Budgeting: Key considerations
- Benefits of MTBFs:
  - Help insulate spending from volatile oil receipts by delinking annual budgets from short-term volatility in oil revenue.
  - Support expenditure smoothing and reserve buildup, and protect priority expenditures.
  - Reduce risk of ad-hoc increases in current expenditure that create budget rigidities and force drastic reductions in capital expenditure during fiscal consolidation.
  - Enhance prioritization, quality of investments, evaluation and management of projects, and mitigate risks to long-term project viability.

### Staged implementation and content
- Short term:
  - A simple medium-term fiscal framework (MTFF) that projects the fiscal balance, non-oil balance, and includes aggregate estimates of government revenues and spending.
- Follow-up:
  - A fiscal strategy document translating the MTFF into fiscal policy priorities and containing fiscal risk analysis and sensitivity analysis.
- Next stage:
  - A simple MTBF providing envelopes to line ministries to prepare medium-term spending plans.

### Preconditions for a full and effective MTBF
- A credible annual budget:
  - Current practice: annual budget based on a conservative oil price assumption, resulting in budget revenues much lower than actual oil prices.
  - Recommendation: use realistic oil price assumptions based on explicit rules to avoid systematic deviations between budgeted and actual revenues.
- Medium-term macroeconomic projections:
  - A macro-fiscal unit exists; MoF needs to enhance capacity for medium-term macroeconomic forecasts.
  - Challenge: resource price and production uncertainty makes medium- to long-term resource revenue forecasts difficult.
- Fiscal risk management framework:
  - Multi-year framework should include sensitivity analysis to price, cost, and production assumptions and plan for contingency reserves to smooth spending.
- A comprehensive and unified top-down budget process:
  - Budget process should be top-down, unified, comprehensive, and relatively unencumbered by extensive earmarking or standing expenditure commitments.
- Capacity building at ministries and agencies:
  - Strengthen costing of new initiatives, reporting and monitoring, and transparency.

### Towards fiscal rules — anchoring fiscal targets
- Fiscal rules can reinforce multi-year frameworks; types include expenditure, revenue, budget balance, and debt rules. In commodity exporters rules often adapt for price volatility.
- Current status:
  - Qatar currently does not have an explicit fiscal rule; annual budget expenditure appears anchored on a declining path of fiscal break-even oil price.
- Recommendation:
  - Adopt a procedural fiscal rule (not a rigid permanent numerical target) that includes:
    - (i) principles for fiscal policymaking;
    - (ii) requirement to set targets for one or more fiscal indicators;
    - (iii) content of the fiscal strategy statement where targets are set;
    - (iv) arrangements for reporting performance against targets;
    - (v) an escape clause for exceptional circumstances.
  - Procedural rules should allow MoF flexibility to change quantitative targets within a principle-based framework, with explicit revision clauses (e.g., targets reassessed every four years).

### Permanent Income Hypothesis (PIH) simulations and fiscal sustainability
- Implementation:
  - The non-oil primary balance rule can be implemented by calculating sustainable spending using the Permanent Income Hypothesis (PIH).
- PIH concept:
  - For a resource-dependent country, the intertemporal budget constraint is satisfied when the non-resource primary fiscal deficit is limited to the perpetuity value of resource wealth; implies constant real per capita government spending out of hydrocarbon revenues equal to the annuity present value of expected hydrocarbon wealth.
- Formulaal description parameters:
  - Wt = value of accumulated revenue in the sovereign wealth fund at end of previous year;
  - Rt+k = hydrocarbon revenues expected in period k;
  - (r − n) = expected average real rate of return on hydrocarbon wealth minus the annual rate of population growth;
  - K = number of years until depletion of hydrocarbon resources.
- Simulation results and projections:
  - Under baseline assumptions, savings would be broadly adequate by 2023 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 2018.
  - Continuation with fiscal consolidation will help close the estimated gap in the medium term.
  - The projected non-hydrocarbon primary deficit excludes portions of QP investment income and corporate income tax (that come from hydrocarbon activities).
  - Projections until 2023 use WEO assumptions. After 2023, the baseline scenario assumes annual oil price growth of 2 percent and real return on assets of 4 percent.

### Sovereign Wealth Funds (SWFs) and transparency
- Observations:
  - SWFs have been effective stabilization instruments but pose challenges if accumulation and withdrawal rules are rigid or disconnected from fiscal targets.
  - Risk: accumulation of assets with low returns while borrowing expensively to finance fiscal deficits.
- Best practice:
  - SWFs should be financing instruments funding the budget for stabilization or long-term financing and should have no spending authorities to avoid extra-budgetary quasi-fiscal operations without proper fiscal oversight.
- Recommendation for Qatar:
  - Consider making publicly available the relationship between fiscal authorities and QIA, including main principles underlying transfers from the budget to QIA; improved transparency about QIA assets would support market confidence.

### Conclusion and policy recommendations (MoF / MTBF)
- Fiscal policy objectives:
  - Expenditure smoothing, accumulation of financial assets, and diversification away from hydrocarbons to strengthen the tradeable sector.
- Progress and enhancements needed:
  - Qatar has initiated MTBF steps critical to aligning the national medium-term development strategy with the budget; enhancements needed include:
    - Strengthening the underlying medium-term fiscal framework and strategy;
    - Adopting more comprehensive coverage of line ministries;
    - Making outer years’ allocations more binding.
- Key requirements to establish a full-fledged and robust MTBF:
  - More clarity on how oil prices that underlie the budget are determined to avoid consistent deviations between budgeted revenues and actuals;
  - Further improving macroeconomic and fiscal forecasting;
  - Strengthening capacity at line ministries.
- Complementary measures:
  - Proposed measures to underpin the medium-term fiscal framework could be complemented by a formal procedural fiscal rule (for example, a non-hydrocarbon balance as a ratio of non-hydrocarbon output derived from PIH), designed with flexibility to ensure consistency with long-term fiscal sustainability.
- IMF support:
  - IMF stands ready to provide technical assistance to Qatari authorities to explore in more detail potential fiscal rules and new supportive fiscal arrangements to strengthen the fiscal framework.

*Source: QATAR — POLICIES TO DRIVE DIVERSIFICATION FOR QATAR (April 29, 2019); IMF staff chapter on diversification and industrial policy; Country authorities; and IMF staff calculations (excerpts provided).*

### References ____________________________________________________________________________ 14

### POLICIES TO DRIVE DIVERSIFICATION FOR QATAR

### A. Introduction
- Qatar has experienced rapid hydrocarbon-led growth and rising income per capita; investments in health and education have improved the Human Development Index.
- With substantial remaining hydrocarbon reserves, Qatar plans to raise natural gas production further by the mid-2020s.
- Qatar’s Second National Development Strategy recognizes room to diversify activity, exports, and revenues to manage temporary and permanent shifts in the economic environment.

### B. Why Diversification Is Important
- Key motivations:
  - Diversification helps manage temporary shocks and prepare for permanent shifts in demand for hydrocarbons.
  - Hydrocarbons represent a significant share of activity, exports, and fiscal revenues; decoupling government expenditures from hydrocarbon revenues would reduce destabilizing oil price volatility.
- Noted oil price dynamics preserved from source:
  - Brent (oil) prices doubled to well above $100 from 2009 to 2011, and in 2016 they dipped back below $50.
- Long-term risks:
  - Natural gas reserves are expected to last for more than a century.
  - The value of reserves may be impaired before physical exhaustion; alternatives such as solar power or nuclear fusion could emerge earlier than expected.
- Reference to supporting documents:
  - See the accompanying Selected Issues Paper titled “Fiscal Policy in a Medium-Term Context and Fiscal Rules”.

### C. Financial Diversification
- Role of financial assets:
  - Prudent fiscal management has allowed assets held by Qatar Investment Authority (QIA) to reportedly cumulate to over $300 billion.
  - Returns on financial investments can provide revenues that do not directly rely on hydrocarbons.
- Correlation considerations:
  - Returns on financial assets diversify revenues only if they do not move together with oil market developments; low or negative correlation insulates the general government balance from oil price shocks, while a large positive correlation increases sensitivity.
  - This correlation consideration could inform QIA’s strategic asset allocation.
- Domestic investment trade-offs:
  - Domestic investments facilitate economic diversification but entail foregone financial accumulation and associated returns; rigorous evaluation of public capital spending, particularly cost-benefit analysis, is recommended.
- Complementarity:
  - Real sector diversification must complement financial diversification; experience from the 2017 diplomatic rift accelerated momentum for economic diversification.

### D. Policies to Drive Real Sector Diversification
- Overall approach:
  - Structural reforms to unlock private-sector-led non-hydrocarbon growth plus sector-specific policies (industrial policies) can support diversification of exports and activity.
  - Careful cost-benefit analysis is needed for policies with significant fiscal elements.
  - Raising the non-hydrocarbon share will be challenging given planned substantial increases in LNG production, but there is room to broaden and deepen beyond hydrocarbons.

### E. Structural Reforms (Key areas)
- Objectives:
  - Create an environment enabling non-hydrocarbon growth led by the private sector.
- Typical pre-conditions cited:
  - Stable macroeconomic environment, predictable/simple legal framework, favorable business climate, appropriate incentives, low corruption, strong education system.
- Areas needing attention in Qatar:
  - Contract enforcement, insolvency and dispute resolution processes, and educational outcomes.
  - The Second National Development Strategy notes challenges such as the “lack of bankruptcy laws”, “cumbersome regulatory procedures” and an “ineffective litigation system.”
- Special Economic Zones (SEZs):
  - SEZs (e.g., Qatar Financial Center, Ras Bufontas, Um Alhoul, planned Al Karaana) can support diversification but should be temporary solutions until economy-wide regulatory improvements are implemented.
  - SEZs should not substitute for nationwide improvements in contract enforcement and dispute resolution.

### F. Industrial Policies and Sector Priorities
- Strategy focus:
  - Prioritize sectors that link with existing strengths and have potential to expand exports and innovate.
- Examples and international analogues:
  - Malaysia: vertical expansion in upstream/downstream activities related to rubber and palm oil.
  - Mexico: horizontal diversification around automotive sector.
  - Singapore: clustered petrochemical leadership on an artificially constructed island.
- IMF findings and diagnostics:
  - IMF (2018) finds Qatar’s non-hydrocarbon exports are smaller, less diversified, and less sophisticated than in countries with similar fundamentals; FDI inflows into Qatar have fallen in recent years; non-hydrocarbon exports are a smaller share of GDP than in GCC countries; exports are more concentrated than in some GCC countries.
- Priority sectors in Qatar’s Second National Development Strategy:
  - Manufacturing, finance, professional and scientific activities, tourism, logistics, and information and communication.
- Specific opportunities highlighted:
  - 3D printing and agriculture in controlled environments (3D printing uses petrochemical-related inputs; agriculture relevant given high temperatures).
  - Further growth in finance (some Qatari banks have significant regional roles).
  - Targeted logistics leveraging strong air and shipping port infrastructure.
- Implementation guidance:
  - Emphasize focused opportunities for exports and innovation with links to existing strengths.
  - Clear, coherent communication of sector-specific strategies is necessary to harness entrepreneurial activity.

### G. Building Expertise and Clusters
- Rationale:
  - Investments in clusters can produce self-reinforcing knowledge acquisition and innovation (agglomeration effects across firms, workforce, and shared infrastructure).
- Examples in Qatar:
  - Industrial zone Mesaieed and logistics parks located near Qatar Petroleum (QP) and Hamad Port.
- Policy options:
  - Encourage related activities to develop in logical clusters; consider active policy approaches where appropriate.

### H. Targeted Incentives and Access to Finance
- Instruments in use:
  - Investors in priority sectors offered exemptions from income tax for up to ten years and land allocations with long-term leases.
  - Qatar Development Bank (QDB) provides preferential credit to Qatari SMEs and operates an equity funding initiative.
  - QP plans to encourage local suppliers backed by access to finance through Qatar National Bank.
- Recommendations:
  - Pair access to finance more systematically with sectors prioritized in the Second National Development Strategy.
  - Programs supporting innovation through early stage financing for small firms can help overcome elevated risks and long time horizons associated with new sectors.
  - While SEZs can locally address business-environment weaknesses, continue improving the economy-wide business environment.
  - There may be a case for well-targeted tax incentives and access to preferential financing when paired with broader reforms.

*Source: QATAR — POLICIES TO DRIVE DIVERSIFICATION FOR QATAR (April 29, 2019).*

### 18.      Foreign partners can play a key role in supporting entry into new sectors. Countries

### Foreign partners can play a key role in supporting entry into new sectors

### Role of foreign partners and joint ventures
- Countries adopting technological and methodological advances in new sectors can learn from foreign partners.
- Inviting foreign direct investment (FDI) and entering into joint ventures with foreign leaders can be crucial for entering new sectors and improving domestic technological capacity (Lin 2014).
- When large investments are required, the public sector may need to enter joint ventures; example: Qatar Petroleum increased its technological and investment capacity through joint ventures in the gas sector.
- IMF (2018) estimates that structural reforms such as improved contract enforcement and minority protection could support FDI and increase economic growth in Qatar by as much as one percentage point.
- Qatar’s Second National Development Strategy identifies FDI as an important contributor to diversification.

### Strategy to attract foreign investment and integrate technology
- Current state:
  - Multiple portals aim to attract foreign investment (including invest.qa and Manateq).
  - invest.qa clarifies that, per Qatari Investment Law No. 1 of 2019, foreigners can now invest in any sector excluding banks, insurance, and commercial agencies, even outside SEZs.
- Recommendations:
  - A comprehensive communications campaign is needed to ensure all potential investors are aware of the change in Qatari Investment Law No. 1 of 2019.
  - Plans to facilitate access to finance in priority sectors should be explicitly communicated.
  - Once foreign investment is attracted, integrate resulting enterprises into the Qatari economy to facilitate improvements in technological capacity throughout the economy.

### Human capital and targeted training for priority sectors
- Deliberate investments in human capital, targeted at priority sectors, are essential to build expertise and valuable know-how in advanced sectors.
- Evidence and examples:
  - Productivity has been declining in Qatar; improving productivity through improved educational outcomes is important.
  - Targeted investments in human capital should be linked to prioritized sectors (Callen and others 2014).
  - Technical training can be more valuable than other types of higher education in some cases: apprenticeship programs are common in Switzerland and Germany (Cherif and Hasanov 2016).
  - Singapore initially focused on training technicians, engineers, and local managers, later adding scholarships extending to the doctoral level at local and foreign universities (Yeo 2016).

### Sequencing, focus, and international examples
- Singapore demonstrates that well-sequenced, focused, and ambitious long-term plans can enable diversification even with a small population and shallow labor pool.
- Singapore prioritized precision engineering, chemicals, and more recently biomedical sciences, eschewing more advanced sectors until human capital, infrastructure, and technological foundations were ready (Yeo 2016).

### Ensuring discipline: risks and enforcement mechanisms
- Risk: Industrial policy can support rampant inefficiency and create rents for a few business owners and ‘national champions’, yielding little broader economic impact (Callen and others 2014, Studwell 2013).
- Two mechanisms to enforce discipline:
  - Export markets:
    - Provide an objective external benchmark to assess progress and sustainability of new sectors.
    - Allow discontinuation of support where sustainability seems unachievable.
    - Example: Korea’s Heavy and Chemical Industrialization Plan required export performance (letters of credit, export volumes, number of export items, destinations, overseas branches) for access to favorable credit; lack of export performance led to withdrawal of support (Woo 2016; Studwell 2013).
    - As a WTO member, Qatar should carefully design policies in view of rules that prohibit subsidies with direct export conditionality and domestic content requirements.
  - Domestic competition:
    - Avoid providing special benefits to individual firms to preserve competition.
    - Best practices: call on independent experts to identify narrow objectives, support many attempts to achieve objectives, and withdraw support if insufficient progress (Mazzucato 2013).
    - Historical examples: Japan and Korea supported multiple industrial groups that competed against each other (Studwell 2013); decentralized U.S. implementation aided development of general-purpose technologies.

### Conclusions and policy recommendations
- Strategic priorities:
  - Continue diversification to manage temporary shocks and prepare for long-term shifts in the economic context.
  - QIA’s asset allocation strategy should not ignore Qatar’s significant dependence on hydrocarbon revenues.
  - Continue rigorous evaluation of public capital spending due to important opportunity costs (foregone financial accumulation and associated returns).
- Structural reforms needed:
  - Improve contract enforcement, processes for dealing with insolvency and disputes, and the quality of education.
  - SEZs can be helpful short-term but are not a substitute for economy-wide business environment improvements.
- For sector-specific strategies (Second National Development Strategy priorities: manufacturing, financial and other services):
  - Identify specific opportunities for growth linked to current strengths, with scope for exports and innovation.
  - Clearly communicate strategies to invite entrepreneurial participation.
  - Two main lessons from international experience:
    - Policies should aim to build expertise in specific clusters of innovative activity: encourage clustering, ensure access to finance for priority sectors, integrate innovative foreign ventures into the economy, and target human capital investments to sector-specific skills. Acquiring expertise takes time; follow focused, realistic priorities while being ambitious long run (Singapore example).
    - Export markets and competition should be used to hold recipients of support accountable: withdraw support in absence of progress; use success in export markets as an external benchmark; encourage sectors rather than specific firms to preserve competition.

### Key statistics and factual figures (as presented)
- IMF (2018) growth increase potential from reforms: as much as one percentage point.
- Qatari Investment Law: No. 1 of 2019 (foreigners can invest in any sector excluding banks, insurance, and commercial agencies, even outside SEZs).
- Qatar’s infrastructure program: US$200 billion.
- Qatar Investment Authority (QIA) accumulated savings: more than US$300 billion as at end-2018.
- Hydrocarbon revenues averaged about 90 percent of total revenues during 1990–2018.
- Hydrocarbon revenues were about 34 percent of GDP.

*Source: IMF staff chapter on diversification and industrial policy (excerpts provided).*

### 5.      The ministry of finance (MoF) continues with efforts to modernize budget

### 5.      The ministry of finance (MoF) continues with efforts to modernize budget

### Overview
- MoF is preparing a three-year forward-looking budget and medium-term fiscal framework that is reviewed annually and used to guide the budgeting process and rationalize expenditure, including expenditure ceilings on current and capital expenditures.
- After issuing the State’s financial system in 2015, MoF developed a 3-year forward-looking financial framework (2017–2019), which includes overall estimates of state revenues and expenditures (Qatar Second National Development Strategy, 2018–2022).

### Medium-Term Budgeting: Key Considerations
- Medium-term budget frameworks (MTBFs) help insulate spending from volatile oil receipts by delinking annual budgets from short-term volatility in oil revenue, supporting expenditure smoothing and reserve buildup, and protecting priority expenditures.
- MTBFs reduce the risk of ad-hoc increases in current expenditure that create budget rigidities and can force drastic reductions in capital expenditure during fiscal consolidation.
- MTBFs enhance prioritization, quality of investments, evaluation and management of projects, and help mitigate risks to long-term project viability.

### Staged Implementation and Content
- Short term: a simple medium-term fiscal framework (MTFF) that projects the fiscal balance, non-oil balance, and includes aggregate estimates of government revenues and spending.
- Follow-up: a fiscal strategy document translating the MTFF into fiscal policy priorities and containing fiscal risk analysis and sensitivity analysis.
- Next stage: a simple MTBF providing envelopes to line ministries to prepare medium-term spending plans.

### Preconditions for a Full and Effective MTBF
- A credible annual budget:
  - Current practice: annual budget based on a conservative oil price assumption, resulting in budget revenues much lower than actual oil prices.
  - Recommendation: use realistic oil price assumptions based on explicit rules to avoid systematic deviations between budgeted and actual revenues.
- Medium-term macroeconomic projections:
  - A macro-fiscal unit exists; MoF needs to enhance capacity for medium-term macroeconomic forecasts.
  - Recognized challenge: resource price and production uncertainty makes medium- to long-term resource revenue forecasts difficult.
- Fiscal risk management framework:
  - Multi-year framework should include sensitivity analysis to price, cost, and production assumptions and plan for contingency reserves to smooth spending.
- A comprehensive and unified top-down budget process:
  - Budget process should be top-down (determine expenditure aggregates before distribution), unified (major expenditure decisions taken at one time), comprehensive, and relatively unencumbered by extensive earmarking or standing expenditure commitments.
- Capacity building at ministries and government agencies:
  - Strengthen costing of new initiatives, reporting and monitoring, and transparency.

### Towards Fiscal Rules — Anchoring Fiscal Targets
- Fiscal rules can reinforce multi-year frameworks; types include expenditure, revenue, budget balance, and debt rules. In commodity exporters rules often adapt for price volatility.
- Qatar currently does not have an explicit fiscal rule; annual budget expenditure appears anchored on a declining path of fiscal break-even oil price.
- Recommendation: adopt a procedural fiscal rule (not a rigid permanent numerical target) that includes:
  - (i) principles for fiscal policymaking;
  - (ii) requirement to set targets for one or more fiscal indicators;
  - (iii) content of the fiscal strategy statement where targets are set;
  - (iv) arrangements for reporting performance against targets;
  - (v) an escape clause for exceptional circumstances.
- Procedural rules should allow MoF flexibility to change quantitative targets within a principle-based framework, with explicit revision clauses (e.g., targets reassessed every four years) to balance credibility and adaptability.

### Permanent Income Hypothesis (PIH) Simulations and Fiscal Sustainability
- The non-oil primary balance rule can be implemented by calculating sustainable spending using the Permanent Income Hypothesis (PIH).
- PIH concept: for a resource-dependent country, intertemporal budget constraint is satisfied when the non-resource primary fiscal deficit is limited to the perpetuity value of resource wealth; it implies constant real per capita government spending out of hydrocarbon revenues equal to the annuity present value of expected hydrocarbon wealth.
- PIH formulaal description: sustainable per capita government spending out of hydrocarbon wealth equals the annuity present value of expected hydrocarbon wealth, where parameters include:
  - Wt = value of accumulated revenue in the sovereign wealth fund at end of previous year;
  - Rt+k = hydrocarbon revenues expected in period k;
  - (r − n) = expected average real rate of return on hydrocarbon wealth minus the annual rate of population growth;
  - K = number of years until depletion of hydrocarbon resources.
- Simulation results and projections:
  - Under baseline assumptions, savings would be broadly adequate by 2023 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 2018.
  - Continuation with fiscal consolidation will help close the estimated gap in the medium term.
  - The projected non-hydrocarbon primary deficit excludes portions of QP investment income and corporate income tax (that come from hydrocarbon activities).
  - Projections until 2023 use WEO assumptions. After 2023, the baseline scenario assumes annual oil price growth of 2 percent and real return on assets of 4 percent.

### Other Considerations: Sovereign Wealth Funds (SWFs) and Transparency
- SWFs have been effective stabilization instruments but pose challenges if accumulation and withdrawal rules are rigid or disconnected from fiscal targets.
- Risks noted from the 2014 oil price collapse: some countries used SWFs to smooth adjustment without a clear fiscal rule, creating conflicts between stabilization and intergenerational investment objectives.
- Typical problem: accumulation of assets with low returns while borrowing expensively to finance fiscal deficits.
- Best practice: SWFs should be financing instruments funding the budget for stabilization or long-term financing and should have no spending authorities to avoid extra-budgetary quasi-fiscal operations without proper fiscal oversight.
- Recommendation for Qatar: consider making publicly available the relationship between fiscal authorities and QIA, including main principles underlying transfers from the budget to QIA; improved transparency about QIA assets would support market confidence.

### Conclusion and Policy Recommendations
- Fiscal policy objectives include expenditure smoothing, accumulation of financial assets, and diversification away from hydrocarbons to strengthen the tradeable sector.
- Qatar has initiated MTBF steps critical to aligning the national medium-term development strategy with the budget; enhancements needed include:
  - Strengthening the underlying medium-term fiscal framework and strategy;
  - Adopting more comprehensive coverage of line ministries;
  - Making outer years’ allocations more binding.
- Key requirements to establish a full-fledged and robust MTBF:
  - More clarity on how oil prices that underlie the budget are determined to avoid consistent deviations between budgeted revenues and actuals;
  - Further improving macroeconomic and fiscal forecasting;
  - Strengthening capacity at line ministries.
- Proposed measures to underpin the medium-term fiscal framework could be complemented by a formal procedural fiscal rule (for example, a non-hydrocarbon balance as a ratio of non-hydrocarbon output derived from PIH), designed with flexibility to ensure consistency with long-term fiscal sustainability.

### IMF Support
- IMF stands ready to provide technical assistance to Qatari authorities to explore in more detail potential fiscal rules and new supportive fiscal arrangements to strengthen the fiscal framework.

*Source: Country authorities; and IMF staff calculations (excerpt from IMF staff paper).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1qatea2019002.pdf_