## _cr1218

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### Background and current context
- Qatar has the third-largest proven reserves of gas in the world, and is now the world's largest producer of LNG.
- The State completed a 20-year investment program in 2011; a moratorium on development of new hydrocarbon projects is in place until 2015 to allow assessment of production and a comprehensive study of the offshore North Field.
- Government medium-term infrastructure investment program (roads, completion of the port and airport, and metro) with budget allocation expected to be close to $100 billion.
- Population and income: total population 1.7 million; Qatari nationals are less than a fifth of the total; annual per capita income around $100,000.
- Official unemployment rate estimated at less than 1 percent.

### Recent economic developments and performance (2010–11)
- Real GDP growth:
  - 2010: 17 percent (reported 17.7 percent in tables).
  - 2011: projected to accelerate to 19 percent in text (table: 18.8 percent), driven by LNG production which increased by 36 percent.
  - Real nonhydrocarbon sector growth in 2011: 9 percent.
- Inflation:
  - Inflation excluding rent increased to 5.8 percent in October 2011.
  - Following an average deflation of around 2.5 percent in 2010, inflation expected to average around 2 percent in 2011 (end-year 2.5 percent).
- Fiscal and external balances:
  - Overall fiscal balance (net lending/borrowing) surplus of 2.7 percent of GDP in 2010/11.
  - Post-budget salary and pension hikes estimated to add $1.6 billion to government expenditure in 2011/12.
  - With oil prices on average well above $55 a barrel in 2011, actual fiscal balance projected surplus of 7.2 percent of GDP in 2011/12.
  - Current account surplus projected at 28 percent of GDP in 2011, up from 26 percent in 2010.
- Monetary and credit conditions:
  - Commercial banks’ claims on the private sector increased by 19 percent y-o-y in October 2011.
  - Easing of monetary conditions in 2011 coincided with launch of infrastructure-related investments.
- Banking sector soundness (end-June 2011):
  - Qatar Investment Authority injected $2.8 billion capital into the banking system in three tranches between 2009 and 2011.
  - Capital adequacy ratio increased to 22.3 percent by end-June 2011.
  - Average return on assets: 2.7 percent.
  - Non-performing loans ratio: 2.3 percent at end-June 2011.
  - Local banks’ cross-border exposures to the European banking sector: approximately $3.3 billion at end-June 2011 (constituting 2 percent each of 2011 GDP and banking system assets).

### Short- and medium-term outlook (2012 and beyond)
- 2012 projections:
  - Real GDP growth projected to moderate to 6 percent in 2012.
  - Real hydrocarbon GDP projected to slow to less than 3 percent (table: 2.9 percent) in 2012 as LNG production remains constant.
  - Real nonhydrocarbon GDP projected at 9 percent in 2012.
  - Average headline CPI inflation projected at 4 percent in 2012.
  - Fiscal balance projected to record a surplus of over 7 percent in 2012 (table: 7.2 percent).
  - External balance projected to post a surplus of $47 billion in 2012.
- Medium term:
  - Fiscal and external current account balances projected to record surpluses as hydrocarbon prices expected to remain high.
  - Large government investment would sustain nonhydrocarbon growth between 9 and 10 percent beyond 2012.
  - Average headline inflation projected at 4 to 5 percent over the medium term.

### Risks, shock ("crisis") macroeconomic scenario, and financial contagion
- Principal risks:
  - Lower oil and gas receipts from global demand decline and potential disruption in LNG transportation due to geopolitical tensions.
  - A large drop in hydrocarbon prices would significantly impact fiscal and external current accounts, though Qatar would still generate surpluses under staff analysis.
- Staff’s alternative (“crisis”) scenario assumptions:
  - Treat 2011/Q3 as equivalent to 2008Q3 and use quarter-on-quarter percentage changes from the previous crisis.
  - Oil price falls to $50 a barrel in 2011Q4, averaging $55 in 2012 and $70 in 2013.
  - LNG production and exports estimated to be 15 percent below the benchmark scenario.
  - Crude oil prices used as a proxy for gas prices; LNG and gas-related products converted to oil barrel equivalent.
- Key outcomes under the shock scenario:
  - External current account surplus declines from average 25.6 percent of GDP in 2012–13 to 5.6 percent of GDP without diversion of exports.
  - Fiscal balance turns from a surplus in 2011 to deficits from 2012 onwards.
  - Cash flows to the State fall by $41 billion between 2012 and 2016, but still generate surpluses in each year.
  - Real nonhydrocarbon GDP would reduce by half in 2012 due to delays in infrastructure project implementation.
- Financial contagion and global liquidity risks:
  - Deepening banking and sovereign debt problems in advanced economies could tighten global liquidity and impact Qatar through funding channels and higher costs for borrowers.
  - Qatar issued a $5 billion sovereign bond in November 2011 in three tranches: five-year $2 billion tranche at a yield of 3.184 percent; $2 billion 10-year at a yield of 4.63 percent; $1 billion 30-year at 5.825 percent.
  - Many local banks planned to raise an aggregate of about $20 billion through international bond issuances and Euro Medium-Term Notes.
- Box 1 summary:
  - Contagion largely confined to equity and CDS markets; local equity index 4 percent below its level at the beginning of 2011 after a 25 percent increase in 2010.
  - Europe explains 90 percent of the contagion risk to Qatar for the period since July 2011 (Spillover Coefficient methodology).
  - Estimated financial spillovers to Qatar remain relatively low and lower than during 2008–09.

### Inflation outlook, VAR analysis, and fiscal package impact
- Inflation dynamics:
  - Average deflation around 4.9 percent in 2009 and 2.5 percent in 2010.
  - Month-on-month core inflation (excluding food and rents): 5.2 percent in September 2011.
  - Potential inflationary pressures from sizeable increases in public expenditure announced in 2011 (salary increases and pensions).
- VAR model findings (annual 1990–2008 data, one-year lags):
  - Estimated elasticity of inflation to current expenditure: coefficient 0.1 (interpreted as a 1 percent increase in current expenditure associated with a 0.1 percentage point increase in inflation).
  - Estimated CPI inflation equation coefficients (selected):
    - CPI Inflation (t-1): 1.42 [ 5.52]
    - Non-oil real GDP growth (t-1): -0.23 [-2.41]
    - Domestic credit growth (t-1): -0.07 [-2.11]
    - Current expenditure growth (t-1): 0.11 [ 2.46]
    - Nominal effective exchange rate growth (t): -0.30 [-2.11]
    - R-squared for CPI Inflation equation: 0.96; Adj. R-squared: 0.92
- Inflationary impact of the September 1, 2011 fiscal package:
  - Assumed QR 10 billion increase in salaries; estimated 8 percent increase in current expenditure in 2012.
  - Expected inflationary impact in 2012: 1 percentage point (noting caveats on spending leakages and wage spillovers).

### Monetary policy, liquidity management, and QCB stance
- Under the peg, QCB has limited flexibility to deviate from US interest rates and therefore must manage liquidity actively.
- QCB actions and instruments:
  - Caps on remunerated deposits; reduction in policy interest rates in phases to align with US policy rates (QMR Deposit rate reduced to 0.75 percent by August 2011).
  - Issuance of government bonds and sukuk; issuance of T-bills in lieu of certificates of deposit (CDs) to mop up structural liquidity.
  - Main liquidity management instruments: reserve requirements, (discontinued) CDs, and open market operations.
  - Recommendation: develop a formal liquidity management framework; continue regular issuance of T-bills to manage liquidity and develop the short end of the yield curve.
- Recent central bank indicators and timeline:
  - Reserve requirement: 4.75 percent of total deposits (noted).
  - QMR deposit rate reductions: 2.0 percent → 1.5 percent (August 11, 2010) → 1.0 percent (April 5, 2011) → 0.75 percent (August 2011).
  - QMR Lending rate and QCB Repo rate reduced to 5.0 percent (April 5, 2011) and later QMR Lending to 4.5 percent (August 2011).

### Macroprudential policy, credit growth, and real estate
- Recommendation: develop a formal and transparent macroprudential policy framework (objectives, analytical methods, toolkit) to enable swift response and orderly credit growth without overheating.
- Credit and foreign-currency exposures:
  - Credit expanding rapidly, driven by the public sector and real estate.
  - Lending to residents in foreign currency increased by $31 billion between December 2010 and October 2011 to $49 billion (46 percent of total loans and 27 percent of total assets of the banking system).
  - Borrowings from non-residents in foreign currency increased by $6 billion; central bank reserves fell by $16 billion; balance covered by foreign currency deposits of public enterprises over the same period.
  - Much foreign currency lending to a few large government-owned enterprises judged limited credit risk by QCB.
- Real estate sector supervision and data:
  - Excess supply in real estate keeping rents depressed; potential build-up of bank risks in private real estate.
  - QCB collecting municipality-level data and constructing a real estate price index (ready for dissemination after three years).
  - Staff suggested collating and disseminating comprehensive price and volume data on real estate market segments and developing a corporate governance code for real estate developers.

### Banking sector resilience, stress testing, and governance
- Corporate debt-service and bank resilience:
  - Qatari corporates well-cushioned to withstand interest rate and income shocks; profits recovered compared to 2010.
  - Interest Coverage Ratios (ICRs): 3.7 in Q2 2011 (3.1 at end-2010); ICRs with cash buffers: 18.3 in Q2 2011 (13.1 at end-2010).
  - Two out of 34 listed companies have ICRs <1 or operating losses; their debt accounts for 0.7 percent of total debt.
  - Distance-to-default results indicate default risks remain low in 2011 compared to 2010.
- Stress testing and regulatory recommendations:
  - Staff stress tests indicate banking system can withstand credit and market risks, but monitoring of individual banks needed due to interlinkages.
  - Recommendations: lower dependence on wholesale funding; enable a more robust risk assessment culture; conduct regular stress testing; put in place an early warning system.
  - Progress toward a single regulatory regime welcomed; ban on Islamic banking windows in conventional banks and quantitative/price ceilings on personal loans against salary assignment noted.
  - QCB rewriting central bank Law to address corporate governance and single regulator issues; staff recommends appointment of independent directors and in-depth diagnostic of bank governance.

### Fiscal stance, public investment, pensions, and structural reform
- Fiscal stance and aggregate demand:
  - Expansionary fiscal stance in 2011/12 warrants careful monitoring of aggregate demand to ward off inflation risks.
  - Underlying fiscal stance reflects higher expenditure from salary increases, one-off Arab Spring-related current expenditures, and capital projects.
  - Nonhydrocarbon deficit as percent of nonhydrocarbon GDP projected to expand from 25.6 percent to 27.7 percent in the fiscal year (instead of contracting from 36.5 percent had investment income been fully accounted for in FY 2010/11).
  - Authorities aim to allocate 40 percent of total expenditure toward capital expenditure over the medium term.
- Public finances and public investment management:
  - Staff urged adoption of a Public Investment Management System for project selection, appraisal, and programming—critical given large FIFA 2022 infrastructure-related expenditure.
  - Authorities reevaluating major infrastructure projects (such as the metro) to reassess size, structure, financing and completion time.
- Pensions and subsidies:
  - Recent salary hike of 60 to 120 percent for civilian Qatari public sector employees and military personnel extended to pensioners.
  - Fiscal expenditure to compensate utility company losses budgeted at QR1.8 billion in 2011/12 (0.3 percent of GDP).
  - Staff suggested pension reforms: rebasing pensions over the average of the last few years of service instead of the last month’s salary; increasing the retirement age; raising the early retirement age; and changes to investment policy — to be implemented with cash and asset transfers.

### External sustainability and exchange rate assessment
- Exchange rate peg:
  - Peg to the U.S. dollar provides a strong nominal anchor; CGER-type methodologies broadly indicate an undervalued real effective exchange rate, narrowing over the medium term; macroeconomic balance approach suggests overvaluation.
  - Preconditions to sustain the peg—strong fiscal position, sound banking system, and flexible labor and capital markets—are in place.
- External sustainability (annuity/allocation rules):
  - IMF staff estimate Qatar’s wealth at $3.0 trillion.
  - Benchmark: constant real per capita annuity rule indicates a small undervaluation of 3 percent (implied norm 9 percent of GDP in 2016 vs. projected current account 11 percent of GDP in 2016).
  - GMM-estimated Current Account Norm (2016): 22.7 percent; Underlying Current Account Norm (2016): 11.4 percent.
  - Contributions to CA norm (selected): NFA/GDP Relative income contribution 14.29%; Proxy for SWF/IIP contribution 11.92%; Oil and gas trade balance contribution 8.26%.

### Key statistics and selected projections (2007–12; medium-term highlights)
- Real GDP growth (percent per annum): 2007 18.0; 2008 17.7; 2009 12.0; 2010 16.6; 2011 18.8; 2012 6.0.
  - Hydrocarbon: 2007 13.8; 2008 13.2; 2009 4.5; 2010 28.8; 2011 31.1; 2012 2.9.
  - Nonhydrocarbon: 2007 21.6; 2008 21.3; 2009 17.6; 2010 8.4; 2011 9.0; 2012 9.0.
- Nominal GDP (million U.S. dollars): 2007 79,547; 2008 115,020; 2009 97,583; 2010 127,332; 2011 172,982; 2012 179,925.
- Nominal GDP per capita (U.S. dollars): 2007 64,872; 2008 79,409; 2009 59,545; 2010 74,901; 2011 97,840; 2012 97,853.
- LNG production (million tons per year): 2007 29.9; 2008 31.5; 2009 36.0; 2010 55.0; 2011 74.8; 2012 77.0.
- Oil export price (U.S. dollars per barrel): 2007 70.0; 2008 96.9; 2009 62.6; 2010 77.4; 2011 101.1; 2012 97.9.
- CPI period average: 2007 13.8; 2008 15.0; 2009 -4.9; 2010 -2.4; 2011 2.0; 2012 4.0.
- Central government finances (fiscal year basis, million Qatari Riyals):
  - Total revenue: 2006/07 86,062; 2007/08 117,865; 2008/09 140,993; 2009/10 169,095; 2010/11 155,908; 2011/12 209,464.
  - Total expenditure: 67,147; 86,249; 99,294; 114,574; 142,370; 163,460.
  - Net lending (+)/borrowing (-): 18,915; 31,616; 41,699; 54,521; 13,538; 46,004.
- Key fiscal ratios (percent of GDP, fiscal year basis):
  - Revenue: 36.1; 36.6; 35.0; 44.2; 30.9; 32.9 (2006/07–2011/12).
  - Hydrocarbon revenue: 23.2; 22.0; 19.9; 21.7; 19.2; 18.0.
  - Net lending (+)/borrowing (-): 7.9; 9.8; 10.4; 14.3; 2.7; 7.2.
  - Nonhydrocarbon fiscal balance (percent of nonhydrocarbon GDP): -32.4; -25.8; -20.1; -14.0; -36.5; -27.7.
- Current account (million U.S. dollars and percent of GDP): 2007 20,186 (25.4%); 2008 33,039 (28.7%); 2009 9,987 (10.2%); 2010 33,531 (26.3%); 2011 48,660 (28.1%); 2012 47,290 (26.3%).
- Central bank reserves, gross (million U.S. dollars): 2007 9,753; 2008 9,837; 2009 18,352; 2010 30,720; 2011 20,703; 2012 24,412.
  - Months of imports of goods and services: 3.3; 3.9; 5.8; 8.4; 5.4; 5.8 (2007–2012).
- Public debt (million Qatari Riyals): total government debt 28,910; 25,749; 46,972; 110,111; 156,523; 214,524 (2006/07–2011/12).
  - Memorandum ratios (percent of GDP): total government debt 12.1; 8.0; 11.7; 28.8; 31.0; 33.7.

### Staff appraisal and policy recommendations (consolidated)
- Maintain fiscal and external surpluses to preserve buffers against hydrocarbon price volatility.
- Use existing policy framework and financial cushions to mitigate price and quantity risks from hydrocarbon markets; leverage Qatar’s low cost of LNG production and built-in diversion clauses in gas contracts.
- Monitor and manage potential overheating pressures from large public investment and real estate capacity adjustments to contain inflationary risks.
- QCB should manage liquidity actively under the peg: develop a formal liquidity management framework; continue issuance of T-bills; coordinate debt management with the Ministry of Economy and Finance to develop a yield curve and interbank repo market.
- Develop a more formal and transparent macroprudential policy framework to enable swift responses and achieve orderly credit growth without overheating.
- Strengthen bank risk assessment, conduct regular stress testing, put in place an early warning system, and monitor individual banks’ foreign currency liquidity conditions.
- Strengthen public financial management: establish a macro-fiscal unit and a medium-term expenditure framework; adopt a Public Investment Management System for FIFA 2022 and other infrastructure projects.
- Reduce vulnerabilities to hydrocarbon price fluctuations via diversification, improved competitiveness, reduced subsidies, and consideration of deeper pension reforms.

*International Monetary Fund. QATAR 2011 ARTICLE IV REPORT.*

### 1. Selected Macroeconomic indicators, 2007–12 _________________________________________________  27

### _cr1218 - 1. Selected Macroeconomic indicators, 2007–12 _________________________________________________  27

### Background and current context
- Qatar has the third-largest proven reserves of gas in the world, and is now the world's largest producer of LNG.
- The State completed a 20-year investment program in 2011 focused on commercializing natural resources; a moratorium on development of new hydrocarbon projects is in place until 2015 to allow assessment of production and a comprehensive study of the offshore North Field.
- The government has embarked on a medium-term infrastructure investment program (roads, completion of the port and airport, and metro) with budget allocation expected to be close to $100 billion.
- Qatar’s 20-year investment program culminated in 2011.
- Qatar has a small Qatari population of less than a fifth of a total of 1.7 million.
- Annual per capita income is around $100,000.
- The official unemployment rate is estimated at less than 1 percent.

### Recent economic developments and performance (2010–11)
- Real GDP growth:
  - Projected to accelerate to 19 percent in 2011 from 17 percent in 2010, driven by LNG production which increased by 36 percent.
  - Real nonhydrocarbon sector growth driven by manufacturing, financial services, and trade and hotels was 9 percent in 2011.
- Inflation:
  - Inflation excluding rent increased to 5.8 percent in October 2011.
  - Following an average deflation of around 2.5 percent in 2010, inflation is expected to average around 2 percent in 2011 (end-year 2.5 percent).
- Fiscal and external balances:
  - Overall fiscal balance (net lending/borrowing) remained in a surplus of 2.7 percent of GDP in 2010/11.
  - The post-budget announcement of salary and pension hikes would add an estimated $1.6 billion to government expenditure in 2011/12.
  - With oil prices on average well above $55 a barrel in 2011, the actual fiscal balance is projected to record a surplus of 7.2 percent of GDP in 2011/12.
  - The current account surplus is projected at 28 percent of GDP in 2011, up from a surplus of 26 percent in 2010, reflecting increased hydrocarbon export volumes and prices.
- Monetary and credit conditions:
  - Commercial banks’ claims on the private sector increased by 19 percent y-o-y in October 2011.
  - Easing of monetary conditions in 2011 coincided with launch of infrastructure-related investments.
- Banking sector soundness (end-June 2011):
  - Qatar Investment Authority injected $2.8 billion of capital into the banking system in three tranches between 2009 and 2011.
  - Capital adequacy ratio of the banking sector increased to 22.3 percent by end-June 2011.
  - Average return on assets stood at 2.7 percent.
  - Non-performing loans ratio was 2.3 percent at end-June 2011.
  - Local banks’ cross-border exposures to the European banking sector were approximately $3.3 billion at end-June 2011—constituting 2 percent each of 2011 GDP and banking system assets.

### Short- and medium-term outlook (2012 and beyond)
- 2012 projections:
  - Real GDP growth projected to moderate to 6 percent in 2012.
  - Real hydrocarbon GDP projected to slow to less than 3 percent in 2012 as LNG production remains constant.
  - Real nonhydrocarbon GDP projected at 9 percent in 2012 due to large infrastructure investment and increased manufacturing production.
  - Average headline CPI inflation projected at 4 percent in 2012.
  - Fiscal balance projected to record a surplus of over 7 percent in 2012.
  - External balance projected to post a surplus of $47 billion in 2012.
- Medium term:
  - Fiscal and external current account balances projected to record surpluses as hydrocarbon prices expected to remain high.
  - Large government investment would sustain nonhydrocarbon growth between 9 and 10 percent beyond 2012.
  - Average headline inflation projected at 4 to 5 percent over the medium term, as rents stabilize and investment projects may generate some overheating pressures.

### Risks, shock scenario, and financial contagion
- Principal risks:
  - Lower oil and gas receipts from global demand decline and potential disruption in LNG transportation due to geopolitical tensions.
  - A large drop in hydrocarbon prices would significantly impact fiscal and external current accounts, though Qatar would still generate surpluses under staff analysis.
- Staff’s alternative (“crisis”) macroeconomic scenario assumptions:
  - Treat 2011/Q3 as equivalent to 2008Q3 and use quarter-on-quarter percentage changes from the previous crisis.
  - Oil price falls to $50 a barrel in 2011Q4, averaging $55 in 2012 and $70 in 2013.
  - LNG production and exports estimated to be 15 percent below the benchmark scenario.
  - Crude oil prices used as a proxy for gas prices; LNG and gas-related products converted to oil barrel equivalent.
- Key outcomes under the shock scenario:
  - External current account surplus declines sharply from an average 25.6 percent of GDP in 2012–13 to 5.6 percent of GDP without diversion of exports.
  - Fiscal balance turns from a surplus in 2011 to deficits from 2012 onwards.
  - Cash flows to the State fall by $41 billion between 2012 and 2016, but still generate surpluses in each year.
  - Real nonhydrocarbon GDP would reduce by half in 2012 due to delays in infrastructure project implementation.
- Financial contagion and global liquidity risks:
  - Deepening banking and sovereign debt problems in advanced economies could tighten global liquidity and impact Qatar through funding channels and higher costs for borrowers, affecting infrastructure plans and nonhydrocarbon growth.
  - Qatar issued a $5 billion sovereign bond in November 2011 in three tranches: a five-year $2 billion tranche at a yield of 3.184 percent, $2 billion with 10-year maturity at a yield of 4.63 percent, and $1 billion of 30 year-maturity yielding 5.825 percent.
  - Many local banks planned to raise an aggregate of about $20 billion through international bond issuances and Euro Medium-Term Notes.
- Box 1: Financial Contagion to Qatar’s Sovereign Risk
  - Contagion from recent global and regional developments has been confined largely to equity and CDS markets.
  - Local equity market index was 4 percent below its level at the beginning of 2011 after a 25 percent increase in 2010.
  - Using a Spillover Coefficient (SC) methodology based on CDS data, Europe has been identified as explaining 90 percent of the contagion risk to Qatar for the period since July 2011, when the Euro area debt crisis intensified.
  - Estimated financial spillovers to Qatar remain relatively low and lower than during 2008–09, though Europe is a key contributor.

### Policy implications and priorities (as presented)
- Maintain fiscal and external surpluses to preserve buffers against hydrocarbon price volatility.
- Use existing policy framework and financial cushions to mitigate price and quantity risks from hydrocarbon markets; leverage Qatar’s low cost of LNG production and built-in diversion clauses in gas contracts.
- Monitor and manage potential overheating pressures from large public investment and real estate capacity adjustments to contain inflationary risks.
- Ensure banking sector liquidity and capitalization remain strong given potential tightening of global liquidity and funding costs for international issuers.

*International Monetary Fund. QATAR 2011 ARTICLE IV REPORT.*

### 13.      Headline inflation remains

### 13.      Headline inflation remains

### Inflation outlook and risks
- Headline inflation is subdued.
- Inflation risks have risen due to an increase in public sector wages.
- Authorities identified three potential medium-term inflationary channels:
  - The expansionary effect of the major Barzan gas project that will start in 2012.
  - The implementation of major projects in the nonhydrocarbon sector.
  - The recent fiscal package.
- Authorities consider the first two channels “growth generating” and of little concern; the impact of the public sector wage increase depends on the marginal propensity for domestic consumption.
- Most inflationary pressure would come from the nontradable sector, despite excess supply in real estate keeping rents depressed.
- Authorities expect the newly formed High-Level Committee on Prices to contain monopolistic price pressures.
- Recently introduced limits on retail lending by banks against salary assignment are intended to preempt further leverage from the salary increase.
- Staff projects a potential inflationary effect of the recent fiscal package of about one percentage point (Appendix 1).

### Fiscal stance and aggregate demand
- The expansionary fiscal stance in 2011/12 warrants careful monitoring of aggregate demand to ward off inflation risks.
- The underlying fiscal stance for FY 2011/12 mainly reflects:
  - Higher expenditure on account of the salary increase.
  - One-off current expenditures related to the Arab Spring.
  - Capital projects.
- These higher expenditures would be less than compensated by higher hydrocarbon revenues, expected additional profit transfers from public enterprises and higher corporate taxes.
- The nonhydrocarbon deficit as a percent of nonhydrocarbon GDP is projected to expand from 25.6 percent to 27.7 percent this fiscal year (instead of contracting from 36.5 percent, had investment income been fully accounted for in FY 2010/11).
- Authorities do not anticipate further one-off increases in current expenditure and aim to allocate 40 percent of total expenditure toward capital expenditure over the medium term.
- Staff and authorities agreed fiscal policy needs to balance spending on infrastructure to sustain non-inflationary growth and saving and investing hydrocarbon surpluses abroad to generate income to finance future budgets.

### Monetary policy, liquidity management, and the QCB’s stance
- The QCB should maintain its policy stance of driving out short-term speculative inflows and absorbing structural liquidity.
- Beginning January 2011, the QCB imposed a cap on its remunerated deposits and reduced policy interest rates in phases to align them with US policy rates; these measures successfully drove out short-term arbitrage funds intermediated through the banking system.
- Issuance of government bonds and sukuk coinciding with the cap on central bank deposits, and issuance of T-bills in lieu of certificates of deposit (CDs), facilitated mopping up structural liquidity over a longer period while shifting cost from the QCB’s balance sheet to government expenditure.
- Under the peg, the central bank has limited flexibility to deviate from US interest rates and therefore needs to manage liquidity more actively to keep inflation in check.
- QCB’s main liquidity management instruments: reserve requirements, (discontinued) CDs, and open market operations.
- Authorities reported positive experience with issuance of T-bills and plan to continue regular issuance to manage liquidity and develop the short end of the yield curve.

### Macroprudential policy and credit growth
- Recommendation: develop a more formal and transparent macroprudential policy framework (definition of objectives, elaboration of analytical methods, and policy toolkit) to enable swift response and achieve orderly credit growth without overheating.
- Monetary policy challenge: support credit growth—particularly project related—without fuelling inflationary pressures or short-term capital inflows.
- Credit is expanding rapidly, driven by the public sector and real estate.
- Continued growth in the nonhydrocarbon sector and infrastructure projects will increase demand for credit.
- Staff cautioned banks and the QCB to ensure overall credit quality does not weaken, especially in the real estate sector given prevailing excess supply and a precarious global outlook.
- Authorities indicated excess real estate supply would gradually converge with demand as infrastructure projects complete and construction workers are replaced by white-collar workforce; example: completion of the new airport would entail additional jobs for about 30,000 service-oriented and skilled workers, who are expected to migrate with families and generate demand for services and housing.
- Authorities may seek IMF assistance in developing a macroprudential framework.

### Bank liquidity, foreign currency exposure, and contingency readiness
- QCB should monitor individual bank liquidity conditions and stand ready to relieve potential pressures.
- Interest rate differential between local and foreign currency lending led to high demand for bank credit in foreign currency by residents.
- Lending to residents in foreign currency increased by $31 billion between December 2010 and October 2011 to $49 billion (46 percent of total loans and 27 percent to total assets of the banking system).
- On liabilities: borrowings from non-residents in foreign currency increased by $6 billion; central bank reserves fell by $16 billion; balance was covered by foreign currency deposits of public enterprises over the same period.
- Much foreign currency lending was to a few large government-owned enterprises that were profitable and generated foreign currency earnings; QCB judged credit risk limited for these exposures.
- Staff noted a global foreign funding shock could generate liquidity tightening in the domestic banking sector that would need to be managed at individual bank level.
- QCB monitors liquidity of individual banks and applies prudential regulation on foreign asset-liability positions; requirement that banks lend in foreign currency only if corporates can generate revenues in foreign currency provides a safeguard.

### Exchange rate peg and fiscal sustainability
- The exchange rate peg provided a strong nominal anchor.
- CGER-type methodologies broadly indicate an undervalued real effective exchange rate, narrowing over the medium term (Appendix 3).
- The macroeconomic balance approach suggests the Qatari Riyal is overvalued (implying Qatar should accumulate larger current account surpluses given fundamentals).
- The external sustainability and equilibrium real exchange rate approaches suggest undervaluation (implying different saving recommendations).
- Preconditions to sustain the peg—strong fiscal position, sound banking system, and flexible labor and capital markets—are in place and should facilitate adjustment.
- Staff’s medium-term fiscal sustainability exercise shows fiscal space has contracted somewhat compared to last year because of the permanent increase in current expenditure.
- Government expenditure remains predominantly current expenditure, though this declined from about 90 percent of total expenditure in 1990 to about 65 percent in FY 2010/11.
- Authorities aim to fully finance the budget from nonhydrocarbon revenues from 2020 onwards and to build buffers; staff encouraged authorities to save more.
- Projected nonhydrocarbon balance at around 25 percent of nonhydrocarbon GDP in 2016; in the benchmark scenario, projected nonhydrocarbon revenues financing of total projected expenditure would increase from 52 percent to about 63 percent in 2016/17.
- Policies to broaden the nonhydrocarbon tax base (VAT), rationalize the corporate tax rate, non-renewal of tax holidays, and introduction of withholding tax would increase corporate tax revenues in the future.
- Authorities remain committed to keeping capital expenditure at 40 percent of total expenditure in the medium term and do not foresee further ad hoc increases in current expenditures.

### Financial sector resilience and regulatory recommendations
- Staff stress tests indicate the banking system can withstand credit and market risks, but monitoring of individual banks is needed due to system interlinkages.
- Banks’ dependence on wholesale funding, though not significant, should be lowered to mitigate risks.
- Recommendations: enable a more robust risk assessment culture, conduct regular stress testing, and put in place a framework for an early warning system to mitigate banking system risks and strengthen financial stability.
- Authorities and staff agreed on these recommendations and on monitoring individual bank stress indicators.

*Source: QATAR 2011 ARTICLE IV REPORT, International Monetary Fund.*

### 22.      Staff’s analysis suggests that

### _cr1218 - 22.      Staff’s analysis suggests that

### Financial sector resilience and corporate debt-service capacity
- Qatari corporates appear well-cushioned to withstand interest rate and income shocks.
- Profits show a recovery compared to 2010.
- Interest Coverage Ratios (ICRs) for Q2 2011 were at 3.7 compared to 3.1 at end 2010, driven by interest expenses decreasing by 43 percent (from $1.5 to $0.9) even though cash buffers decreased by 16 percent.
- ICRs with cash buffers stand at 18.3 in Q2 2011 compared to 13.1 at end-2010.
- The income shock—a 25 percent decline—also does not point to debt servicing pressures at the aggregate level.
- Distance-to-default results indicate that default risks still remain low in 2011 compared to 2010.
- By sectors: two (one industry and one services sector) out of the 34 listed companies have ICRs<1 or operating losses, with their debt accounting for 0.7 percent of the total debt.

### Money and bond markets; liquidity management
- Staff welcomes steps to develop the money and bond markets.
- Recommendation: QCB should develop a formal liquidity management framework to facilitate a more proactive strategy in fine-tuning liquidity.
- Recommendation: Coordination of debt management with the Ministry of Economy and Finance to maintain a stable and adequate stock of government securities, to support development of an interbank repo market and provide a robust benchmark yield curve for the corporate bond market.
- Initiatives welcomed: High Level Financial Market Development Committee to list T-bills at Qatar Exchange from early 2012, and efforts to develop a yield curve.

### Regulatory reforms, single regulatory regime, and Islamic banking
- Staff welcomes progress toward the single regulatory regime.
- Other developments: ban on Islamic banking windows in conventional banks, and imposition of quantitative and price ceilings on personal loans against salary assignment.
- These changes aim to bring greater clarity to the regulatory framework, mitigate risks in the banking system and household debt, and usher in more orderly credit growth.
- Approval by the Council of Ministers of the proposal to establish the single regulator; staff looks forward to its formal launch in early 2012.
- Authorities are considering strengthening the central bank law to address legal issues arising under the single regulatory regime and addressing Shariah dimensions of Islamic banking to place the Islamic banking industry on firmer statutory footing.

### Real estate sector supervision and data transparency
- There is scope to strengthen supervision of real estate sector loans and improve transparency of the real estate market.
- Although prudential regulation for lending to real estate exists, staff views banks might be building excessive risks in private real estate given existing excess capacity, which may materialize if global conditions worsen.
- Absence of comprehensive and timely data on the real estate market precludes proper bank risk assessment and central bank risk-based supervision.
- QCB collects data at the municipality level and is constructing a real estate price index, which would be ready for dissemination after three years.
- Staff suggested collating and disseminating comprehensive price and volume data on Qatar’s real estate market segments to help banks assess risks and enable QCB preemptive regulatory measures.
- Staff encouraged development of a corporate governance code for real estate developers to help prevent excessive risk-taking.

### Corporate governance in banks
- Guidelines issued by the QCB in 2008 provide a framework for improving corporate governance in banks.
- Staff recommends moving towards international good practices such as appointment of independent directors on bank boards.
- Given high credit concentration of Qatari banks, staff encourages an in-depth diagnostic of bank governance to highlight potential areas of improvement.
- QCB is rewriting the central bank Law to address corporate governance issues and align with the single regulatory regime.

### Institutional capacity, macro-fiscal framework, and debt management
- Staff urged acceleration of steps to establish a macro-fiscal unit to develop a medium-term expenditure framework to ensure efficiency of public spending.
- Progress noted: restructuring and modernizing operations in the Ministry of Economy and Finance; drafting of new financial and procurement laws; developing an e-based tax system (currently at the tendering stage); move toward preparation of a three-year budgeting framework.
- A solid medium-term expenditure framework would be a critical building block for eventual adoption of a fiscal rule.
- Authorities are interested in receiving technical assistance (TA) from the Fund on setting up the macro-fiscal unit.
- Staff reiterated recommendation to consolidate debt management and development functions in a debt office. Currently, the debt office functions as a secretariat to the Ministerial State Finance Policy Committee.
- Maximum limit for borrowing is determined through an Emiri decree and the Committee decides timing, amount, maturity, and instrument type for each internal and external debt.

### Public investment, FIFA 2022, and public financial management
- Staff encouraged sustaining efforts to strengthen public financial management.
- Given large FIFA 2022 infrastructure-related expenditure, staff underscored importance of adopting a Public Investment Management System for project selection, appraisal, and programming to enhance efficiency, accountability and governance.
- Authorities are reevaluating major infrastructure projects (such as the metro) to reassess size, structure, financing and completion time.

### Economic diversification, subsidies, and pensions
- Reducing vulnerability to hydrocarbon price fluctuations requires fiscal management, diversification, and reinforcing competitiveness via productivity, technology, investment efficiency, openness to foreign competition, and labor quality—articulated in National Development Strategy (NDS) for 2011–16.
- Opportunities exist to improve efficiency and reduce distortions in petrol, energy, and water use by reducing direct and indirect subsidies.
- Increasing petrol pump prices by 25 percent in January 2011 to QR1 per liter noted as a step in the right direction.
- Free electricity and water for nationals and subsidized tariffs for expatriates increase inefficiency; fiscal expenditure to compensate utility company losses is budgeted at QR1.8 billion in 2011/12 (0.3 percent of GDP), and expected to grow with population and industrial development.
- Natural gas feedstock prices for Qatari petrochemical companies have been on the rise, but remain lower than spot and contracted Qatari export prices. Authorities indicated no plans to review subsidies.
- Pension issues: recent salary hike of 60 to 120 percent for civilian Qatari public sector employees and military personnel was extended to pensioners.
- Authorities confirmed transfers to the pension fund to meet increased cash outflows and the actuarial deficit would be predominantly in the form of assets.
- Staff suggested reforms: rebasing of pension payments over the average of the last few years of service instead of the last month’s salary; increasing the retirement age; raising the early retirement age; and changes to investment policy to improve the risk-return profile — to be implemented in conjunction with cash and asset transfers.

### Statistics, AML/CFT, and data dissemination
- Timely compilation and dissemination of key statistics remain essential.
- Significant progress achieved in national accounts, inflation data, and sovereign external debt statistics.
- Since the September 2010 TA mission on balance of payments, authorities have made progress implementing recommendations, including compiling balance of payments data in the international format needed for publication in the International Financial Statistic (IFS).
- Staff encouraged pursuit of efforts to strengthen economic statistics, including compiling an International Investment Position (IIP) statement.
- Mission commends authorities on strengthening Qatar’s Anti Money Laundering (AML)/Combating Financing of Terrorism (CFT) framework: consistent Rules/Regulations across supervisory bodies, increased offsite and onsite reviews of AML/CFT compliance, progress in implementing UN Security Council Resolutions, and strengthened mechanisms and training for supervisors.

### Staff appraisal and policy recommendations
- Qatar is using fiscal space from increased hydrocarbon production and prices to implement a large public spending program.
- Large infrastructure investments are expected to sustain strong growth of 9 to 10 percent in the nonhydrocarbon sector in the medium term.
- Headline inflation is projected to remain subdued, but inflation risks have risen due to domestic factors; the potential inflationary effect of the recent fiscal package is estimated to be around 1 percentage point.
- Fiscal policy should monitor aggregate demand and QCB should manage liquidity.
- Expansionary fiscal stance in 2011/12 warrants careful monitoring of aggregate demand to ward off inflation risks; fiscal policy must balance infrastructure spending with saving and investing hydrocarbon surpluses abroad.
- In the context of the peg, QCB needs to manage liquidity more actively; develop a formal liquidity management framework; and coordinate debt management with the Ministry of Economy and Finance.
- Recommendation: develop a more formal and transparent macroprudential policy framework to enable swift response, achieve orderly credit growth without overheating, and focus on supporting credit growth without fuelling inflationary pressures or short-term capital inflows.
- Warning: increasing credit growth requires caution to prevent weakening credit quality, particularly in the real estate sector given excess supply; collating and disseminating real estate price and volume data would aid risk assessment and preemptive measures.
- Banking system can withstand credit and market risks, but staff underscores need to monitor individual banks for stress given interlinkages; monitor individual banks’ foreign currency liquidity conditions and have QCB ready to relieve potential pressures.
- Further measures: enable a more robust risk assessment culture, conduct regular stress testing of banks, and put in place an early warning system to mitigate risks and maintain financial stability.
- Medium-term fiscal policy must balance stabilization, development, and generating intergenerational savings. Fiscal space has contracted somewhat compared to last year because of the permanent increase in current expenditure (staff’s medium-term fiscal sustainability exercise).
- Given the authorities’ objective of fully financing the budget from 2020 onwards from nonhydrocarbon revenues and building buffers for shocks, authorities will need to increase savings over the medium term.
- While eventual VAT implementation will increase revenues, adjustment in current expenditures is the most feasible way to reduce dependency of the budget on hydrocarbon revenues.
- Establishing a macro-fiscal unit would support fiscal policymaking and development of a medium-term budget framework, and is critical for eventual adoption of a fiscal rule.
- Reducing vulnerability to hydrocarbon price fluctuations will require diversification, improved competitiveness, reduced subsidies, and consideration of deeper pension reforms.

*Source: QATAR 2011 ARTICLE IV REPORT (excerpts).*

### 45.      Further improvements in statistics

### 45.      Further improvements in statistics

### Recommendations and institutional coordination
- Further improvements in statistics will be essential, which will also require greater coordination across agencies.
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Summary projection highlights (selected macro aggregates, 2007–12)
- Nominal GDP (in million Qatari Riyals): 289,551; 418,672; 355,204; 463,490; 629,653; 654,928 (2007–2012).
- Nominal hydrocarbon GDP (in million Qatari Riyals): 150,014; 230,312; 159,467; 239,745; 388,409; 387,348 (2007–2012).
- Nominal GDP (in million U.S. dollars): 79,547; 115,020; 97,583; 127,332; 172,982; 179,925 (2007–2012).
- Nominal GDP per capita (in U.S. dollars): 64,872; 79,409; 59,545; 74,901; 97,840; 97,853 (2007–2012).
- Real GDP growth (percent per annum): 18.0; 17.7; 12.0; 16.6; 18.8; 6.0 (2007–2012).
  - Hydrocarbon: 13.8; 13.2; 4.5; 28.8; 31.1; 2.9 (2007–2012).
  - Nonhydrocarbon: 21.6; 21.3; 17.6; 8.4; 9.0; 9.0 (2007–2012).
- Crude oil output (thousand barrels per day): 839; 836; 792; 789; 756; 739 (2007–2012).
- LNG production (million tons per year): 29.9; 31.5; 36.0; 55.0; 74.8; 77.0 (2007–2012).
- Oil export price (U.S. dollars per barrel): 70.0; 96.9; 62.6; 77.4; 101.1; 97.9 (2007–2012).
- CPI period average: 13.8; 15.0; -4.9; -2.4; 2.0; 4.0 (2007–2012).

### Public finance (fiscal year basis April–March, selected levels and ratios)
- Total revenue (in million Qatari Riyals, 2006/07–2011/12): 86,062; 117,865; 140,993; 169,095; 155,908; 209,464.
  - Hydrocarbon revenue: 55,429; 70,748; 80,009; 82,807; 96,849; 114,687.
    - Oil: 48,181; 60,050; 61,245; 61,742; 58,639; 67,603.
    - LNG-related (royalties): 7,248; 10,698; 18,764; 21,065; 38,210; 47,084.
  - Non-hydrocarbon: 30,634; 47,117; 60,984; 86,288; 59,059; 94,777.
- Total expenditure (in million Qatari Riyals): 67,147; 86,249; 99,294; 114,574; 142,370; 163,460.
  - Expense: 49,751; 52,316; 65,817; 75,334; 98,127; 105,461.
  - Net acquisition of nonfinancial assets: 17,396; 33,933; 33,477; 39,240; 44,243; 57,999.
- Net lending (+)/borrowing (in million Qatari Riyals): 18,915; 31,616; 41,699; 54,521; 13,538; 46,004 (2006/07–2011/12).
- Nonhydrocarbon fiscal balance (in million Qatari Riyals): -36,514; -39,132; -38,310; -28,286; -83,311; -68,683 (2006/07–2011/12).
- Key fiscal ratios (percent of GDP, fiscal year basis):
  - Revenue: 36.1; 36.6; 35.0; 44.2; 30.9; 32.9 (2006/07–2011/12).
  - Hydrocarbon revenue: 23.2; 22.0; 19.9; 21.7; 19.2; 18.0.
  - Total expenditure and net lending: 28.2; 26.8; 24.7; 30.0; 28.2; 25.7.
  - Net lending (+)/borrowing (-): 7.9; 9.8; 10.4; 14.3; 2.7; 7.2.
  - Nonhydrocarbon fiscal balance (in percent of nonhydrocarbon GDP): -32.4; -25.8; -20.1; -14.0; -36.5; -27.7 (2006/07–2011/12).

### Public debt and government balance-sheet items
- Total government debt (in million Qatari Riyals): 28,910; 25,749; 46,972; 110,111; 156,523; 214,524 (2006/07–2011/12).
- Government external debt (in million Qatari Riyals): 12,526; 12,081; 28,387; 65,318; 70,269; 93,019 (2006/07–2011/12).
- Memorandum ratios (percent of GDP):
  - Total government debt: 12.1; 8.0; 11.7; 28.8; 31.0; 33.7.
  - Government external debt: 5.3; 3.8; 7.0; 17.1; 13.9; 14.6.
  - Government net domestic debt (net of deposits): 3.3; 0.8; 1.2; 7.4; 13.8; 15.9.

### Money, credit, and liquidity
- Broad money (annual percent change): 39.5; 19.7; 16.9; 23.1; 24.8; 20.8 (2007–2012).
- Net foreign assets (annual percent change): 0.3; -20.5; -4.2; 35.9; -24.3; 25.8 (2007–2012).
- Net domestic assets (annual percent change): 88.6; 47.0; 24.0; 19.5; 40.4; 20.0 (2007–2012).
- Domestic credit (annual percent change): 66.1; 48.7; 24.0; 2.0; 14.2; 19.9; 13.2 (selected years shown).
- Claims on private sector (annual percent change): 51.3; 42.4; 2.4; 7.0; 10.6; 15.8; 15.9 (selected years shown).
- Broad money (levels, in million Qatari Riyals): 153,735; 195,672; 184,005; 215,082; 264,716; 330,447; 399,340 (2007–2012 and beyond).

### External sector and balance of payments (selected flows, in million U.S. dollars)
- Current account: 20,186; 33,039; 9,987; 33,531; 48,660; 47,290 (2007–2012).
  - In percent of GDP: 25.4; 28.7; 10.2; 26.3; 28.1; 26.3 (2007–2012).
- Trade balance: 24,318; 42,077; 24,476; 51,834; 76,836; 74,425 (2007–2012).
- Exports: 44,142; 67,212; 46,928; 79,070; 106,202; 106,997 (2007–2012).
  - Of which crude oil and refined petroleum products: 21,083; 29,438; 18,384; 29,099; 35,249; 35,534.
  - LNG and related exports: 18,710; 32,267; 23,947; 43,535; 61,938; 61,330.
- Imports: -19,824; -25,135; -22,452; -27,237; -29,367; -32,573 (2007–2012).
- Central bank reserves, gross (in million U.S. dollars): 9,753; 9,837; 18,352; 30,720; 20,703; 24,412 (2007–2012).
  - In months of imports of goods and services (next 12 months): 3.3; 3.9; 5.8; 8.4; 5.4; 5.8 (2007–2012).
- Total external debt (excluding banks, in million U.S. dollars): 24,762; 33,453; 50,259; 70,757; 87,409; 89,535 (2007–2012).
  - In percent of GDP: 31.1; 29.1; 51.5; 55.6; 50.5; 49.8 (2007–2012).

### Vulnerability and solvency indicators (selected)
- Total debt (in billion U.S. dollars, including commercial banks): 26.3; 41.9; 57.1; 80.1; 109.0; 126.1 (2006–2011).
- Total debt (in percent of GDP): 43.2; 52.6; 49.6; 82.0; 85.6; 72.9 (2006–2011).
- Debt service/exports of goods and services: 14.8; 19.9; 27.6; 54.8; 40.6; 36.6 (2006–2011).
- Central bank net reserves (in million U.S. dollars): 5,410; 9,546; 9,832; 18,352; 30,720; 20,703 (2006–2011).
  - In months of imports: 2.4; 3.3; 3.9; 5.8; 8.4; 5.4 (2006–2011).
- Crude oil exports/total exports (percent): 50.9; 47.8; 43.8; 39.2; 36.8; 33.2 (2006–2011).

### Medium-term baseline scenario (2008–16; selected projections)
- Nominal GDP (in million Qatari Riyals): 418,672; 355,204; 463,490; 629,653; 654,928; 680,880; 708,441; 754,818; 801,830 (2008–16).
- Real GDP growth (percent): 17.7; 12.0; 16.6; 18.8; 6.0; 4.6; 4.6; 5.9; 5.9 (2008–16).
  - Hydrocarbon: 13.2; 4.5; 28.8; 31.1; 2.9; -0.3; -1.2; 0.3; 0.0 (2008–16).
  - Nonhydrocarbon GDP: 21.3; 17.6; 8.4; 9.0; 9.0; 9.0; 9.5; 10.0; 10.0 (2008–16).
- Central government finances (levels, in million Qatari Riyals): Total revenue 140,993; 169,095; 155,908; 209,464; 232,446; 241,740; 244,174; 251,410; 266,379 (2008–16).
  - Total expenditure 99,294; 114,574; 142,370; 163,460; 185,123; 204,522; 218,808; 237,933; 258,097.
  - Net lending (+)/borrowing (-): 41,699; 54,521; 13,538; 46,004; 47,323; 37,218; 25,366; 13,477; 8,283.
- Current account (in million Qatari Riyals and percent of GDP): 33,039; 9,987; 33,531; 48,660; 47,290; 46,710; 40,663; 33,827; 25,108 (2008–16).
  - In percent of GDP: 28.7; 10.2; 26.3; 28.1; 26.3; 25.0; 20.9; 16.3; 11.4.

### Balance of payments (2007–12; selected items)
- Financial account (in million U.S. dollars): -16,148; -29,083; 2,135; -7,800; -56,547; -41,217 (2007–2012).
  - Direct investment, net: 4,700; 3,516; 4,950; -664; 512; 439.
  - Portfolio borrowing, net: 794; -137; 254; 1,066; -7,465; -8,535.
  - Other investment (net): -12,361; -15,790; -6,516; 1,967; 3,233; -16,277.
- Overall balance (in million U.S. dollars): 4,136; 286; 8,120; 12,371; -10,018; 3,710 (2007–2012).

### Financial sector and market indicators
- Foreign currency deposits/total deposits (percent): 34.9; 32.6; 26.6; 13.7; 11.4; 13.4 (2006–2011).
- Private credit/total assets of banks (percent): 42.2; 41.1; 42.9; 39.4; 36.0; 38.8 (2006–2011).
- Stock market index (end of period): 7,133; 9,580; 6,886; 6,959; 8,682; ... (2006–2011).
- Credit rating (Moody's investor services): Aa2; Aa2; Aa2; Aa3; Aa2; ... (2006–2011).

### Appendix 1 — VAR analysis of the September 1, 2011 fiscal package
- Policy change summarized: Effective from September 1 2011, salaries and wages of Qatari civilian and military state employees have been permanently increased by sizeable amounts.
- Empirical method: A simple VAR model for inflation in Qatar was estimated using historical data.
- Key finding: These increases in current expenditure have the potential to increase inflation in 2012 by one percentage point.

*Source: QATAR 2011 ARTICLE IV REPORT (selected tables and text).*

### 1.      The recent deflationary period in

### 1.      The recent deflationary period in

### Recent inflation dynamics
- Average deflation of around 4.9 percent in 2009 and 2.5 percent in 2010 driven mainly by the roll out of infrastructure and increased supply of real estate.
- Inflation is expected to average around 2 percent in 2011 reflecting increases in domestic prices of petrol and steel, and the impact of global food prices.
- Month-on-month core inflation (excluding food and rents) was 5.2 percent in September 2011.
- Potential inflationary pressures might arise in 2012 onwards from the recently announced sizeable increases in current public expenditure.
- The government recently announced a 60 percent increase in the basic salary and social allowance for state civilian employees, a 120 percent rise for military personnel of officer ranks and a 50 percent increase for military personnel of other ranks. In addition, the pension of civilian retirees will increase by 60 percent, while the pension of retired military officers will rise by 120 percent and of other ranks by 50 percent.

### VAR model and specification
- A simple VAR model is estimated to infer the effect of recent increases in current public expenditure on inflationary prospects, focusing on the fiscal package for 2012.
- Model includes non-oil real GDP and domestic credit growth endogenously with inflation.
- Exogenous variables: one-period lags of current and capital expenditure, current international food prices, imports prices and the nominal effective exchange rate.
- Exogeneity assumption: fiscal variables treated as exogenous because budgets are voted well ahead and are heavily reliant on fuel export revenues; inclusion of lagged fiscal variables to alleviate endogeneity concerns.
- All variables are expressed in growth rates; estimated coefficients are interpreted as elasticities.
- Model estimated on annual 1990–2008 data, using one year lags. 2009 and 2010 were excluded due to possible overestimation of deflation linked to rent measurement skew.

### Estimated elasticity of inflation to current expenditure
- Main result (column (1) of Table 1): coefficient on current expenditure in the CPI inflation equation is 0.1 and highly significant.
- Interpretation: a 1 percent increase in current expenditure is associated with a 0.1 percentage point increase in inflation in Qatar.
- Note: the inflation response can be overestimated due to possible reverse causality; the estimate can be viewed as an upper bound.

### Inflationary impact of the 2012 fiscal package
- Assumed increase of QR 10 billion in salaries of public sector employees.
- With an estimated 8 percent increase in current expenditure in 2012 on account of the recent measures, the expected inflationary impact of the salary increase in 2012 is 1 percentage point.
- Caveats and additional channels:
  - Analysis assumes additional cash will be spent on goods and services domestically; potential leakages (e.g., spending on travel or debt repayment) could lower inflationary pressures.
  - Does not account for potential wage spillovers to private sector Qataris or expatriates; inflationary pressures would be higher if such spillovers materialize.
  - Transfers from government to the pension fund are not taken into account, as timing and form are unclear.

### VAR regression summary (selected coefficients from Table 1)
- CPI Inflation (t-1): 1.42 [ 5.52]
- Non-oil real GDP growth (t-1): -0.23 [-2.41]
- Domestic credit growth (t-1): -0.07 [-2.11]
- Current expenditure growth (t-1): 0.11 [ 2.46]
- Capital expenditure growth (t-1): 0.00 [ 0.05]
- Nominal effective exchange rate growth (t): -0.30 [-2.11]
- Imports price index growth (t): 0.12 [ 1.07]
- International food price index growth (t): 0.04 [ 0.77]
- R-squared for CPI Inflation equation: 0.96; Adj. R-squared: 0.92
- Note: t-statistics in brackets; variables are differences in logs (growth rates).

### Monetary management and experience with capital inflows
- Monetary policy independence limited by the peg to the US dollar.
- QCB policy framework:
  - Two policy rates: QCB Deposit Rate (QCBDR) and QCB Lending Rate (QCBLR) announced via the Qatar Money Market Rate (QMR) Standing Facility.
  - Reserve requirement currently at 4.75 percent of total deposits.
  - Issuance of CDs temporarily discontinued since 2011 and replaced by issuance of T-bills.
- Since 2008 QCB maintained higher interest rates compared to US interest rates to contain inflation and prevent expansion of bad loans.
- QCB’s net foreign exchange reserves increased by $8.6 billion to $18.4 billion in 2009; QMR deposits remunerated at 2.0 percent increased from $1.8 billion to $7.3 billion.
- In August 2010 QMR deposit rate reduced by 50 basis points to 1.5 percent; between January and July 2010 QMR deposits increased to $11 billion and QCB foreign exchange reserves to $23 billion.

### Capital inflows, reserve changes, and central bank actions
- Despite rate reduction, net capital inflows continued; between April 2008 and December 2010 QCB’s net foreign exchange reserves doubled to $31 billion.
- January 2011: new mechanism—QMR deposits and CDs not allowed to exceed 100 percent of required reserves; funds beyond 100 percent receive no interest.
- QCB sold $13.7 billion (three-year maturity, with 5 percent coupon) government bonds to local banks.
- Between December 2010 and March 2011 QCB’s net foreign assets declined by $9 billion to $22 billion; QMR deposits dipped from $19 billion to $5.5 billion.
- April 2011: QMR deposit rate reduced to 1.0 percent; August 2011: reduced by further 25 basis points to 0.75 percent.
- Central bank foreign reserves about $16 billion at end-October 2011.

### Central bank policy measures and recommendations
- Recent measures successful in driving out speculative short-term inflows.
- Reduction in policy rate coincides with large government salary hikes and pension increases, which may increase inflation.
- QCB needs to closely monitor inflation and be ready to absorb liquidity through:
  - reserve requirements,
  - issuance of T-bills,
  - open market operations.
- QCB has taken measures to ban personal credit for investment in equity, and imposed quantitative and price ceilings on personal loans assigned against salary.

### Recent monetary policy timeline (selected)
- 2007: QMR Deposit rate reduced to 4 percent; required reserve ratio increased from 3.25 percent to 3.75 percent.
- Mid-February 2008: Required Reserve Ratio raised to 3.75 percent.
- Mid-April 2008: Required Reserve Ratio raised to 4.75 percent.
- 2008: QMR deposit rate reduced in four tranches from 4 percent to 2 percent; last changed on May 1, 2008 to 2.0 percent.
- December 24, 2008: Limit on QMR deposit withdrawn.
- August 11, 2010: QMR deposit rate reduced to 1.5 percent.
- January 17, 2011: Limit on QMR Deposit + CDs ≤ required reserves maintained with the QCB.
- April 5, 2011: QMR Deposit rate reduced to 1.0 percent; QMR Lending rate reduced to 5.0 percent; QCB Repo rate reduced to 5.0 percent.
- August 2011: QMR Deposit rate reduced to 0.75 percent; QMR Lending rate reduced to 4.5 percent; QCB Repo rate reduced to 4.5 percent.

### Exchange rate assessment (summary of CGER-type results)
- Equilibrium real exchange rate (ERER) approach indicates undervaluation:
  - REER depreciated 19.1 percent between end 2008 and July 2011.
  - Cointegration between log(REER) and log(real oil prices) found; elasticity coefficient of 11 percent.
  - Suggests Qatari Riyal is currently undervalued by 15 percent given trends in oil (and gas) prices.
- Macroeconomic balance approach indicates overvaluation:
  - Estimated average current account norm surplus of 22.7 percent of GDP in 2016.
  - Projected “underlying” current account position in 2016 of 11.4 percent of GDP.
  - Contrasting norm to projection suggests a 20 percent overvaluation of the REER.

*Prepared by Ghada Fayad; Appendix contributions prepared by A. Prasad and Samya Beidas-Strom.*

### 4.  The external sustainability

### _cr1218 - 4.  The external sustainability

### External sustainability approach: framework and headline finding
- The approach requires that the net present value (NPV) of all future oil and financial or investment income (wealth) be equal to the NPV of imports of goods and services net of non-oil exports.
- Under this constraint the economy chooses import and current account paths that support intergenerational equity given volatile oil prices and exhaustible oil reserves through an appropriate pace of accumulation of net foreign assets.
- IMF staff estimate Qatar’s wealth at $3.0 trillion.
- Benchmark result: Choosing the constant real per capita annuity rule indicates a small undervaluation of 3 percent, since the implied norm (9 percent of GDP in 2016) is smaller than the projected current account (11 percent of GDP in 2016), implying Qatar could save less.

### Annuity/allocation rules, scenarios, and sensitivity
- Three annuity/allocation rules used to derive import trajectories and current account norms:
  - (a) constant share of GDP annuity (red line)
  - (b) constant real per capita annuity (green line)
  - (c) constant real annuity (black line)
- Footnote assumptions for illustrative calculations:
  - Reserves: 864 billion barrels
  - Recovery rate: 4 percent
  - Oil and gas production would grow gradually (by 2 percent)
  - Oil prices and the GDP deflator increase by about 2 percent after 2016
  - Real non-oil GDP grows by 5 percent
  - Future oil revenues are nominally discounted at 6 percent (assumed rate of return on externally held financial wealth/NFA)
- Note: implied current accounts under each allocation rule are sensitive to changes in oil production and price paths, population growth, or initial NFA.

### Macroeconomic balance (GMM estimation) — coefficients and contributions to CA norm (percent)
- Estimated Current Account Norm (2016): 22.7%
- Underlying Current Account Norm (2016): 11.4%

- GMM coefficients and contributions to CA norm (Contribution to CA norm = coefficient * medium-term projection/steady state value (in percent)):
  - Constant: 0.0434 → Contribution to CA norm: 4.30%
  - Lagged dependent: (coefficient not displayed in provided excerpt)
  - Non-oil fiscal balance/GDP: 0.363 → Contribution to CA norm: -4.80%
  - Oil and gas trade balance/GDP: 0.469 → Contribution to CA norm: 8.26%
  - Old age dependency: -0.034 → Contribution to CA norm: -0.04%
  - Population growth: -0.632 → Contribution to CA norm: -2.53%
  - NFA/GDP Relative income: 0.071 → Contribution to CA norm: 14.29%
  - Economic growth: -0.064 → Contribution to CA norm: -0.38%
  - Net Oil-Exporter Specific Regressors:
    - Oil and gas reserves: 0.00061 → Contribution to CA norm: 1.66%
    - Proxy for SWF/IIP: 0.160 → Contribution to CA norm: 11.92%

### Figure 3 (External Sustainability’s Current Account Norms vs. Projection, 2010–16)
- Figure compares projected current account with three current account norms derived from the annuity rules for 2010–2016 (Percent of GDP).
- Key point from figure/text: the constant real per capita annuity rule implies a current account norm of 9 percent of GDP in 2016, versus a projected current account of 11 percent of GDP in 2016 (hence the 3 percent undervaluation conclusion).

*Source: IMF staff estimates.*

### 1.5 percent, which worked out to 6.5

### _cr1218 - 1.5 percent, which worked out to 6.5

### Interest rate ceiling and recent directives
- A new interest rate ceiling was introduced, with a specific cited rate of 1.5 percent, which worked out to 6.5 percent in April 2011.
- The new interest rate also applies to existing salary-backed loans contracted prior to the issuance of the new directive.
- Interest rates on credit card loans were capped at 1 percent monthly.
- A February 2010 QCB directive set a ceiling on commission and fees on personal accounts and services to help prevent circumvention of the interest rate ceiling.
- The QCB policy deposit rate has been reduced in several steps from 5.15 percent to 0.75 percent between September 2007 and August 2011.

### Rationale and market context
- Objective: correct the unresponsiveness of interest rates to the gradual decline in the cost of funding in recent years.
- Observed market dynamics prior to/around the ceiling:
  - Credit card rates fluctuated between 18 and 20 percent.
  - Average car loan rates stayed close to 8 percent.
  - Spread between lending rates and the cost of funds widened considerably.
  - After rapid build-up between 2005 and mid-2008, total amount of personal loans in the Qatari banking system stabilized in the QR55–60 billion range ($16 billion).
- The tightening of personal loan regulation in March 2008 stabilized the absolute amount of personal loans and led to a decline in these loans’ share in total banking sector lending.

### Effects on bank behavior and personal loan volumes
- Bank rates started to adjust to the new limits; some banks lowered retail loan rates months before the regulation to increase market share.
- The fall was especially pronounced for credit card rates, capped at 1 percent per month.
- Volume dynamics:
  - The volume of personal loans dipped in May (year not specified) but then picked up strongly again.
  - The share of personal loans in the total loan book and as a percentage of private sector loans stabilized since Q3 2010 — possibly indicating market saturation.

### Impact on bank income, profitability, and broader lending
- Personal loans account for approximately 18 percent of total banking sector lending.
- Lower interest revenue from personal loans represents a significant upfront hit to banks’ profitability, especially because existing contracts will have to be repriced.
- The decline in net interest margin is likely to be offset by strong growth in credit to the public and corporate sectors.
- Private sector loans growth: 16 percent y-o-y in July 2011.
- Behavioral implications for pricing:
  - Banks may seek to reflect lost interest income in pricing of other products.
  - Corporate customers may pressure banks to lower corporate lending rates by comparing spreads to retail spreads.

### Regulatory and financial-stability concerns
- The interest rate ceiling may be counterproductive to QCB efforts to strengthen risk management, which is backed by improving capabilities of the recently established credit bureau.
- Ceiling implications:
  - Banks will not be able to apply risk-based pricing on salary-assigned loans.
  - Limits on absolute amounts of personal loans alone would have been adequate to bring down interest rates on such loans.
  - Imposing the ceiling on previously extended loans implies a subsidy for borrowers, including those whose repayment capacity is not in question, raising the issue of moral hazard.
- Timing concerns: the ceiling was imposed while efforts are being made to develop the local debt market.

### Comparative regulatory snapshot in the GCC (selected excerpts from Table 1)
- Presence of lending limits to retail borrowers (examples vary by country):
  - Bahrain: Max debt service ratio of 50%. Max term of 7 years.
  - Kuwait: Total monthly repayments should not exceed 40% of borrower salary and 30% of income for pensioners. Real estate mortgages are capped at KD 70,000 per person.
  - Qatar: Credit to individuals capped at 50% of monthly salary and allowances, not to exceed QR 400,000 for expats and QR 2 million for nationals per person and for 7 years max.
  - Saudi Arabia: Total monthly repayments (for both personal loans and credit cards) should not exceed 33% of a borrower's salary. Personal loan maturity should not exceed 5 years.
  - United Arab Emirates: Personal loans to salaried individuals cannot exceed 250,000 Dirhams.
- Year introduced (selected):
  - Bahrain: 2005
  - Kuwait: 2007/08
  - Qatar: 2011
  - Saudi Arabia: 2006
  - United Arab Emirates: 1993
- Interest rate ceilings on personal loans (selected):
  - Bahrain: No.
  - Kuwait: Discount rate + 3 percent for personal loans.
  - Oman: 8 percent for personal loans, and 18 percent on credit cards.
  - Qatar: QCB lending rate plus 150 basis points.
  - Saudi Arabia: No.
  - United Arab Emirates: No.

*QATAR 2011 ARTICLE IV REPORT*

### 2011. Following an average deflation of around 2.5 percent in 2010, average CPI inflation is

### _cr1218 - 2011. Following an average deflation of around 2.5 percent in 2010, average CPI inflation is

### Inflation outlook
- Following an average deflation of around 2.5 percent in 2010, average CPI inflation is expected to average around 2 percent in 2011 (end-year 2.5 percent).
- Negative rental inflation in 2011 is more than offset by a general increase in all the other components of the inflation basket.
- Average CPI inflation is projected at 4 percent to 5 percent over the medium term, as rents stabilize due to a gradual decline in excess capacity in real estate, and as the implementation of large investment projects lead to some overheating pressures.
- The potential inflationary effect of the recent fiscal package is estimated to be around 1 percentage point.

### Banking sector and financial stability
- The banking sector remains profitable and strong with a capital adequacy ratio of 22.3 percent, average return on assets of 2.7 percent, and non-performing loans ratio of 2.3 percent at end-June 2011.
- Staff assessment: banking system can withstand credit and market risks, but monitoring of individual banks for stress is needed given interlinkages.
- Recommendations:
  - Monitor individual banks’ foreign currency liquidity conditions; the QCB should stand ready to relieve potential pressures.
  - Enable a more robust risk assessment culture, conduct regular stress testing of banks, and put in place an early warning system.
  - Collate and disseminate price and volume data on Qatar’s real estate market segments to help banks assess risks and enable preemptive central bank measures.

### Growth and external risks
- Real GDP growth rate is projected to moderate to 6 percent in 2012.
- Projected real hydrocarbon GDP growth: slowing down to 3 percent in 2012, as LNG production remains constant due to the self-imposed moratorium on new hydrocarbon projects.
- Large government investment for infrastructure would sustain growth in the nonhydrocarbon sector between 9 and 10 percent beyond 2012.
- Main downside risks: lower hydrocarbon prices and potential disruption in transportation of liquefied natural gas (LNG) due to increased geopolitical tensions.
- Fiscal and external accounts projected to remain in surplus throughout the medium term, as oil prices are expected to remain high.

### Fiscal policy and macro-fiscal recommendations
- Executive Board view: Qatar is using fiscal space from increased hydrocarbon production and prices to implement a large public spending program.
- Fiscal policy must monitor aggregate demand to ward off inflation risks; the expansionary fiscal stance in 2011/12 warrants careful monitoring.
- Fiscal policy should balance spending on infrastructure to sustain non-inflationary growth, and saving and investing hydrocarbon surpluses abroad to generate sufficient income to finance future budgets.
- Medium-term fiscal concerns:
  - Fiscal space has contracted somewhat compared to last year because of the permanent increase in current expenditure (staff’s medium-term fiscal sustainability exercise).
  - Given the authorities’ objective of fully financing the budget from 2020 onwards from its nonhydrocarbon revenues, and for building buffers for shocks, the authorities will need to increase savings over the medium term.
  - Adjustment in current expenditures is the most feasible way to reduce dependency of the budget on hydrocarbon revenues, pending eventual implementation of large capital projects.
- Recommendations:
  - Establish a macro-fiscal unit to support fiscal policy making and develop a medium-term budget framework.
  - Develop a solid medium-term expenditure framework as a critical building block for the eventual adoption of a fiscal rule.
  - Reduce vulnerabilities to hydrocarbon price fluctuations by diversifying into other sectors and reinforcing competitiveness.
  - Consider reducing direct and indirect subsidies in petrol, energy, and water use to gain efficiencies and reduce distortions.
  - Consider options for deeper pension reforms.
  - Further improvements in statistics and greater coordination across agencies.

### Monetary policy, liquidity, and market development
- In the context of the peg, the Qatar Central Bank (QCB) would need to manage liquidity more actively.
- QCB needs to develop a formal liquidity management framework to facilitate a more proactive strategy in fine-tuning liquidity.
- Coordination of debt management with the Ministry of Economy and Finance would help maintain a stable and adequate stock of government securities to:
  - Develop an interbank repo market.
  - Provide a robust benchmark yield curve for the corporate bond market.
- Develop a more formal and transparent macroprudential policy framework to enable a swift response when needed and achieve orderly credit growth without generating overheating.

### Key statistics and projections (selected)
- Real GDP (in percent per annum): 2007 18.0; 2008 17.7; 2009 12.0; 2010 16.6; 2011 18.8; 2012 6.0.
- Hydrocarbon real GDP (percent per annum): 2007 13.8; 2008 13.2; 2009 4.5; 2010 28.8; 2011 31.1; 2012 2.9.
- Nonhydrocarbon GDP (percent per annum): 2007 21.6; 2008 21.3; 2009 17.6; 2010 8.4; 2011 9.0; 2012 9.0.
- Nominal GDP (in billion U.S. dollars): 2007 79.5; 2008 115.0; 2009 97.6; 2010 127.3; 2011 173.0; 2012 179.9.
- Consumer price index (period average): 2007 13.8; 2008 15.0; 2009 -4.9; 2010 -2.4; 2011 2.0; 2012 4.0.
- Public finance (In percent of GDP on fiscal year basis): Total revenue: 2007 36.6; 2008 35.0; 2009 44.2; 2010 30.9; 2011 32.9; 2012 35.1.
- Hydrocarbon revenue (percent of GDP): 2007 22.0; 2008 19.9; 2009 21.7; 2010 19.2; 2011 18.0; 2012 18.0.
- Other revenue (percent of GDP): 2007 14.6; 2008 15.1; 2009 22.6; 2010 11.7; 2011 14.9; 2012 17.2.
- Total expenditure and net lending (percent of GDP): 2007 26.8; 2008 24.7; 2009 30.0; 2010 28.2; 2011 25.7; 2012 28.0.
- Current expenditure (percent of GDP): 2007 16.3; 2008 16.3; 2009 19.7; 2010 19.4; 2011 16.6; 2012 18.3.
- Wages and salaries (percent of GDP): 2007 5.0; 2008 4.6; 2009 5.7; 2010 4.6; 2011 4.9; 2012 5.9.
- Capital expenditure (percent of GDP): 2007 10.5; 2008 8.3; 2009 10.3; 2010 8.8; 2011 9.1; 2012 9.7.
- Overall fiscal balance (deficit -) (percent of GDP): 2007 9.8; 2008 10.4; 2009 14.3; 2010 2.7; 2011 7.2; 2012 7.2.
- Broad money (annual change in percent): 2007 39.5; 2008 19.7; 2009 16.9; 2010 23.1; 2011 24.8; 2012 20.8.
- Claims on private sector (annual change in percent): 2007 51.3; 2008 42.4; 2009 7.0; 2010 10.6; 2011 15.8; 2012 15.9.
- Exports of goods and services (in million U.S. dollars): 2007 50,508; 2008 73,026; 2009 48,280; 2010 81,723; 2011 111,457; 2012 112,783.
- Crude oil and refined petroleum products exports (in million U.S. dollars): 2007 21,083; 2008 29,438; 2009 18,384; 2010 29,099; 2011 35,249; 2012 35,534.
- LNG and related exports (in million U.S. dollars): 2007 18,710; 2008 32,267; 2009 23,947; 2010 43,535; 2011 61,938; 2012 61,330.
- Imports of goods and services (in million U.S. dollars): 2007 -27,172; 2008 -35,045; 2009 -30,120; 2010 -38,021; 2011 -44,134; 2012 -46,334.
- Current account (in million U.S. dollars): 2007 20,186; 2008 33,039; 2009 9,987; 2010 33,531; 2011 48,660; 2012 47,290.
- Current account (In percent of GDP): 2007 25.4; 2008 28.7; 2009 10.2; 2010 26.3; 2011 28.1; 2012 26.3.
- Central Bank reserves, net (in million U.S. dollars): 2007 9,546; 2008 9,832; 2009 18,352; 2010 30,720; 2011 20,703; 2012 24,412.
- Central Bank reserves (In months of imports of goods and services): 2007 3.3; 2008 3.9; 2009 5.8; 2010 8.4; 2011 5.4; 2012 5.8.
- Exchange rates (Riyals/U.S. dollars): 2007 3.64; 2008 3.64; 2009 3.64; 2010 3.64; 2011 3.64.
- Real effective exchange rate (percent change): 2008 5.1; 2009 6.3; 2010 -1.4; 2011 -5.1.

*International Monetary Fund — 2011 Article IV consultation with Qatar (staff report summary).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1218.pdf_