## 1.      Living with cheap oil. Qatar’s public finances remain sustainable at

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### Near-term fiscal sustainability and recommended fiscal adjustment
- Main finding:
  - Public finances remain sustainable at expected oil prices, but projected budget balances no longer appear consistent with intergenerational equity.
- Recommendation:
  - Implement measures to improve the budget balance by 5 percent of non-hydrocarbon GDP gradually over the medium term.
- Institutional recommendations:
  - Specify clear medium-term fiscal objectives.
  - Make the annual budgets binding.
  - Further increase transparency of fiscal accounts.

### Macroeconomic context and shocks
- Key context:
  - Qatar accounts for one-third of global LNG trade.
  - Authorities executing a $200 billion infrastructure program related to economic diversification and FIFA 2022.
  - Qatar Investment Authority (QIA) investments estimated at about $250 billion (Sovereign Wealth Fund Institute estimate).
  - About 90 percent of Qatar’s population are expatriate workers; remittances by these workers amounted to an estimated $13 billion in 2014, about 6 percent of GDP.
- Oil price shock:
  - Brent oil price unexpectedly fell to about $60 a barrel over the past six months.
  - Futures markets suggest a significant part of this decline is likely to persist over the medium term.
  - More than 90 percent of Qatar’s budget revenues and exports are tied to activities of the hydrocarbon sector; Qatar’s LNG price is linked to the price of crude oil.

### Recent macro-financial developments
- Growth and inflation:
  - Real GDP growth stable at about 6 percent over the past three years, driven by double-digit expansion of the non-hydrocarbon sector.
  - Inflation: peaked at 3¾ percent in summer 2014; eased to 2¾ percent in December 2014.
  - Real estate prices accelerated to 35 percent year-on-year in December 2014.
  - Rents constitute over 30 percent of the CPI basket.
- Public finances and assets:
  - Central government budget surplus increased to 14 percent of GDP in fiscal year 2013/14.
  - Gross government debt fell to about 30 percent of GDP.
  - Rough estimate of net financial worth of the government incorporating QIA is 100 percent of GDP.
  - Gross government debt including contingent liabilities from state-owned enterprises amounted to 50 percent of GDP in FY2013/14.
- Monetary, credit, and banking conditions:
  - Domestic credit grew by 10 percent year-on-year in December 2014; private sector credit growth accelerated to 20 percent.
  - Real estate credit has generally grown in line with the non-hydrocarbon economy; public sector credit recently contracting.
  - Tier 1 capital exceeds 15 percent of risk-weighted assets (as of September 2014).
  - Non-performing loans (NPLs) remain below 2 percent.
  - Return on assets at 2 percent.
  - Aggregate loan-to-deposit ratio has remained at about 1.
  - Cross-border assets have grown to about 20 percent of banks’ assets.
- Policy framework progress:
  - Transfer of all hydrocarbon profits from Qatar Petroleum to the budget improved fiscal transparency.
  - Most Basel III regulations were introduced last year.
  - QCB issued instructions for the loan-to-deposit ratio in mid-2014.
  - QCB Governor chairs the Financial Stability and Risk Committee.
- Exchange rate:
  - The peg to the U.S. dollar remains appropriate; staff find no evidence of a current account gap using two alternative techniques (Annex II).

### Macro outlook and major quantitative projections
- Growth:
  - Real growth could accelerate to about 7 percent in the near term as the Barzan field begins natural gas production.
  - Non-hydrocarbon growth expected to remain in double digits in 2015.
  - Growth could slow to about 4 percent over the medium term as public investment growth tapers off.
  - Official forecast (Ministry of Development Planning and Statistics, last year) used crude oil price assumption of $97 a barrel and projected growth at 7.7 percent and 7.5 percent during 2015-16.
  - Minister of Finance (February) expected growth at 7 percent and inflation at 3 percent in 2015.
- Inflation and real estate:
  - Near-term inflation could decelerate to 2 percent given large drop in international commodity prices and appreciating U.S. dollar.
  - Over the medium term, headline inflation is projected to increase modestly as disinflationary pressures dissipate.
  - Future real estate price developments are uncertain; prices may remain supported by the public investment program but could correct due to loss of hydrocarbon wealth and uncertainties.
- Oil price and fiscal/external impacts:
  - Staff assumption: gradual recovery in the Brent oil price to about $74 a barrel by the end of the decade (reflecting futures markets at the time of consultation).
  - Staff expects a substantial deterioration in fiscal and external balances from the large drop in oil prices.
  - Government budget projected to fall into a deficit from 2016 onwards.
  - Authorities projected to reduce public debt while accumulating net financial assets in the medium run, partly due to capital gains from QIA’s investments.
  - Current account surplus projected to drop from over 30 percent of GDP in 2013 to 2 percent of GDP in 2020.

### Risks and vulnerabilities
- External risks:
  - Possibility of lower-than-expected oil and natural gas prices due to slow global growth, rising unconventional oil supplies, and growing LNG competition.
  - Upside oil price shocks possible if geopolitical risks escalate or unconventional producers respond.
  - Revenue losses from lower hydrocarbon exports are the most significant spillover channel.
  - Spillovers could be amplified by falling liquidity in the banking system if government and hydrocarbon companies slow deposit growth, especially if coinciding with tighter U.S. monetary policy and mobilization of infrastructure resources.
  - Qatar’s external borrowing costs could increase if low oil prices persist.
- Domestic risks:
  - Ongoing public investment program entails risk of overheating the economy in the near term and low-return and overcapacity in some sectors over the medium term.
  - Rapidly growing credit to selected sectors and cross-border credit growth are emerging vulnerabilities in the financial sector.
  - Real estate market speculative activity noted; real estate valuations appear on the upper end of a range consistent with fundamentals.
- Financial sector monitoring needs:
  - Further enhancements to early warning systems recommended, including improving availability of real estate statistics.
  - Continue careful monitoring of rapidly growing credit to selected sectors and across the border.

### Policy priorities for diversification and macroprudential balance
- Diversification and inclusiveness:
  - Intensify diversification efforts via further improvements in the business environment, higher education quality, and labor market reforms to make growth more inclusive.
- Investment program management:
  - Recent progress in public investment management is welcome.
  - Consideration should be given to raising real estate transaction fees to deter speculators and to further increasing land supply.
- Fiscal/monetary/macroprudential balance:
  - Use fiscal and macroprudential policies to address the limited scope for independent monetary policy under the peg.
  - Maintain accommodative monetary and credit conditions while monitoring overheating risks.

### Spillovers, oil-price scenarios, and immediate vulnerabilities
- Hydrocarbon prices:
  - Hydrocarbon prices identified as the key channel for spillovers from the global economy; Qatar’s interconnectedness with global financial markets has increased.
  - Futures prices and oil industry cost-structure analysis suggest medium-term oil prices should be above today’s levels, but may not return to previous highs.
  - Both futures-based upside/downside scenarios correspond to oil prices higher/lower by US$25 a barrel (one standard deviation in oil prices) from 2015 onwards.
- U.S. interest rate risk:
  - U.S. interest rate hike, if it materializes this year, would have minimal immediate effects partly because Qatar’s main policy rate remains almost ¾ percentage point above the prevailing Fed Funds Rate.
- Banking cross-border activity:
  - Cross-border activities of Qatari banks have increased substantially in recent years—albeit from a fairly low level—and are closely monitored.

### Short-term policy space and liquidity options
- Fiscal buffers and resources are sizeable; spending is unlikely to be affected by falling hydrocarbon prices or market volatility in the near term.
- QCB liquidity tools: discount window and repo operations.
- Government liquidity options: manage portfolios of the QIA and public sector enterprises, including in foreign currency.
- Administration monitors risks from the public investment program continuously.

### Quantified sensitivities and illustrative oil-price impacts
- Illustrative elasticities:
  - An oil price drop of $10 a barrel would reduce fiscal balances by 2¼ percentage points of GDP, assuming no policy response.
  - The same drop would reduce external balances by 4 percentage points of GDP, assuming no policy response.
  - A permanent $10 drop in oil prices could reduce Qatar’s GDP level by 2½ percentage points after 5 years assuming the government fully offsets revenue losses with expenditure cuts (actual impact likely smaller due to fiscal buffers and FIFA commitments).

### Risk Assessment Matrix — main risks, likelihood, and expected impacts
- Lower-than-expected oil and natural gas prices
  - Likelihood: Medium to High
  - Expected impact: Medium to High
  - Policy implications: Intensify diversification efforts; ensure adequate banking system liquidity.
- Geopolitical fragmentation leading to a sharp rise in oil prices
  - Likelihood: Medium
  - Expected impact: Medium
  - Outcome: Likely accumulation of fiscal and external surpluses.
- Risks related to large infrastructure investments
  - Likelihood: Medium
  - Expected impact: Low to Medium
  - Concerns: Cost overruns, inflation, disappointing productivity gains; if labor productivity growth does not pick up, non-hydrocarbon growth could be only 2.5 percent in 2020.
  - Policy tools: Enhance early warning system; comprehensive public investment management framework; macroprudential measures; liquidity withdrawal; consider increasing real estate transaction fees; enhance labor protection and mobility.
- Side-effects from global financial conditions (surge in financial volatility; persistent dollar strength)
  - Likelihood: High
  - Expected impact: Medium (overall); Low to Medium (some effects)
  - Considerations:
    - U.S. tightening could cause oil prices to fall by less than 5 percent in staff’s assessment.
    - Normalization of U.S. policy would tighten Qatar financial conditions with a delay.
    - Strong dollar would reduce import prices and inflation short-term; portfolios held abroad in non-USD currencies would suffer moderate valuation losses.
    - Banks’ profit margins would shrink; some banks reliant on wholesale funding could face liquidity pressures.
    - Large financial cushions and policy framework are in place to mitigate impacts.

### Policy challenges and priorities — A. Living with Cheap Oil, while Maintaining Intergenerational Equity
- Staff view:
  - Qatar’s public finances remain sustainable at projected oil prices, but projected budget balances no longer appear consistent with intergenerational equity.
- Short-run projection:
  - Reduction in government financial assets due to fiscal deficits and debt repayments; net financial assets start growing again once oil prices recover above $68 a barrel (staff ballpark estimate of medium-term budget breakeven price).
- Permanent-income model calculations:
  - Government does not save sufficiently for future generations. The gap between projected fiscal balances and the optimal policy is about 5 percentage points of non-hydrocarbon GDP (Annex III).
  - Current budget policies would be consistent with intergenerational equity if oil prices turned out to be higher than IMF assumptions by roughly $10 a barrel.
  - Assuming IMF assumptions hold, additional measures worth 5 percent of non-hydrocarbon GDP should be phased in gradually over the medium term.
- Suggested measures (examples):
  - Prioritize public investment while raising its efficiency.
  - Gradual reduction in subsidies.
  - Additional savings in administrative expenses.
  - New non-hydrocarbon revenues.

### Budget reform progress and recommendations
- Authorities’ actions:
  - Fiscal policies became prudent prior to the oil price drop; budget reforms remain on track.
  - Slowed growth of current spending since mid-2013; capital expenditures and operational spending reviewed to establish medium-term envelopes.
  - Ministry of Finance preparing a medium-term strategy planned for completion by mid-2015 to inform the budget process.
- Staff recommendations:
  - Establish a clear medium-term fiscal framework, including contingency plans.
  - Formulate clear medium-term fiscal objectives and communicate expected trajectories of budget expenditures and taxation.
  - Align annual budgeting with the medium-term framework to eliminate spending overruns.
  - Consider broadening the corporate income tax base and introducing a low-rate value-added tax (VAT); caution against reliance on user fees and charges.
  - Improve transparency of fiscal accounts, including financial transactions of the government.

### Policy challenges and priorities — B. Managing Overheating Risks and Securing High Return from Public Projects
- Ministry of Finance measures:
  - Smoothing time profile of investments; providing additional land to priority sectors; National Logistics Committee addressing bottlenecks.
- Financial-sector safeguards:
  - QCB monitors real estate exposures, limits borrower LTV and DSTI ratios; QCB stress tests suggest NPLs for real estate, construction contractors, and consumer loans would need to jump to nearly 30 percent before banks’ capital ratios fall below regulatory minimum.
- State-owned-enterprise borrowing:
  - Loans to state-owned enterprises account for about 40 percent of domestic credit and have traditionally been fully performing.
- Policy recommendations:
  - Enhance early warning systems; improve real estate data (price indices, vacancies, transaction characteristics).
  - Ensure adequate supply of land and affordable housing.
  - Consider raising real estate transaction fees (currently 0.25 percent) to reduce speculative pressures; fees could be differentiated so first-time homebuyers pay very little while short-term investors are penalized.
  - Resist rent controls as they would likely reduce housing supply.
  - If excessive credit growth, deploy further macroprudential measures (reduce LTV, calibrate countercyclical buffers) and liquidity withdrawals.
  - Slow public sector spending if inflation accelerates.
- Public investment management progress:
  - MoF empowered to manage public investments and established an approximately QAR 600 billion 10-year spending cap on new investment projects with yearly indicative targets.
  - MoF’s PIM department collated detailed project data, reviews major investment proposals, and refines PIM system via inter-ministerial committee.
  - Staff suggests deeper cost-benefit analysis and ex-post project assessments.

### Policy challenges and priorities — C. Maintaining Financial Stability
- Overall assessment:
  - Banks remain well capitalized and liquid, but emerging risks require careful monitoring.
- Emerging vulnerabilities:
  - Falling liquidity due to oil price drop.
  - Rapidly-growing credit to selected sectors and abroad.
  - Large credit growth to construction contractors, services, trade, and consumers linked to public investment and population growth could raise NPLs over time.
  - Developments at weaker banks should be closely monitored despite system-wide cushioning.
  - Largest Qatari banks expanding in Middle Eastern and African countries with difficult macro and geopolitical environments; regional expansion could stretch risk management capacity.
  - Reliance on external funding could increase as low oil prices largely eliminate the current account surplus.
- Policy options if liquidity falls:
  - Reallocate deposits of government-owned companies and the QIA from abroad.
  - Adjust size of T-bill and T-bond auctions.
  - Close coordination between QCB and Ministry of Finance in managing liquidity; sizeable capital, liquidity, and policy buffers noted by authorities.

### Financial-sector regulation and capacity building
- Basel III and supervisory updates:
  - Capital Adequacy: 10% minimum (of which 8% tier 1, of which 6% common equity tier 1), effective January 2014; plus 2.5% capital conservation buffer; plus 0.5-3.5% for 5 Domestic Systemically Important Banks; plus 0-2.5% countercyclical buffer.
  - Leverage: Tier 1 leverage ratio 3% minimum (circular issued July 2014, effective September 2014).
  - Liquidity: Net stable funding ratio 100% minimum (supervisory observation only); Liquidity Coverage Ratio: 60% minimum in 2014, rising to 100% in 2018.
  - Authorities’ rule: maximum loan to deposit ratio of 100%; a 90% credit ratio will operate in parallel for a period of three years with immediate penalties for exceeding the limit.
- Supplementary indicators (Dec 2014):
  - Tier I capital: 15.8 percent of risk-weighted assets.
  - Non-performing loans: 1.7 percent.
  - Earnings and liquidity buffers: "remained strong".
- Staff recommendations:
  - Continue strengthening AML/CFT framework; authorities interested in further technical assistance and establishing an AML/CFT regional training center in Doha.

### Diversification, business environment, and inclusiveness
- Staff urged intensification of diversification efforts given prospects for persistently low oil prices and slowing medium-term growth.
- Growth drivers and productivity:
  - Qatar’s long-run high growth mainly driven by labor and capital accumulation rather than productivity gains (Box 3).
  - Since 2006/7: labor and capital each grew by about 13 percent annually; TFP growth close to zero.
- Policy recommendations:
  - Simplify business registration; improve enforcement of contracts; enhance quality of education and align it with labor market needs; consider privatization to stimulate private sector activity.
  - Boost incentives for Qatari citizens to work in the private sector; increase expatriate mobility to improve labor matching.
- Authorities’ measures:
  - Higher foreign ownership limits for listed companies; merger of Qatar Development Bank and Enterprise Qatar; expansion of e-government; issuance of long-term T-bonds.

### Data, statistics, and monitoring
- Recent improvements:
  - Authorities started publishing quarterly GDP by expenditure.
  - Finalized the Foreign Investment Survey to improve IIP and BoP statistics.
  - Ministry of Finance plans to begin compilation of fiscal data according to the GFSM2001 methodology by end-2015.
- Further needs:
  - Improve real estate sector statistics; develop data on household, corporate, and government balance sheets.
  - Enhance early warning system and availability of real estate market statistics.

### Fiscal frameworks and budgetary recommendations (Box 2 highlights)
- Revenue options:
  - Broadening the corporate income tax base (apply CIT of 10 percent to Qatari and GCC companies) — estimated 2.0 (In percent of non-hydrocarbon GDP).
  - Introducing a 5 percent VAT — estimated 1.5 (In percent of non-hydrocarbon GDP).
- Expenditure options:
  - Freezing administrative expenses between 2016-2020 — estimated 3.5 (In percent of non-hydrocarbon GDP).
  - Removal of water and electricity subsidies — estimated 1.0 (In percent of non-hydrocarbon GDP).
- Illustrative Menu of Options for Fiscal Adjustment (In percent of non-hydrocarbon GDP):
  - Revenues 3.5
  - CIT 2.0 — Applying the CIT of 10 percent to Qatari and GCC companies
  - VAT 1.5 — Introducing a 5 percent VAT
  - Expenditures 4.5
  - Administrative expenses 3.5 — Freezing administrative expenses between 2016-2020
  - Water and electricity subsidies 1.0 — Removal of water and electricity subsidies
- Sequencing to strengthen medium-term budgeting:
  - First phase (to be completed by mid-2015): formulate a medium-term fiscal framework (MTFF); prepare a medium-term fiscal strategy document.
  - Second phase (to be completed by end-2016): prepare the medium-term budget framework (MTBF) and integrate it in the annual budget process.
  - Third phase (to be completed by end-2017): gradually turn the MTBF into a performance-based medium-term expenditure framework (MTEF).

### Real estate market (Box 1 highlights)
- December real estate values up by 35 percent year-on-year (QCB data).
- Transaction-level trends:
  - Total number of real estate transactions decreased from the 2013 peak, while total value of transactions dramatically increased.
  - Land prices rose fastest, followed by villas; price increases slower for apartments and villas with extension.
  - Price growth recently strongest outside of Doha (e.g., Al Wakrah, Al Daayen).

### Permanent Income Hypothesis (Annex I and related indicators)
- Main PIH finding:
  - Staff analysis suggests the government does not save sufficiently for future generations. The gap between projected deficits and deficits consistent with a constant real per capita annuity is about 5 percent of non-hydrocarbon GDP.
- Assumptions after 2020 for baseline:
  - flat hydrocarbon production,
  - annual oil price growth of 2 percent,
  - population growth of 0.5 percent (includes a departure of construction and other workers after investment projects are completed, followed by population growth of 1 percent),
  - real return on assets of 4 percent.
- Alternative scenarios assume either constant nominal oil prices or lower real return on assets by 1 percentage point.
- Measurement note:
  - Fiscal deficits measured by non-hydrocarbon primary deficits that exclude portions of QP investment income and corporate income tax (from hydrocarbon activities).

### Selected DSA and external indicators (as reported)
- Current account and fiscal projections:
  - Baseline/alternative scenario primary balances (selected entries preserved as in source):
    - Baseline Primary Balance: 5.1 0.5 0.0 0.3 -0.2 -0.8
    - Oil Price Scenario Primary Balance: 5.1 -10.7 -9.5 -8.6 -8.5 -8.7 (Oil price is lower by $25 in 2016-20)
    - Growth-Spending Scenario Primary Balance: 5.1 -1.5 -2.0 -1.7 -2.2 -2.8 (Real GDP growth lower by 1 percentage point and non-interest expenditure-to-GDP ratio higher by 2 percentage points than baseline in 2016-20)
    - Combined Scenario Primary Balance: 5.1 -12.7 -11.5 -10.6 -10.5 -10.7
- External debt and sustainability (selected entries preserved):
  - External debt (percent of GDP): 87.4 76.9 84.8 80.4 79.5 80.6 79.9 77.1 75.0 74.5 74.2
  - Debt-stabilizing non-interest current account: 1.0
  - Exports: 62.3 71.7 75.1 72.9 67.4 51.8 47.1 46.6 45.7 44.6 43.6
  - Imports: 23.8 25.8 28.7 29.0 30.1 33.3 33.4 31.9 30.8 30.0 29.3
- Bound tests (external debt percent of GDP) — selected scenarios:
  - Oil price $25 below baseline from 2015-2020: 99.9 113.3 121.1 129.0 137.8 146.5
  - Combination of oil price and interest rate shock: 100.7 115.2 123.8 132.8 142.7 152.7
  - One time 30 percent real depreciation in 2015: 94.9 94.1 90.7 88.2 87.7 87.4
  - Real GDP growth at baseline minus one-half standard deviations: 83.4 85.6 85.7 86.7 89.7 93.2

*Sources: IMF staff estimates and discussions with authorities as presented in the content unit.*

### 1.      Living with cheap oil. Qatar’s public finances remain sustainable at

### Living with cheap oil. Qatar’s public finances remain sustainable at expected oil prices, but in contrast to the recent past, projected budget balances no longer appear consistent with intergenerational equity.

### Near-term fiscal sustainability and recommended fiscal adjustment
- Main finding: Public finances remain sustainable at expected oil prices, but projected budget balances no longer appear consistent with intergenerational equity.
- Recommendation: Implement measures to improve the budget balance by 5 percent of non-hydrocarbon GDP gradually over the medium term.
- Institutional recommendations:
  - Specify clear medium-term fiscal objectives.
  - Make the annual budgets binding.
  - Further increase transparency of fiscal accounts.

### Macroeconomic context and shocks
- Context:
  - Qatar accounts for one-third of global LNG trade.
  - Authorities are executing a $200 billion infrastructure program to advance economic diversification and prepare for the FIFA 2022 World Cup.
  - Qatar Investment Authority (QIA) investments estimated at about $250 billion (Sovereign Wealth Fund Institute estimate).
  - About 90 percent of Qatar’s population are expatriate workers; remittances by these workers amounted to an estimated $13 billion in 2014, about 6 percent of GDP.
- Oil price shock:
  - Brent oil price unexpectedly fell to about $60 a barrel over the past six months.
  - Futures markets suggest a significant part of this decline is likely to persist over the medium term.
  - More than 90 percent of Qatar’s budget revenues and exports are tied to activities of the hydrocarbon sector; Qatar’s LNG price is linked to the price of crude oil.

### Recent macro-financial developments
- Growth and inflation:
  - Real GDP growth stable at about 6 percent over the past three years, driven by double-digit expansion of the non-hydrocarbon sector.
  - Inflation: peaked at 3¾ percent in summer 2014; eased to 2¾ percent in December 2014.
  - Real estate prices accelerated to 35 percent year-on-year in December 2014.
  - Rents constitute over 30 percent of the CPI basket.
- Public finances and assets:
  - Central government budget surplus increased to 14 percent of GDP in fiscal year 2013/14.
  - Gross government debt fell to about 30 percent of GDP.
  - Rough estimate of net financial worth of the government incorporating QIA is 100 percent of GDP.
  - Gross government debt including contingent liabilities from state-owned enterprises amounted to 50 percent of GDP in FY2013/14.
- Monetary, credit, and banking conditions:
  - Domestic credit grew by 10 percent year-on-year in December 2014; private sector credit growth accelerated to 20 percent.
  - Real estate credit has generally grown in line with the non-hydrocarbon economy; public sector credit recently contracting.
  - Tier 1 capital exceeds 15 percent of risk-weighted assets (as of September 2014).
  - Non-performing loans (NPLs) remain below 2 percent.
  - Return on assets at 2 percent.
  - Aggregate loan-to-deposit ratio has remained at about 1.
  - Cross-border assets have grown to about 20 percent of banks’ assets.
- Policy framework progress:
  - Transfer of all hydrocarbon profits from Qatar Petroleum to the budget improved fiscal transparency.
  - Most Basel III regulations were introduced last year.
  - QCB issued instructions for the loan-to-deposit ratio in mid-2014.
  - QCB Governor chairs the Financial Stability and Risk Committee.
- Exchange rate:
  - The peg to the U.S. dollar remains appropriate; staff find no evidence of a current account gap using two alternative techniques (Annex II).

### Macro outlook and major quantitative projections
- Growth:
  - Real growth could accelerate to about 7 percent in the near term as the Barzan field begins natural gas production.
  - Non-hydrocarbon growth expected to remain in double digits in 2015.
  - Growth could slow to about 4 percent over the medium term as public investment growth tapers off.
  - Official forecast (Ministry of Development Planning and Statistics, last year) used crude oil price assumption of $97 a barrel and projected growth at 7.7 percent and 7.5 percent during 2015-16.
  - Minister of Finance (February) expected growth at 7 percent and inflation at 3 percent in 2015.
- Inflation and real estate:
  - Near-term inflation could decelerate to 2 percent given large drop in international commodity prices and appreciating U.S. dollar.
  - Over the medium term, headline inflation is projected to increase modestly as disinflationary pressures dissipate.
  - Future real estate price developments are uncertain; prices may remain supported by the public investment program but could correct due to loss of hydrocarbon wealth and uncertainties.
- Oil price and fiscal/external impacts:
  - Staff assumption: gradual recovery in the Brent oil price to about $74 a barrel by the end of the decade (reflecting futures markets at the time of consultation).
  - Staff expects a substantial deterioration in fiscal and external balances from the large drop in oil prices.
  - Government budget projected to fall into a deficit from 2016 onwards.
  - Authorities projected to reduce public debt while accumulating net financial assets in the medium run, partly due to capital gains from QIA’s investments.
  - Current account surplus projected to drop from over 30 percent of GDP in 2013 to 2 percent of GDP in 2020.

### Risks and vulnerabilities
- Main risks identified:
  - External risks:
    - Possibility of lower-than-expected oil and natural gas prices due to slow global growth, rising unconventional oil supplies, and growing LNG competition.
    - Upside oil price shocks possible if geopolitical risks escalate or unconventional producers respond.
    - Revenue losses from lower hydrocarbon exports are the most significant spillover channel.
    - Spillovers could be amplified by falling liquidity in the banking system if government and hydrocarbon companies slow deposit growth, especially if coinciding with tighter U.S. monetary policy and mobilization of infrastructure resources.
    - Qatar’s external borrowing costs could increase if low oil prices persist.
  - Domestic risks:
    - Ongoing public investment program entails risk of overheating the economy in the near term and low-return and overcapacity in some sectors over the medium term.
    - Rapidly growing credit to selected sectors and cross-border credit growth are emerging vulnerabilities in the financial sector.
    - Real estate market speculative activity noted; real estate valuations appear on the upper end of a range consistent with fundamentals.
- Financial sector monitoring needs:
  - Further enhancements to early warning systems recommended, including improving availability of real estate statistics.
  - Continue careful monitoring of rapidly growing credit to selected sectors and across the border.

### Policy priorities for diversification and macroprudential balance
- Diversification and inclusiveness:
  - Intensify diversification efforts via further improvements in the business environment, higher education quality, and labor market reforms to make growth more inclusive.
- Investment program management:
  - Recent progress in public investment management is welcome.
  - Consideration should be given to raising real estate transaction fees to deter speculators and to further increasing land supply.
- Fiscal/monetary/macroprudential balance:
  - Use fiscal and macroprudential policies to address the limited scope for independent monetary policy under the peg.
  - Maintain accommodative monetary and credit conditions while monitoring overheating risks.

*IMF staff report, March 6, 2015.*

### 14.      The authorities agreed that hydrocarbon prices were the key channel for

### _cr1586 - 14.      The authorities agreed that hydrocarbon prices were the key channel for

### Spillovers, oil-price scenarios, and immediate vulnerabilities
- Hydrocarbon prices identified as the key channel for spillovers from the global economy; Qatar’s interconnectedness with global financial markets has increased.
- Futures prices and oil industry cost-structure analysis suggest medium-term oil prices should be above today’s levels, but may not return to previous highs.
- Both futures-based upside/downside scenarios correspond to oil prices higher/lower by US$25 a barrel (one standard deviation in oil prices) from 2015 onwards.
- Despite adverse impacts on budget and external balances from lower oil prices, authorities saw limited scope for spillovers to local non-hydrocarbon activity given the unchanged path of fiscal expenditures.
- U.S. interest rate hike, if it materializes this year, would have minimal immediate effects partly because Qatar’s main policy rate remains almost ¾ percentage point above the prevailing Fed Funds Rate.
- Cross-border activities of Qatari banks have increased substantially in recent years—albeit from a fairly low level—and are closely monitored.

### Short-term policy space and liquidity options
- Fiscal buffers and available natural resources are sizeable; spending is unlikely to be affected by falling hydrocarbon prices or market volatility in the near term.
- The QCB can inject liquidity via discount window and repo operations.
- The government can provide additional liquidity, including in foreign currency, by managing portfolios of the QIA and public sector enterprises.
- The administration continually monitors risks from the public investment program.

### Quantified sensitivities and illustrative oil-price impacts
- For illustrative purposes, an oil price drop of $10 a barrel would reduce:
  - fiscal balances by 2¼ percentage points of GDP, assuming no policy response,
  - external balances by 4 percentage points of GDP, assuming no policy response.
- A permanent $10 drop in oil prices could reduce Qatar’s GDP level by 2½ percentage points after 5 years assuming the government fully offsets revenue losses with expenditure cuts. The actual impact would likely be smaller since public expenditures would not be adjusted fully given fiscal buffers and FIFA-related commitments.
- The baseline/alternative scenario analysis and charts cover 2011–20 for sensitivity of external balances and fiscal balances (percent of GDP).

### Risk Assessment Matrix — main risks, likelihood, and expected impacts
- Lower-than-expected oil and natural gas prices (triggered by protracted slow growth and higher supply)
  - Likelihood: Medium to High
  - Expected impact: Medium to High
  - Policy implications: Intensify diversification efforts; ensure adequate banking system liquidity.
- Geopolitical fragmentation leading to a sharp rise in oil prices
  - Likelihood: Medium
  - Expected impact: Medium
  - Outcome: Likely accumulation of fiscal and external surpluses.
- Risks related to large infrastructure investments
  - Likelihood: Medium
  - Expected impact: Low to Medium
  - Concerns: Cost overruns, inflation, disappointing productivity gains; if labor productivity growth does not pick up, non-hydrocarbon growth could be only 2.5 percent in 2020.
  - Policy tools: Enhance early warning system; comprehensive public investment management framework; macroprudential measures; liquidity withdrawal; consider increasing real estate transaction fees to deter speculators; enhance labor protection and mobility.
- Side-effects from global financial conditions (surge in financial volatility; persistent dollar strength)
  - Likelihood: High
  - Expected impact: Medium (overall); Low to Medium (some effects)
  - Impacts and considerations:
    - U.S. tightening could cause oil prices to fall by less than 5 percent in staff’s assessment.
    - Normalization of U.S. policy would tighten Qatar financial conditions with a delay.
    - Strong dollar would reduce import prices and inflation short-term; trade balance effects vary over time.
    - Portfolios held abroad in non-USD currencies would suffer moderate valuation losses.
    - Banks’ profit margins would shrink; some banks reliant on wholesale funding could face liquidity pressures.
    - Large financial cushions and policy framework are in place to mitigate impacts.

### Policy challenges and priorities — A. Living with Cheap Oil, while Maintaining Intergenerational Equity
- Staff view: Qatar’s public finances remain sustainable at projected oil prices, but projected budget balances no longer appear consistent with intergenerational equity.
- Short-run projection: reduction in government financial assets due to fiscal deficits and debt repayments; net financial assets start growing again once oil prices recover above $68 a barrel (staff ballpark estimate of medium-term budget breakeven price).
- Permanent-income model calculations:
  - Government does not save sufficiently for future generations. The gap between projected fiscal balances and the optimal policy is about 5 percentage points of non-hydrocarbon GDP (Annex III).
  - Current budget policies would be consistent with intergenerational equity if oil prices turned out to be higher than IMF assumptions by roughly $10 a barrel.
  - Assuming IMF assumptions hold, additional measures worth 5 percent of non-hydrocarbon GDP should be phased in gradually over the medium term.
- Suggested measures (examples):
  - Prioritize public investment while raising its efficiency.
  - Gradual reduction in subsidies.
  - Additional savings in administrative expenses.
  - New non-hydrocarbon revenues.

### Budget reform progress and recommendations
- Authorities: Fiscal policies became prudent prior to the oil price drop; budget reforms remain on track.
- Administration actions: Slowed growth of current spending since mid-2013; capital expenditures and operational spending reviewed to establish medium-term envelopes.
- Ministry of Finance preparing a medium-term strategy planned for completion by mid-2015 to inform the budget process.
- Staff recommendations:
  - Establish a clear medium-term fiscal framework, including contingency plans.
  - Formulate clear medium-term fiscal objectives and communicate expected trajectories of budget expenditures and taxation.
  - Align annual budgeting with the medium-term framework to eliminate spending overruns.
  - Consider broadening the corporate income tax base and introducing a low-rate value-added tax (VAT); caution against reliance on user fees and charges.
  - Improve transparency of fiscal accounts, including financial transactions of the government.

### Policy challenges and priorities — B. Managing Overheating Risks and Securing High Return from Public Projects
- Ministry of Finance actions: smoothing time profile of investments; providing additional land to priority sectors; National Logistics Committee addressing bottlenecks.
- Financial-sector safeguards: QCB monitors real estate exposures, limits borrower LTV and DSTI ratios; QCB stress tests suggest NPLs for real estate, construction contractors, and consumer loans would need to jump to nearly 30 percent before banks’ capital ratios fall below regulatory minimum.
- State-owned-enterprise borrowing: loans to state-owned enterprises account for about 40 percent of domestic credit and have traditionally been fully performing.
- Policy recommendations:
  - Enhance early warning systems; improve real estate data (price indices, vacancies, transaction characteristics).
  - Ensure adequate supply of land and affordable housing.
  - Consider raising real estate transaction fees (currently 0.25 percent) to reduce speculative pressures; fees could be differentiated so first-time homebuyers pay very little while short-term investors are penalized.
  - Resist rent controls as they would likely reduce housing supply.
  - If excessive credit growth, deploy further macroprudential measures (reduce LTV, calibrate countercyclical buffers) and liquidity withdrawals.
  - Slow public sector spending if inflation accelerates.
- Public investment management progress:
  - MoF empowered to manage public investments and established an approximately QAR 600 billion 10-year spending cap on new investment projects with yearly indicative targets.
  - MoF’s PIM department collated detailed project data, reviews major investment proposals, and refines PIM system via inter-ministerial committee.
  - Staff suggests deeper cost-benefit analysis and ex-post project assessments.

### Policy challenges and priorities — C. Maintaining Financial Stability
- Overall assessment: Banks remain well capitalized and liquid, but emerging risks require careful monitoring.
- Emerging vulnerabilities:
  - Falling liquidity due to oil price drop.
  - Rapidly-growing credit to selected sectors and abroad.
  - Large credit growth to construction contractors, services, trade, and consumers linked to public investment and population growth could raise NPLs over time.
  - Developments at weaker banks should be closely monitored despite system-wide cushioning.
  - Largest Qatari banks expanding in Middle Eastern and African countries with difficult macro and geopolitical environments; regional expansion could stretch risk management capacity.
  - Reliance on external funding could increase as low oil prices largely eliminate the current account surplus.
- Policy options if liquidity falls:
  - Reallocate deposits of government-owned companies and the QIA from abroad.
  - Adjust size of T-bill and T-bond auctions.
  - Close coordination between QCB and Ministry of Finance in managing liquidity; sizeable capital, liquidity, and policy buffers noted by authorities.

### Financial-sector regulation and capacity building
- Progress: Implementation of the Strategy Plan for Financial Sector Regulation and finalizing the Basel III agenda, including planned introduction of:
  - net stable funding ratio,
  - capital surcharges for domestic systemically-important banks,
  - countercyclical buffers from 2016 (see Update on Basel III Implementation in Annex V).
- Banks upgrading risk assessment and management; QCB monitors loan-level details carefully.
- Financial Stability and Risk Committee initiated work on risk-based analysis and policy impact assessment.
- Staff recommendations: continue strengthening framework for anti-money laundering and combating terrorism financing (AML/CFT); authorities expressed interest in further technical assistance and establishing an AML/CFT regional training center in Doha.

*Sources: IMF staff estimates and discussions with authorities as presented in the content unit.*

### 25.      Staff suggested that the prospects for persistently low oil prices and slowing

### _cr1586 - 25.      Staff suggested that the prospects for persistently low oil prices and slowing

### Diversification and business environment
- Staff suggested that the prospects for persistently low oil prices and slowing medium-term growth call for intensification of diversification efforts.
- Staff analysis found that, while Qatar’s overall growth rates have been high over the past 25 years, this was largely driven by labor and capital accumulation as opposed to productivity gains (Box 3 and accompanying Selected Issues Paper).
- Qatar scores favorably on business environment indicators in the GCC region, but there is scope for improvement relative to non-GCC peers.
- Authorities’ recent measures to improve the business environment and promote diversification:
  - higher foreign ownership limits for companies listed on the stock exchange,
  - merger of the Qatar Development Bank and Enterprise Qatar to better support SMEs,
  - further expansion of e-government,
  - additional financial deepening through issuance of long-term T-bonds.
- Staff view on further reforms:
  - simplify business registration,
  - improve enforcement of contracts,
  - enhance the quality of education and align it with labor market needs,
  - privatization to help stimulate private sector activity.

### Inclusiveness, labor market, and expatriate policies
- Further progress can be made in fostering inclusiveness of growth.
- Boosting incentives of the Qatari citizens to work in the private sector would support diversification of the economy.
- Greater mobility for expatriates would help increase productivity by facilitating better matches between workers and vacancies, while reducing reputational risks.
- Authorities’ steps to address reports of inadequate working conditions of some expatriates:
  - better enforcement of existing laws,
  - timely payment of wages,
  - measures to improve living conditions, such as opening a dedicated Worker’s City.
- Reforms under consideration:
  - reform of the exit visa system,
  - greater flexibility in switching jobs.

### Data, statistics, and monitoring
- Substantial further efforts are necessary to improve the macroeconomic statistics.
- Recent improvements:
  - authorities started publishing quarterly GDP by expenditure,
  - finalized the Foreign Investment Survey, which should improve the IIP and BoP statistics.
- Ministry of Finance plans to begin compilation of fiscal data according to the GFSM2001 methodology by end-2015.
- Further important steps needed:
  - improve real estate sector statistics,
  - develop data on household, corporate, and government balance sheets.
- Collaboration with GCC Stat is reinforcing efforts to enhance national accounts and price statistics.
- Staff recommended enhancing the early warning system, including improving availability of real estate market statistics and developing balance-sheet data.

### Macroeconomic outlook and staff appraisal — growth, inflation, fiscal, external
- Qatar continues to implement an ambitious diversification strategy through a large public investment program, while retaining its systemic role in the global natural gas market.
- The policy framework is being strengthened in a number of areas, including fiscal and financial policies.
- The recent large drop in oil and natural gas prices will lead to a substantial deterioration of the fiscal and external balances, calling for intensification of diversification efforts and some fiscal consolidation in the medium term.
- Growth outlook:
  - Qatar’s growth will remain strong this year, but is expected to slow going forward.
  - In the near term, growth will be propelled by the public investment program and a new natural gas field.
  - Non-hydrocarbon growth should stay in double digits.
  - Over the medium term, headline growth is expected to slow down significantly as the public investment program tapers off and the private sector offsets only some of the decline.
- Inflation and real estate:
  - Consumer price inflation is contained, although real estate prices have grown quickly.
  - CPI inflation has eased in recent months, as rent increases stabilized and tradables inflation fell.
  - In the short run, lower international commodity prices, including for food, and a strong U.S. dollar should reduce headline inflation despite the tight rental market.
  - Real estate prices—especially land prices—are increasing particularly fast, and valuations appear on the upper end of a range consistent with fundamentals.
  - Consideration should be given to introducing a differentiated schedule of real estate transaction fees to deter speculators and taking further measures to increase land supply.
  - Imposing rent controls could prove counterproductive.
  - In case of excessive credit growth, further macroprudential measures and liquidity withdrawals should be deployed.
  - If inflation accelerates, policymakers should slow public sector spending.
- Fiscal and external balances:
  - The large drop in oil prices will lead to a substantial deterioration in fiscal and external balances.
  - In sharp contrast to previous years, the budget will be in deficit from 2016 onward and the current account surplus will largely be eliminated.
  - While there is no immediate concern about fiscal sustainability under staff’s oil price assumptions, additional spending and revenue measures worth about 5 percent of non-hydrocarbon GDP are warranted over the medium term to secure inter-generational equity in the context of low oil prices.

### Fiscal frameworks and budgetary recommendations
- Ongoing budget reforms are welcome and should be deepened further.
  - Significant progress has been made in setting up the macro-fiscal unit and public investment department, and current expenditure growth has been restrained.
  - The oil price slump highlights the need for specifying a clear medium-term fiscal framework, including contingency plans.
  - The strategy document currently prepared by the Ministry of Finance should formulate binding medium-term fiscal objectives and communicate expectations about the future trajectory of budget expenditures and taxation.
  - Annual budgeting process should be aligned with this new medium-term framework so that spending overruns are eliminated.
  - Further improvement in the transparency of fiscal accounts would facilitate a more accurate assessment of the Qatar’s fiscal position in the context of low oil prices.

### Financial sector soundness and risks
- Banks remain sound and the financial sector regulatory agenda is moving forward, but emerging risks and vulnerabilities need to be carefully monitored.
- Potential emerging risks:
  - risk of falling liquidity due to the oil price drop,
  - rapidly-growing credit to selected sectors and across the border.
- Although the banking system as a whole appears cushioned from real estate sector volatility, developments at weaker banks need to be closely monitored.
- Policy recommendations:
  - continue to closely monitor lending standards, concentration risks, and cross-border transactions of banks,
  - if low oil prices reduce financial sector liquidity, policymakers should take timely measures,
  - continue progress in implementing Basel III and related regulations,
  - enhance the early warning system and data availability (real estate, household, corporate, government balance sheets).

### Box 1 — Recent Trends in Qatar Real Estate Prices
- Real estate prices accelerated last year, despite the sharp drop in oil prices.
- QCB data: December real estate values up by 35 percent year-on-year.
- Staff calculations based on Ministry of Justice transaction-level data — broad trends:
  - total number of real estate transactions has decreased from the 2013 peak, while the total value of real estate transactions has dramatically increased (higher average prices and compositional changes),
  - land prices appear to have increased at the fastest pace, followed by villas where land is typically the most important cost component; price increases have been slower for apartments and villas with extension (e.g., a guest house),
  - price growth was recently strongest outside of Doha (example municipalities: Al Wakrah, Al Daayen) due to development projects and urbanization.

### Box 2 — Strengthening Fiscal Policy and Fiscal Frameworks in Qatar
- Given low oil prices, measures to contain expenditures and increase revenues are needed to save sufficient financial resources for future generations.
- Revenue options:
  - (i) broadening the corporate income tax base, as the current CIT does not apply to domestic and GCC investors in the non-hydrocarbon sector;
  - (ii) introducing a low-rate VAT (e.g. at 5 percent) that would raise new revenues efficiently, while helping to strengthen tax administration.
- Expenditure options:
  - (i) freezing administrative expenses; and
  - (ii) reducing subsidies, while protecting those in need.
  - Prioritization of investment projects is essential.
- Sequencing to strengthen medium-term budgeting:
  - First phase (to be completed by mid-2015): (i) formulate a medium-term fiscal framework (MTFF); and (ii) prepare a medium-term fiscal strategy document. Authorities are on track to complete this phase on time.
  - Second phase (to be completed by end-2016): (i) prepare the medium-term budget framework (MTBF) by matching the MTFF with a bottom-up estimation of the costs of existing policy; (ii) integrate the MTBF in the annual budget process.
  - Third phase (to be completed by end-2017): (i) gradually turn the MTBF into a performance-based medium-term expenditure framework (MTEF); (ii) continue developing competency in policy analysis and performance management in sectoral ministries and agencies.
- Illustrative Menu of Options for Fiscal Adjustment (In percent of non-hydrocarbon GDP):
  - Revenues 3.5
  - CIT 2.0 — Applying the CIT of 10 percent to Qatari and GCC companies
  - VAT 1.5 — Introducing a 5 percent VAT
  - Expenditures 4.5
  - Administrative expenses 3.5 — Freezing administrative expenses between 2016-2020
  - Water and electricity subsidies 1.0 — Removal of water and electricity subsidies
  - 1/ In percent of non-hydrocarbon GDP. Source: Staff estimates.

### Exchange rate and Article IV timing
- The fixed exchange rate regime remains appropriate for Qatar.
  - The peg to the U.S. dollar has served Qatar well in periods of both high and low oil prices by anchoring prices of tradables and providing stability to income flows and financial wealth.
  - An assessment of the exchange rate level is complicated by the undiversified structure of Qatar’s exports, which are dominated by hydrocarbons, but staff estimates do not find evidence of a current account gap.
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*IMF staff report excerpts.*

### Box 3. Lessons from Qatar’s Growth Experience

### Box 3. Lessons from Qatar’s Growth Experience

### Overview
- Qatar is one of only 14 countries that, on average, have recorded annual real GDP growth of above 7 percent over a period of at least 25 years.
- Annual population growth was almost 7 percent over the same period.
- Per capita GDP grew by a mere 1 percent annually over the same period, placing Qatar in the lowest third of all countries world-wide.

### Growth drivers and productivity
- Growth has been attained through factor accumulation rather than productivity gains.
- Since 2006/7:
  - Labor and capital have each grown by about 13 percent annually.
  - Output has risen at a similar pace.
- Total factor productivity (TFP) growth remains close to zero.
- For the non-hydrocarbon economy:
  - The estimated growth was barely positive.
  - Alternative calculations (see accompanying Selected Issues Paper) yield negative TFP growth.
- Channels behind factor-driven growth:
  - High government spending, primarily on infrastructure, led to a rapid inflow of workers, especially by construction firms.
  - Real estate market and other economic sectors boomed in response to the rapid rise in immigration.

### Policy recommendations to improve productivity
- Strengthen oversight of public investment projects to improve capital productivity, given that government investment will remain significant in the near future.
- Focus on strengthening public investment management; Qatar has established a new public investment management department at the Ministry of Finance.
- Critical tasks for the new department should include:
  - (a) obtaining objective information to better estimate the returns of the public investments, and
  - (b) ensuring that expenditure decisions react to this information properly.
- Enhance labor productivity by:
  - Improving the quality of education and training.
  - Liberalizing the domestic mobility of the workforce.
  - Removing other regulatory constraints on private sector development.

### Key empirical points (reported magnitudes)
- Annual real GDP growth: above 7 percent (on average over at least 25 years) for Qatar among 14 countries.
- Annual population growth: almost 7 percent (same period).
- Per capita GDP growth: 1 percent annually (same period).
- Labor growth since 2006/7: about 13 percent annually.
- Capital growth since 2006/7: about 13 percent annually.
- TFP growth: close to zero.
- Non-hydrocarbon sector estimated growth: barely positive; alternative calculations show negative TFP growth.

*Box 3. Lessons from Qatar’s Growth Experience — source document content.*

### Annex I. Status of Staff Recommendations Made in the 2014

### Annex I. Status of Staff Recommendations Made in the 2014 Article IV Consultation

### Status of 2014 Staff Recommendations
- Remain vigilant about overheating pressures
  - Consumer price inflation remains subdued and national logistics committee monitors price developments and supply chain bottlenecks.
  - Real estate price growth accelerated despite the large drop in oil prices.
- Improve public investment management
  - The Ministry of Finance set up a Public Investment Management department.
  - Established a 10-year cap on new investment projects.
  - Reviewing projects' operational expenditures.
  - Liaises with a number of stakeholders, including through a recently-established inter-ministerial committee.
- Continue fiscal reforms, including strengthening medium-term budgeting
  - The Ministry of Finance is planning to strengthen its medium-term revenue and expenditure focus by preparing a medium-term strategy document.
  - Authorities contained growth in current spending in FY2013/14.
  - Increased transparency of revenue accounting.
  - Made the Macro-Fiscal Unit operational.
  - Work on GFSM2001 data compilation is in progress.
- Implement financial regulatory reforms
  - The Basel III circular was issued in January 2014.
  - Remaining Basel III agenda to be phased-in from 2016 through introduction of the net stable funding ratio, capital surcharges for the domestic systemically-important banks, and countercyclical buffers.
  - The Financial Stability and Risk Committee is developing risk-based analysis of the financial system and assessing the impact of new policies and legislation.
- Pursue diversification
  - Measures include higher foreign ownership limits for companies listed on the stock exchange.
  - Integration of the Qatar Development Bank and Enterprise Qatar to support SMEs.
  - Further expansion of the e-government.
  - Additional financial deepening through issuance of long-term T-bonds.

### External Sector Assessment — Key Findings
- Exchange rate and inflation
  - Riyal estimated to have appreciated by 2 percent in real effective terms in 2014, with stronger appreciation during the second half of the year.
  - Appreciation is helping to reduce inflationary pressures.
- Permanent income (External Sustainability, ES) approach
  - The ES approach is preferred because a current account gap would reflect suboptimal saving of hydrocarbon revenues rather than traditional competitiveness issues.
  - For 2014, the current account required to provide a constant real income per capita exceeds the preliminary current account balance estimate by only 1 percent of GDP.
  - The model permits consumption smoothing and reduces the required norm in line with projected oil prices in 2015, leaving the gap unchanged (the 2020 gap is also about 1 percent).
  - Conclusion: gaps are too small to indicate misalignment but consistent with the need to increase fiscal saving for intergenerational equity.
- Macrobalance approach (EBA-Lite)
  - Model’s predicted value for 2014 is 20 percent of GDP based on actual policies.
  - Imposing Qatar’s fiscal policy consistent with intergenerational equity raises the norm by almost 2 percent.
  - Allowing for 2014 estimates of global policy gaps results in a norm of 21 percent.
  - The model likely overestimates the current account gap during an oil price slump because Qatar’s current account is more sensitive to oil price declines than implied by the model’s average-country predictions.

### Fiscal Position and Permanent Income Hypothesis (PIH)
- Main finding
  - Staff analysis based on the PIH suggests the government does not save sufficiently for future generations.
  - The gap between the projected deficits and the deficits consistent with a constant real per capita annuity is about 5 percent of non-hydrocarbon GDP.
- Assumptions underpinning calculations
  - Projections until 2020 are based on staff’s macroframework, including the WEO assumptions about the oil price.
  - After 2020, the baseline scenario assumes:
    - flat hydrocarbon production,
    - annual oil price growth of 2 percent,
    - population growth of 0.5 percent (this includes a departure of construction and other workers after the investment projects are completed, followed by population growth of 1 percent),
    - real return on assets of 4 percent.
  - Alternative scenarios assume either constant nominal oil prices or lower real return on assets by 1 percentage point.
- Measurement note
  - The fiscal deficits are measured by the non-hydrocarbon primary deficits that exclude portions of QP investment income and corporate income tax (from hydrocarbon activities).

### Public Sector and External Sustainability — Selected Indicators and Scenarios
- Selected government and market indicators (rows preserved as in source)
  - Nominal gross government debt: 25.7 51.5 48.8 45.9 39.9 31.2 22.7 16.4 13.1
  - EMBIG (bp): 82
  - Y CDS (bp): 66
  - Real GDP growth (in percent): 15.1 6.3 6.1 7.1 6.4 5.6 4.5 4.1 3.9
  - Inflation (GDP deflator, in percent): 10.8 0.5 -2.7 -15.0 -3.2 4.9 3.5 2.4 1.7
  - Moody's: Aa2 Aa2
  - S&P: AAAA
  - Change in gross government debt (cumulative): -0.3 15.0 -2.7 -2.9 -6.0 -8.7 -8.5 -6.3 -3.3 -35.7
  - Identified debt-creating flows: -17.3 -23.0 -16.0 0.7 -1.0 -3.2 -2.0 -0.7 0.4 -5.8
  - Primary deficit: -12.9 -21.7 -15.3 -5.1 -0.5 0.0 -0.3 0.2 0.8 -5.0
  - Primary (noninterest) revenue and grants: 42.1 52.3 46.3 40.1 35.2 32.5 31.5 30.4 29.4 199.1
  - Primary (noninterest) expenditure: 29.2 30.7 31.1 35.0 34.7 32.5 31.2 30.6 30.2 194.1
  - Automatic debt dynamics: -4.4 -1.3 -0.7 5.8 -0.4 -3.2 -1.7 -0.9 -0.5 -0.9
  - Residual, including asset changes: 17.0 37.9 13.2 -3.6 -5.1 -5.5 -6.5 -5.6 -3.7 -29.9
- DSA alternative scenarios — selected assumptions and outcomes
  - Baseline vs. Oil Price Scenario vs. Growth-Spending Scenario vs. Combined Scenario — underlying assumptions (in percent):
    - Baseline Primary Balance: 5.1 0.5 0.0 0.3 -0.2 -0.8
    - Oil Price Scenario Primary Balance: 5.1 -10.7 -9.5 -8.6 -8.5 -8.7 (Oil price is lower by $25 in 2016-20)
    - Growth-Spending Scenario Primary Balance: 5.1 -1.5 -2.0 -1.7 -2.2 -2.8 (Real GDP growth lower by 1 percentage point and non-interest expenditure-to-GDP ratio higher by 2 percentage points than baseline in 2016-20)
    - Combined Scenario Primary Balance: 5.1 -12.7 -11.5 -10.6 -10.5 -10.7
  - Effective interest rate (baseline): 1.9 2.0 2.1 2.2 2.5 2.7
- External debt and external sustainability indicators
  - Debt-stabilizing non-interest current account: 1.0
  - External debt (percent of GDP): 87.4 76.9 84.8 80.4 79.5 80.6 79.9 77.1 75.0 74.5 74.2
  - Change in external debt: 5.4 -10.5 7.9 -4.4 -1.0 1.2 -0.7 -2.8 -2.1 -0.5 -0.2
  - Identified external debt-creating flows (4+8+9): -35.4 -50.0 -40.1 -31.8 -27.0 -8.4 -2.9 -3.7 -3.2 -2.5 -2.0
  - Current account deficit, excluding interest payments: -20.1 -31.3 -33.4 -31.8 -26.2 -7.1 -2.7 -4.5 -5.0 -4.4 -4.3
  - Exports: 62.3 71.7 75.1 72.9 67.4 51.8 47.1 46.6 45.7 44.6 43.6
  - Imports: 23.8 25.8 28.7 29.0 30.1 33.3 33.4 31.9 30.8 30.0 29.3
  - Net non-debt creating capital inflows (negative): 1.7 3.6 0.8 4.4 2.9 3.1 2.9 2.7 2.6 2.7 2.9
  - Automatic debt dynamics: -17.0 -22.3 -7.5 -4.4 -3.8 -4.3 -3.0 -1.9 -0.8 -0.8 -0.5
  - Residual, incl. change in gross foreign assets: 40.8 39.5 48.0 27.5 26.1 9.6 2.2 0.9 1.1 2.0 1.7
  - External debt-to-exports ratio (in percent): 140.2 107.3 112.9 110.3 117.9 155.8 169.8 165.3 164.1 166.9 170.2
  - Gross external financing need (in billions of US dollars): 7.8 -11.0 -14.9 13.5 10.3 56.9 64.4 62.7 67.7 74.2 79.5
  - Gross external financing need (in percent of GDP): 6.2 -6.5 -7.8 6.7 4.9 29.8 32.7 28.7 28.7 29.5 29.9
- Bound tests (external debt in percent of GDP) — selected scenarios
  - Oil price $25 below baseline from 2015-2020: 99.9 113.3 121.1 129.0 137.8 146.5
  - Combination of oil price and interest rate shock: 100.7 115.2 123.8 132.8 142.7 152.7
  - One time 30 percent real depreciation in 2015: 94.9 94.1 90.7 88.2 87.7 87.4
  - Real GDP growth at baseline minus one-half standard deviations: 83.4 85.6 85.7 86.7 89.7 93.2

*Source: IMF staff.*

### Annex V. Update on Basel III Implementation

### Annex V. Update on Basel III Implementation

### Capital
- Capital Adequacy (as a share of risk-weighted assets):
  - 10% minimum (of which 8% tier 1, of which 6% common equity tier 1), effective January 2014
  - Plus 2.5% capital conservation buffer, effective January 2014
  - Plus 0.5-3.5% for 5 Domestic Systemically Important Banks (banks already identified and notified, highest buffer currently 2.5%, to be phased in during 2016-2019)
  - Plus 0-2.5% countercyclical buffer (trial period is planned to start in 2016, the initial buffer has not yet been finalized)
  - Plus additional capital requirements identified by Banks Internal Capital Adequacy Assessment Process as part of Pillar 2 framework, effective from 2014

### Leverage
- Leverage (as a share of total consolidated assets, not risk weighted):
  - Tier 1 leverage ratio 3% minimum (circular issued July 2014, effective September 2014)

### Liquidity
- Stable funding:
  - Net stable funding ratio: 100% minimum (supervisory observation only; implementation circular to be issued shortly)
- Short term liquidity:
  - Liquidity Coverage Ratio: 60% minimum high quality liquid assets as a share of 30 days’ net cash outflows in 2014, rising to 100% in 2018 (amended circular May 2014)

- Source: Qatar Central Bank.

### Additional supervisory requirement (authorities’ rule)
- The authorities also require a maximum loan to deposit ratio of 100%; banks exceeding this ratio need to reduce it on a pro rata basis over a period of three years or face a penalty.
- A 90% credit ratio will operate in parallel for a period of three years with immediate penalties for exceeding the limit.

### Supplementary information (financial sector indicators, Dec 2014)
- Under the Basel III standard, the Tier I capital was 15.8 percent of risk-weighted assets.
- Non-performing loans: 1.7 percent.
- Earnings and liquidity buffers: "remained strong" (as reported by the Qatar Central Bank).

*Source: _cr1586 - Annex V. Update on Basel III Implementation (Qatar Central Bank; IMF staff supplement and related PDF content).*

### 2.23 million

### _cr1586 - 2.23 million

### Memorandum items
- Local currency per U.S. dollar (period average): 3.64 3.64 3.64 3.64 3.64 3.64
- Real effective exchange rate (change in percent): -5.0 3.0 2.5 2.2 ... ...
- Credit rating (Moody's investor services): Aa2 Aa2 Aa2 Aa2 ... ...
- Population growth (percent): 4.3 7.5 11.4 9.3 8.0 7.0

### Sources and context notes
- Sources: Qatari authorities; and IMF staff estimates.
- 1/ Includes crude oil, natural gas, propane, butane, and condensates.
- 2/ GFSM 1986; fiscal year begins in April; the upcoming change to the timing of the fiscal year from 2016 is not reflected. (data from 2013 onwards reflect a full transfer of Qatar Petroleum profits to the budget).
- 3/ According to staff estimates, budget revenues related to hydrocarbon and non-hydrocarbon activities amounted to about 42 and 4 percent of GDP, respectively, in 2013.
- 4/ Includes transfers to the General Retirement and Social Insurance Authority in 2011 and 2012.
- 5/ Nonhydrocarbon balance of central government (excluding the portion of investment income and corporate income tax from hydrocarbon activities).
- 6/ Central government balance plus estimated QIA returns, excluding capital gains.
- 7/ Credit to the government, government institutions, and semi-government institutions, as well as holdings of government securities.
- 8/ Excludes financial securities.
- 9/ Excluding QIA assets.

*Sources: Qatari authorities; and IMF staff estimates.*

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