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Qatar and the IMF
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IMF Concludes 2002 Article IV Consultation with Qatar
On June 24, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Qatar.1
Faced with limited oil resources and lukewarm economic growth, Qatar has focused since the mid-1990s on reducing its high dependence on oil and redefining its development strategy. To this end, it has turned to its large untapped reserves of natural gas (the world's third largest), and is investing heavily to develop through joint-ventures with foreign partners liquefied natural gas (LNG) exports and gas-intensive industries, such as petrochemicals and fertilizers. More recently, Qatar expanded its diversification effort to include tourism. At the same time, although constrained by OPEC production quotas, Qatar has continued to invest heavily to increase its crude oil capacity, also with the contribution of foreign partners through production sharing agreements. A further boost to diversification is taking place through the development of small- and medium-size industries that use byproducts of the hydrocarbon production.
This development strategy, together with strong crude oil prices and fiscal discipline, has resulted in an impressive economic performance in the past few years. Amid low inflation, growth has been buoyant and income per capita has become among the highest in the world. In addition, the current account balance has recorded a surplus since 1999, as has the central government's overall fiscal balance since fiscal year 2000/01. Largely because of restrained expenditure growth, the non-oil fiscal balance-a useful indicator of underlying fiscal trends because it excludes oil revenue-has experienced a downward trend since 1997. Although Qatar's total external debt-mostly incurred to finance the development strategy-reached an estimated 92 percent of GDP at end-2001, the debt service has remained within manageable levels at about 20 percent of exports. Average broad money supply growth was moderate in 2000-01, and interest rates declined in those years, in line with development in the U.S. market. Meanwhile, after falling by 8 percent in 2000, the Doha Securities Market recovered by about 37 percent in 2001-one of the best global performances.
Qatar's development strategy has also been accompanied by structural reforms to strengthen the financial sector, increase the role of private sector, and create a business-friendly regulatory environment. The minimum capital adequacy ratio was raised to 10 percent, and nonperforming loan classification criteria tightened, while strictly enforcing loan-loss provisions. The Qatar Central Bank has gradually enhanced its capacity to implement a market-based monetary policy by liberalizing interest rates and simplifying reserve requirements. The privatization of the power sector has advanced rapidly, with most government power generation plants already sold to Qatar Electricity and Water Corporation-which is majority-owned by the local private sector. In addition, construction has already started on the first independent power and water plant in the country, which is majority-owned by a foreign developer. A new foreign investment law was recently approved that allows 100 percent foreign ownership of companies in agriculture, education, health, industry, and tourism, as well as streamlines approval procedures.
Executive Board Assessment
Directors commended the authorities for the pursuit of a balanced development strategy and prudent macroeconomic policies-with emphasis on promoting economic diversification, improving education and health, modernizing infrastructure, and increasing public saving. These policies have contributed over the past few years to external and fiscal surpluses; buoyant economic growth, with rapidly rising per capita income; and a steadily improving standing in international financial markets. At the same time, Directors encouraged the authorities to take steps to further enhance the economy's resilience and efficiency.
Directors commended the authorities for their commitment to fiscal discipline, as a result of which Qatar is likely to continue posting overall fiscal surpluses in the coming years. Directors encouraged the authorities to reduce the budget's dependence on oil receipts through the gradual introduction of a modern tax system, based on a range of taxes on consumption and profits, to replace and broaden existing sources of non-oil revenue. They noted that considerable spending restraint has been exercised over the last few years, which has sharply reduced current expenditure, most notably on wages and salaries.
Directors welcomed the authorities' plans to ensure a more growth-oriented composition of government spending, and encouraged them to reform the present generous welfare system. In particular, they suggested gradually replacing the subsidy on consumption of electricity and water with targeted subsidies for poorer families, and supported the planned introduction of a national pension scheme. They also welcomed the adoption of an oil stabilization fund to insulate government development outlays from volatile oil revenue, while stressing that clear saving-investment rules will be needed to make the fund's operations transparent and to reduce the spending pressures that may rise in times of rising revenue.
Directors commended the authorities for their ongoing efforts to bring prudential regulation and bank supervision to the highest internationally accepted standards. Improvement of bank asset quality and adequate provisioning should remain a priority in the period ahead. Enactment of the new banking law will contribute to strengthening the financial sector, while the authorities should guard against any risks of engendering moral hazard in the sector. They encouraged the authorities to undertake a financial sector assessment program to better assess the strengths and weaknesses of the sector. Directors welcomed the approval of a new anti-money laundering law and recent action to ensure the freezing of assets of individuals and entities linked to terrorism.
Directors observed that monetary policy has played an appropriately supportive role in the pursuit of price and exchange rate stability. To this end, the central bank has taken a number of steps to enhance its capacity to implement a market-based monetary policy, including the liberalization of interest rates and the simplification of reserve requirement. Directors considered that the current fixed exchange rate regime, supported by strong financial discipline, has been a beacon of stability and confidence, and remains appropriate in Qatar's circumstances. Despite the recent appreciation of the real effective exchange rate, competitiveness does not appear to be at risk, given the continued expansion of non-oil exports and Qatar's rising share of the LNG market.
Directors considered that private sector and human capital development would further strengthen external competitiveness in the medium term. They encouraged continuous reliance on market mechanisms, such as education and training, which would gradually increase the participation rate of Qatari nationals in the labor force. Directors welcomed the steps taken to expand the open-door policy toward foreign investment and create a more business-friendly regulatory environment. In this context, prompt action to adopt the new company and agency laws would contribute to fostering domestic competition. Directors urged the authorities to continue with their privatization program to broaden the role the private sector plays in Qatar's development.
Directors welcomed the efforts underway to improve the country's national accounts and price statistics, as well as the authorities' decision to participate in the Fund's General Data Dissemination System. They urged the authorities to forcefully address shortcomings in the quality and availability of balance of payments and fiscal data, and develop labor market indicators. Directors called for the implementation of the action plan proposed by the 2001 Fund's technical assistance mission on balance of payments statistics, and for increased collaboration across government agencies and ministries to collect national statistics. They urged the authorities to strengthen the adequacy and timeliness of data reported to the Fund for surveillance. Directors called on the authorities to report to the Fund available information on Qatar's international investment position to ensure that Qatar provided the Fund with data necessary for the effective discharge of its duties, as required under the IMF's Articles of Agreement, and welcomed their plan to discuss this issue with the staff in the near future. As part of a sustained effort to improve transparency, Directors stressed that priority should be given to adopting internationally accepted standards and methods to collect and present national statistics, as well as to present a more accurate picture of the government position.
IMF EXTERNAL RELATIONS DEPARTMENT