IMF Executive Board Concludes 2010 Article IV Consultation with QatarPublic Information Notice (PIN) No. 11/32
March 9, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Qatar is also available.
On February 16, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Qatar.1
Qatar has weathered the global financial crisis exceptionally well, reflecting the quick and strong policy response by the authorities. The sizeable enhancement of liquefied natural gas (LNG) capacity, large government support to the banking system, and increase in public spending helped sustain high growth rates through the global crisis. Real gross domestic product (GDP) growth has rebounded to 16 percent in 2010 and is projected to accelerate to 20 percent in 2011. Headline consumer price inflation is negative in 2010, reflecting a sharp fall in domestic rents, although non-rent prices have started to rise. While bank credit for consumption and real estate stagnated after 2009, credit to public sector companies increased sharply.
The banking system is well capitalized and profitable. Banks had a high capital adequacy ratio of 17.4 percent, low nonperforming loans ratio of 1.9 percent, and a comfortable provisioning coverage of 85 percent at end August 2010. Profitability was 20 percent higher in the first three quarters of 2010, compared to the same period of 2009.
Continued government investment will keep growth high beyond 2011. While the self-imposed moratorium on increasing gas production after 2012 will lead to a sharp tapering off of growth in the hydrocarbon sector, government investments will support an average growth of 9 percent in the nonhydrocarbon sectors during 2012–15.
Headline consumer price inflation is projected at 4 percent over the medium term, as rents stabilize due to a gradual narrowing of the current excess capacity in real estate. Non-rent inflation, however, could resurge as the recovery in international commodity prices affecting Qatar’s import basket and growth in domestic demand continue. The fiscal and external balances are projected to remain in surplus through 2015.
The economic outlook remains positive, with the main downside risk being a sharp decline in hydrocarbon prices.
Executive Board Assessment
Executive Directors commended the authorities for the prudent policies during the global economic crisis which, coupled with an increase in gas production, have contributed to maintaining strong economic growth while safeguarding financial stability. Directors considered that the economic outlook is favorable, despite vulnerabilities to gyrations in hydrocarbon prices and global financial shocks. They stressed the need, however, to carefully monitor aggregate demand to prevent the resurgence of inflationary pressures. In the medium term, increasing productivity in the nonhydrocarbon sector will be key to promoting economic diversification.
Directors agreed that the current expansionary fiscal stance is broadly appropriate in view of the infrastructure investment needs and the comfortable fiscal position, but recommended the authorities stand ready to adjust policies if demand pressures reemerge. Directors encouraged the authorities to continue saving their hydrocarbon surpluses over the medium term to facilitate intergenerational equity. They stressed that containing current expenditures and broadening the tax base will be critical to reducing the budget’s dependence on hydrocarbon revenues. Directors underlined the importance of strengthening fiscal institutions to support these goals and welcomed the authorities’ intention to establish a macrofiscal unit and a debt office.
Directors considered that the main challenge for the central bank will be to manage the credit cycle without fuelling inflation. Given the pegged exchange rate, they recommended the central bank rely on macroprudential instruments to help contain credit growth and potential surges in capital inflows. Directors noted the staff’s assessment that the Qatari riyal is in line with fundamentals and agreed that the peg to the U.S. dollar remains appropriate. They encouraged the authorities to develop their technical and operational capacity in the event of a switch to an alternative exchange rate regime in the context of the monetary union.
Directors stressed that safeguarding financial stability remains essential. They welcomed the creation of the Financial Stability Unit and the results of the recent stress tests, which show the banking system’s resilience to market and credit risks. Directors also supported the authorities’ plans for establishing a single financial regulator to ensure harmonization of regulation and close regulatory gaps.
Directors noted that achieving strong and sustainable growth in the nonhydrocarbon sectors requires further efforts on structural reforms. They underscored that modernizing and strengthening the financial sector, including by further developing the local debt market, will be vital for supporting private sector diversification efforts. They also stressed the importance of improving the efficiency of public spending, more effective reforms in education and training, and greater encouragement to innovation for increasing Qatar’s competitiveness and productivity.
Directors acknowledged the efforts by the authorities to improve statistics, and noted that there is scope for improving the frequency, timeliness, and coverage of economic data. They underlined the need for greater coordination among data providers and welcomed the authorities’ intention to seek technical assistance in the compilation of the consumer price index.