IMF Executive Board Concludes 2011 Article IV Consultation with QatarPublic Information Notice (PIN) No. 12/7
January 31, 2012
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 2011 Article IV Consultation with Qatar is also available.
On January 30, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Qatar on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes Article IV Consultations without convening formal discussions.1
Qatar has weathered the global crisis with high growth, and large external current account and fiscal surpluses. Government intervention in the banking system has ensured financial stability, and it is using its fiscal space to implement a large public spending program to maintain strong growth in the nonhydrocarbon sector. Real Gross Domestic Product (GDP) growth is projected to accelerate to 19 percent in 2011, up from 17 percent in 2010. The nonhydrocarbon sector is expected to grow by 9 percent, driven by manufacturing, financial services, and trade and hotels. Consumer Price Index (CPI) inflation excluding rent increased to 5.8 percent in October 2011. 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)—with negative rental inflation being more than offset by a general increase in all the other components of the inflation basket.
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.
The economic outlook for 2012 and beyond looks favorable, despite increased external risks. The main downside risks are lower hydrocarbon prices and potential disruption in transportation of liquefied natural gas (LNG) due to increased geopolitical tensions. Real GDP growth rate is projected to moderate to 6 percent in 2012, with real hydrocarbon GDP slowing down to 3 percent, 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. 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 fiscal and external accounts are projected to remain in surplus throughout the medium term, as oil prices are expected to remain high.
Executive Board Assessment
In concluding the 2011 Article IV consultation with Qatar, Executive Directors endorsed staff‘s appraisal, as follows:
Qatar is using its fiscal space, generated from an increase in 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. This underscores the need for fiscal policy to monitor aggregate demand and for the Qatar Central Bank (QCB) to manage liquidity.
The expansionary fiscal stance in 2011/12 thus warrants careful monitoring of aggregate demand to ward off risks of inflation. Fiscal policy must continue to maintain a careful balance between spending on infrastructure to sustain non-inflationary growth, and saving and investing hydrocarbon surpluses abroad to generate sufficient income to finance future budgets.
In the context of the peg, the QCB would need to manage liquidity more actively. The QCB would need to develop a formal liquidity management framework to facilitate a more proactive strategy in fine-tuning liquidity. In addition, coordination of debt management with the Ministry of Economy and Finance would be helpful in maintaining a stable and adequate stock of government securities for the further development of an interbank repo market, and also providing a robust benchmark yield curve for the corporate bond market.
Developing a more formal and transparent macroprudential policy framework to enable a swift response when needed would help achieve orderly credit growth without generating overheating. The main challenges for monetary policy will be to support credit growth without fuelling inflationary pressures or short-term capital inflows. Against the backdrop of increasing credit growth, banks, and the QCB need to be cautious that overall credit quality does not weaken, particularly in the real estate sector in view of the prevailing excess supply. Collating and disseminating price and volume data on Qatar’s real estate market segments would help banks assess risks better and also enable the central bank to take informed preemptive measures to preserve financial stability.
The banking system has the ability to withstand credit and market risks. Nevertheless, staff underscores the need to monitor individual banks for stress, given the interlinkages in the financial system. Further, individual banks’ foreign currency liquidity conditions need to be monitored and the QCB should stand ready to relieve potential pressures. Enabling a more robust risk assessment culture, conducting regular stress testing of banks, and putting in place an early warning system would help mitigate risks to the banking system and maintain financial stability.
In the medium term, fiscal policy will need to balance sometimes competing objectives of economic stabilization, development and generating intergenerational savings. Fiscal space has contracted somewhat compared to last year, because of the permanent increase in current expenditure, according to 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. While the eventual implementation of large capital projects, adjustment in current expenditures would be the most feasible way to reduce the dependency of the budget on hydrocarbon revenues.
Establishing a macro-fiscal unit would support fiscal policy making and the development of a medium-term budget framework to ensure the efficiency of public spending. A solid medium-term expenditure framework would represent a critical building block for the eventual adoption of a fiscal rule to help manage the path of fiscal spending.
Reducing Qatar’s vulnerability to hydrocarbon price fluctuations will require, in addition to fiscal management, diversification into other sectors of the economy and reinforcing competitiveness. Opportunities for efficiency gains and reducing distortions in petrol, energy, and water use exist by reducing, among others, direct and indirect subsidies. It is also opportune to consider options for deeper pension reforms.
Further improvements in statistics will be essential, which will also require greater coordination across agencies.