Press Release No. 15/151

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Qatar

April 2, 2015

On March 23, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Qatar¹ and considered and endorsed the staff appraisal without a meeting.²

Qatar is implementing an ambitious diversification strategy, while retaining its systemic role in the global natural gas market. Qatar accounts for one-third of global liquefied natural gas (LNG) trade and has emerged as an important global financial investor, labor importer, and donor. The authorities are executing a large public infrastructure program to advance economic diversification and prepare for the FIFA 2022 World Cup.

The economy has maintained strong growth momentum so far despite the large drop in oil prices since summer 2014. Real GDP growth has been stable at about 6 percent over the past three years, mostly driven by a double-digit expansion of the non-hydrocarbon sector. Falling global commodity prices have helped reduce inflation below 3 percent, despite a tight real estate market.

The short-term growth outlook is positive, but lower oil prices will lead to a substantial deterioration of the fiscal and external balances. Growth is expected to increase to about 7 percent in 2015 as the Barzan natural gas field starts production and the authorities continue implementing the public investment program. Falling import prices should continue keeping inflationary pressures in check. However, the government budget could fall into a deficit from 2016 onwards and external surpluses will shrink substantially. Growth is expected to slow over the medium term as public investment growth tapers and the private sector offsets the decline only partially. The main risks to the macroeconomic outlook are the possibility of lower-than-expected oil and natural gas prices and the possible side effects of public investments in the form over short-term overheating and medium-term excess capacity.

Executive Board Assessment

In concluding the 2015 Article IV Consultation with Qatar, Executive Directors endorsed staff’s appraisal, as follows:

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. In support of this effort, the policy framework is being strengthened in a number of areas, including fiscal and financial policies.

However, 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.

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.

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. That said, 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.

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.

The 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.

Banks remain sound and the financial sector regulatory agenda is moving forward, but emerging risks and vulnerabilities need to be carefully monitored. Despite broadly stable credit growth overall, potential emerging risks include the risk of falling liquidity due to the oil price drop, and 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. Policymakers should 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. The continued progress in implementing Basel III and related regulations is welcome. Further advances are needed in enhancing the early warning system, including improving availability of the real estate market statistics and developing data on household, corporate, and government balance sheets.

The prospects of persistently low oil prices and slowing medium-term growth call for intensification of diversification efforts. There is scope for further improving the business environment and promoting diversification, including by simplifying business registration, improving enforcement of contracts, and enhancing the quality of educational curricula. Privatization would also help stimulate private sector activity. Growth would be made more inclusive through labor market reforms.

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.