Inflation rising as a ‘serious challenge’ for Qatar
Author: BI-ME staff
Source: BI-ME
Published: 25 February 2008
QATAR. High oil prices will continue to fuel expansion in Qatar, but it has to address the challenges of inflation and diversification, said a research note from Standard Chartered this week.Qatar has recorded impressive growth in the past few years. And it shows no sign of slowing. With the rising price of oil and gas, a country that sits on one of the world’s largest natural gas reserves is revelling in unprecedented levels of income. It has become one of the fastest growing economies in the world.

Since 2000, nominal GDP has seen a cumulative increase of almost 80%. With its small population, GDP per capita has surged from around US$30,000 per capita in 2000 to approximately US$80,000 in 2008, making it also one of the richest countries in the world. Yet this boom presents challenges to this small Gulf country. It must, for example, cope with the dollar peg and the consequent absence of effective monetary policy tools present serious threats for Qatar as it moves ahead.

Qatar’s economic prospects are tied to its natural gas resources. It has the world’s third largest natural gas reserves after Russia and Iran, and it is the world’s largest exporter of liquefied natural gas. Oil production still represents about one half of the state’s total hydrocarbon output. But the country has also engaged in an ambitious plan to diversify, emulating its neighbour the United Arab Emirates, investing in tourism, infrastructure as well as financial services. The commitment to develop the financial industry is strong, and income growth will stimulate demand for financial services. There is increasing competition in the banking sector, which will accelerate the development of best practices. There has been a fall in the proportion of non-performing loans and, according to the central bank, the sector is fully compliant with Basel II.

The Doha Securities Market (DSM) experienced the same correction that affected the region. But the DSM
weathered this downturn and has gained by more than 65% over the past 15 months. From its low point of just 6,000 in November 2006, the index is now trading at 10,000, though it obviously still has a lot of ground to recover in order to return to its late 2005 level of over 13,000.

The Qatar Financial Centre (QFC), similar to the Dubai International Financial Centre (DIFC), has its own Regulatory Authority with its own court of justice, partly based on London’s. Unlike the DIFC, it is not an offshore centre and can operate in local as well as other currencies.

There are a growing number of applications for licences to operate in the QFC, and the growing number of players will add to the sophistication of products. The QFC is also planning to open an International Mercantile Exchange for energy contracts.

The main challenges are near term inflationary pressures and, long-term, the potential degradation of its North gas field, where several structural defects are currently being investigated. The economy is still highly dependent on the hydrocarbon sector: petrochemicals, oil derived products, and products that use oil or gas as feedstock. The oil and gas sector comprises almost two-thirds of Qatar’s GDP.

Diversification is essential, not only to reduce vulnerability to this single sector, but also to create employment opportunities. Almost one quarter of the population is under 15. The country already has a diversification strategy and is gradually ramping up investments in the industrial sector.

Money supply growth was 32% year on year in October 2007 and inflation was 13.7% year on year at the end of third quarter 2007. Qatar has recently increased banks’ required reserve requirement (RRR), in an attempt to manage liquidity more effectively. The hike in February took the RRR from 3.25% to 3.75%. The Qatar Central Bank’s latest figures from October 2007 show that M0 was QAR 5.51 billion while M1 was QAR 33.95 billion.

Based on the Standard Chartered estimates, the 50 bps hike in the reserve requirement can only reduce money supply by QAR 3.87 billion, or 2.16% of M1. This is negligible and it suggests that the actual
impact of raising the reserve requirements on money supply growth is limited.

To mitigate the effects of inflation, Qatar is studying the option of offering subsidies on commodities. This may bring short-term relief but would also fuel demand and push prices up. A longer term issue posed by such measures is that they create distortions in markets, and can serve to boost inflationary expectations. But there are signs that the authorities are aware of the issues.

In the absence of real monetary policy options due to the fixed exchange rate and open capital account, the government would like to build and develop a debt capital market which could allow them to do limited open market operations while deepening and diversifying Qatar’s financial market. This is seen as a very positive development for the country.


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