It is well understood that much of the cause of higher inflation is attributable to shocks on the supply side. The Covid-19 pandemic caused factory closures, so when demand increased at the end of lockdowns, there were shortages of certain components, such as microchips. Then the conflict in Ukraine erupted in February 2022 affected food supplies and caused global disruption in the energy market. In response, interest rates around the world have been raised.
In Qatar, the inflation rate peaked at 6% in September 2022, in part due to increased economic activity in the build-up to the World Cup, but had begun declining before the tournament took place in November and December. Indeed, excluding the sectors recreation and rent, inflation has been low and could even be falling. The International Monetary Fund predicts a rate of around 2% in Qatar for the period 2023-2027.Inflation is lower in Gulf nations than in much of the economically developed world, but that doesn’t mean it isn’t of concern. Recent rises ought to encourage measures to boost competitiveness
Although the data for the past couple of months have been favourable, there had been cumulative price rises over the previous two years with income levels rising at a lower rate. So the experience of many people is of an inflationary squeeze – the issue that the Shura Council was addressing. Many similar goods and services are more expensive than in other Gulf countries, and prices are significantly higher than in 2019, before the pandemic. A small country like Qatar has to import most goods, so much of the inflation is imported. The government has introduced subsidies on some items, especially food, and this is preferable to public sector wage rises, which would have a larger negative effect on the budget. Subsidies should be targeted at essential items, and help those on the lowest income.
Qatar has a free-market economy, however there are some suppliers with a large market share, and more measures could be taken to enhance competitiveness. This was acknowledged at the recent Shura Council meeting, where members emphasised measures to enhance competitiveness as an important policy response, welcoming the Government’s commitment to doing so.
More diversification of the economy, so that more supplies, including of food, are produced locally, would also help, and there has been some progress in recent years. Higher interest rates reward savers, but in the case of Qatar over 80% of residents are non-natives, so much of the savings and investments go abroad. As with the supply side, so with investments and savings – more in-shoring would help stabilise and diversify the economy.
The government could also do more to improve supply chain efficiency, for example at the ports; and could reduce some of the fees that are levied by government departments, such as for certain licences, which cost the same for a small company as for a multinational. These reforms would curb inflation.
In classic monetary policy, higher interest rates curb inflation by reducing money supply and asset price inflation. But in Qatar asset prices, including property and stock markets, have been coming down. Increasing liquidity would reduce costs for banks and their customers – it would not be inflationary, and may even curb inflation as banks can pass on the savings in form of a lower consumer interest rate.
The Shura Council is correct to identify inflation as a serious hazard, and to respond accordingly. Inflation has many causes, and most recently disruption to supply chains has been a bigger contributory factor than money supply. There is much that policy-makers can do to subdue prices rises and inflationary spirals, that will be helpful irrespective of the level of interest rates.