Qatar needs a clear, medium-term fiscal framework

Qatar needs to speed up its economic diversification and further improve business climate to ward off potential threats from persistently low oil price, although IMF says the country’s short-term growth outlook remains positive.Driven by the public investment programme and production start at the Barzan Gas Field, Qatar’s growth was expected to increase to about 7% this year, the International Monetary Fund said recently. But IMF has cautioned that lower oil prices could finally catch up with Qatar and lead to a substantial deterioration of the country’s fiscal and external balances.In sharp contrast to previous years, Qatar’s budget may be in deficit from 2016 and the current account surplus can be eliminated, IMF warned.Hence, it urged Qatar to initiate additional spending and revenue measures worth about 5% of non-hydrocarbon GDP in the medium term to ensure fiscal sustainability in view of the low oil prices. While welcoming Qatar’s ongoing budget reforms, the IMF urged the country’s policymakers to deepen it further.For years, Qatar benefited from an oil price that hovered above $100 a barrel, but in the past six months that fell to about $60. More than 90% of Qatar’s budget revenues and exports stem from activities tied to the energy sector, according to the IMF.Until now and despite the drop in oil prices, the country’s economy has continued to grow at a rapid pace with GDP growth at about 6% in the past three years.Qatar accounts for one-third of the global LNG trade and has emerged as an important global financial investor, labour importer and donor.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,” the IMF said. It said the prospects of persistently low oil prices and slowing medium-term growth called 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. Privatisation would also help stimulate private sector activity. Growth would be made more inclusive through labour market reforms.While the public investment programme is essential for Qatar’s economic development, IMF warned that it risks overheating the economy in the near term.The IMF has urged Qatar to keep an eye on its real-estate market’s rapidly rising prices and initiate steps to tackle inflation. Policymakers in Qatar should slow public sector spending, if inflation accelerates in the country, IMF suggested.In the short run, lower international commodity prices, including for food, and a strong US dollar should reduce headline inflation despite the tight rental market. Falling global commodity prices have helped reduce inflation below 3%, despite a tight real estate market. Also, falling import prices should continue keeping inflationary pressures in check.