The International Monetary Fund (IMF) has lauded Qatar’s continued strong macroeconomic performance, underpinned by the country’s “solid non-hydrocarbon growth and stable prices”.
The large fiscal and external surpluses have rendered the economy resilient against potential external shocks even as Qatar’s outlook is favourable, the IMF said in a report released yesterday.
Qatar’s macroeconomic performance has remained strong. GDP growth slowed from 13% in 2011 to 6.2% in 2012, mostly due to the self-imposed moratorium on additional hydrocarbon production from the North Field, the IMF said.
Growth was 6.5% in 2013, driven by strong expansion in the non-hydrocarbon sector. The negative spillovers from sluggish global growth and financial market volatility have been limited. Price pressures are subdued at present, with March 2014 inflation at 2.6% year-on-year. Fiscal and external sector continue to exhibit large surpluses, thanks to high hydrocarbon prices.
“The baseline macroeconomic outlook is positive,” the IMF said. GDP growth could stay around 6% in 2014, with public investments keeping growth around 6 -7% over the medium term.
Inflation is projected to stay benign at 3 to 4% going forward, partly owing to the anticipated decline in commodity prices, including for food, and the fixed exchange rate. Potential challenges include the risk of over-heating in the near term and over-capacity in the medium term as a result of the public investment programme.
The possibility of a sharp decline in oil and gas prices remains the main medium-term risk; however, the authorities have ample fiscal and external buffers to deal with contingencies.
The macroeconomic policy framework is being strengthened by a number of ambitious reforms in the area of fiscal policy and institutions, financial regulation, macro-prudential policies, liquidity management and development of the local debt market.
In particular, the IMF said Qatari authorities have been “saving the large fiscal surpluses and have started introducing a medium-term focus into the budget process”.
The financial regulatory agenda has centred on establishing an umbrella regulatory body and issuing a final Basel III circular. The authorities are also supporting economic diversification through measures to further financial deepening and private sector development.
The IMF holds the view that continued prudent macroeconomic management and efforts to diversify the economy will help ensure long-term growth and stability.
The fund emphasised the importance of a well-calibrated implementation of the large public investment programme and encouraged the authorities to remain vigilant about possible inflationary pressures. If signs of overheating emerge, action should be taken to smooth capital spending, and deploy liquidity withdrawal operations and further macroprudential measures in case of excessive credit growth or risk-taking.
IMF noted the authorities’ efforts to “ease price pressures by addressing bottlenecks in the supply chain”.
It advised the authorities to enhance the public investment management framework and improve the efficiency of public spending.
The IMF saw merit in a comprehensive approach, including rigorous procedures for the selection and appraisal of projects, underpinned by substantial capacity building and deeper co-operation among various stakeholders. In this regard, the fund welcomed the Qatari authorities’ plan to set up a Public Investment Management Unit.
The IMF commended the authorities for pursuing ambitious fiscal reforms, such as the commitment to limit spending over-runs, a medium-term focus in the budget process, performance budgeting, and setting up of the macro-fiscal unit.
It encouraged timely implementation of these reforms, and recommended that, going forward, the annual budgets should be based on realistic hydrocarbon price assumptions and a more detailed multi-year expenditure framework.
The IMF commended the progress made in enhancing financial sector regulation. It welcomed issuance of the final Basel III circular and the three-year Strategic Plan for Financial Regulation.
The fund observed that Qatar’s banks remain well capitalised, liquid, and profitable. It suggested continued close monitoring of lending standards, concentration risks and cross-border activities of banks through an enhanced early warning system. The fund also saw further scope to improve liquidity management.
The IMF took note of the authorities’ efforts to enhance diversification by supporting financial deepening and private sector development. It said priority should be given to further improving the business environment and the quality of education.
The fund looked forward to continued improvements in the area of macroeconomic statistics.
Riyal’s dollar peg ‘remains appropriate’
Qatar’s dollar peg “remains appropriate”, the IMF has said in its report. The IMF holds the view that the fixed exchange rate regime has anchored prices of tradables and provided stability to income flows and financial wealth, given the dominance of dollar-denominated hydrocarbon exports. The IMF analysis suggests that the global share of Qatar’s non-hydrocarbon exports and the share of Qatar’s imports in GDP have remained broadly stable in recent years.
On the basis of incomplete data, the composition of financial flows appears to have been relatively stable as well. The real effective exchange rate is stronger than the long-term average, consistent with high hydrocarbon prices, it said.
According to the IMF, improving the public investment management process would help Qatar achieve better allocation of resources and high return on investment. Gulf Times