IMF warns Qatar to control inflation

Qatar has been reeling under soaring inflation rate and the problem could continue unless it reduces spending and takes other measures, according to the International Monetary Fund (IMF).

But the Washington-based institution praised what it said was Qatar’s decision to keep its currency, the riyal, pegged to the US dollar, and expected the country’s economy to remain strong in the medium term. In its 2007 review of Qatar’s economy, released this week, the IMF said inflation in the world’s top LNG producer was as high as 12 per cent in 2007 and warned that government action to curb soaring rents would not be enough.

The fund’s executive directors said they were impressed by what they described as Qatar’s strong economic performance in recent years, adding that it was characterised by impressive GDP growth, sizable fiscal and external current account surpluses and a robust financial sector. “Directors noted that, although Qatar’s medium-term prospects are favourable, high inflation remains a concern and its reduction should be a priority.

“Most directors were of the view that inflationary pressures are likely to remain high in the near term even if pressures from the shortage of housing units ease,” the IMF said in its economic and financial review.

“In light of this, directors recommended restraint in current expenditures and the phasing of development expenditures in line with the absorptive capacity of the economy and Qatar’s medium-term priorities. They noted authorities’ intention to use caps in housing rents as a temporary measure, while substantive action is taken to address the underlying inflationary pressures.”

The report said IMF directors were of the view that riyal’s peg to the US dollar has served the economy well by anchoring monetary conditions and supporting the needs of the small, open and oil-dependent economy.

“They noted the authorities’ intention to maintain the peg in the period leading to the monetary union of the GCC countries, while keeping an open mind about the choice of the exchange rate regime under the prospective monetary union. A few directors suggested that consideration be given to moving to a more flexible exchange rate regime to help curb inflationary pressures.”

According to the IMF, Qatar’s economy performed well in 2006 and was projected to remain strong in 2007 and the coming years although it spoke of risk caused by fluctuations in oil and gas exports and tensions in the Gulf. “Qatar’s medium-term outlook is favourable, with continued strong growth expected to be driven by the hydrocarbon sector, as well as by diversification into higher value-added petrochemicals and financial services,” it said.

“The fiscal and external positions are expected to remain comfortable. Downside risks to the outlook include lower oil prices and shortfall in gas production, continued high inflation and a deterioration of the security situation in the Gulf region.”

IMF figures showed Qatar has steadily boosted expenditure over the past few years, buoyed by a surge in its oil and gas export income.

A breakdown showed Qatar’s LNG exports peaked at $13.3bn (Dh48.8bn) in 2006 and were expected to be higher in 2007 as LNG production surged above 29 million tonnes this year from 25m tonnes in 2006.

Crude oil sales fetched Qatar a record $17.8bn (Dh65.3bn) in 2006, bringing the country’s revenues to $41.8bn, (Dh153.4bn) its highest ever. Qatar has the world’s third largest gas reserves of 900 trillion cubic feet after Russia and Iran but is now the number one exporter of liquefied natural gas (LNG).

The gas-rich country has pumped in excess of $60bn (Dh220.2bn) into LNG projects and about $35bn (Dh128.4bn) has been budgeted for gas projects until 2012, when LNG exports will soar to 77 million tonnes per year.