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Host of WTO meetings: Sluggish growth, declining oil reserves prompt Qatar to diversify economy away from oil

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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For Qatar, the 1980s and early 1990s were a period of lukewarm economic growth and rapidly declining oil reserves—projected to last only about 15 years, based on current production levels and proven reserves, which are small by regional standards.

Facing a clear need to revitalize growth and break away from its dependence on oil, Qatar turned to its large untapped reserves of natural gas and redefined its development strategy. The move paid off handsomely, resulting in rapid economic growth in the second half of the 1990s and higher per capita income. From an average of about $14,000 in nominal terms in the early 1990s, per capita GDP rose to more than $25,000 in 2000, one of the highest in the world.

Diversification was key

What did the strategy involve? First, policymakers focused on producing natural gas for power generation and export. Two liquefied natural gas (LNG) facilities were completed, one in late 1996 and the other in mid-1999. Between the two facilities, Qatar produced almost 11 million tons of LNG last year, most of which was sold to Asian countries through long-term contracts. Its total LNG export receipts rose from $0.5 billion in 1997 to over $3 billion in 2000 (nearly 36 percent of total exports). This increase, together with the strong recovery in global oil prices of the past few years, finally turned Qatar’s external position positive in 1999.

Second, policymakers sharply expanded the output capacity of export-oriented, gas-intensive industries, such as petrochemicals, steel, and fertilizers. In fact, Qatar is now the largest Middle East producer of chemical fertilizers and some petrochemical products.

Third, in recent years, policymakers took a number of steps to boost tourism by expanding hotel capacity and the network of the national airline, as well as by promoting international gatherings in the country.

At the same time, Qatar was able to boost its crude oil output capacity, staying within the constraints imposed by membership in the Organization of the Petroleum Exporting Countries (OPEC). New discoveries, the authorities’ adoption of modern recovery methods, and improved terms of exploration and production contracts with foreign oil companies enabled it to increase production by 70 percent from the mid-1990s to 2000, when it reached on average nearly 700,000 barrels a day.

Investor-friendly climate

Of course, this strategy benefited greatly from a series of broad structural reforms aimed at increasing the role of the private sector by privatizing public enterprises and creating a business-friendly regulatory environment. The first major sale of public assets took place at the end of 1998, when the government sold 45 percent of its share in the state telecommunication monopoly in the local stock market.

Major progress has already been made in restructuring the power sector, which will help Qatar meet the longer-term needs of its growing population and industrial development. The Qatar Electricity and Water Corporation (57 percent of which is owned by private investors) was recently created to take overall responsibility for generating, transmitting, and distributing these services. Plans have also advanced for the country’s first independent power and water plant, to be built jointly with foreign investors, who will initially hold a majority equity stake. These developments are expected to bring new technology, improve efficiency, and reduce the need for government subsidies in the power sector.

Gulf Cooperation Council (GCC)

The GCC was established in May 1981 to foster close economic cooperation and regional integration among its members—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—through coordination of policies and harmonization of regulations in various fields. As a result, barriers to free movements of goods and services, national labor, and capital have been largely eliminated. Individuals and corporations of the GCC countries have been granted equal treatment for tax purposes, while all nationals have been allowed to invest in the stock markets of, and own real estate in, member countries. Also, GCC countries have agreed to adopt a common external tariff by March 2005.

The government has also taken several measures in recent years to promote Qatar’s image as an investor-friendly country. These include revising the company and agency laws to foster domestic competition and improving the foreign investment law. Foreign investors are now allowed to lease land for up to 50 years and to own 100 percent (from a maximum previously of 49 percent) of companies in most sectors, including agriculture, manufacturing, health, education, and tourism, while the procedures for approving investments have been streamlined.

The financial and capital sectors have been strengthened in the past few years as well. In 1997, the Doha Securities Market was established, and, in 2000, the authorities finished liberalizing interest rates on deposits in local currency—a process begun two years earlier—leading to a sharp increase in time and saving deposits. Qatar Central Bank also raised the minimum capital adequacy ratio to 10 percent from the internationally suggested minimum of 8 percent while tightening nonperforming loan classification criteria and requiring banks to appoint independent auditors to assess provisioning levels.

Financing the strategy

Where did the money come from to finance this new development strategy? Qatar relied on foreign participation (through both direct investment and management) and borrowed heavily in international markets. As a result, Qatar’s external debt is estimated to have peaked at close to 250 percent of exports of goods and services at the end of 1997 and 1998. In addition, initially, the external current account position took a hit as imports of LNG and other inputs needed for industrial projects mounted.

But by late 2000, debt declined to less than 150 percent, thanks to the rapid growth of export receipts from both higher oil and LNG volumes and improved terms of trade. Less than 40 percent of this debt is classified as government and government-guaranteed debt, and the debt service on the natural gas projects has been secured by the projects’ export proceeds. To restructure part of the debt, in June 2000, the Qatari government issued the first 30-year sovereign bond among oil-exporting countries in the region. This bond’s risk premium has been declining over much of 2001, reflecting growing international confidence in Qatar’s economy and prospects.

At the same time, Qatar moved vigorously to hold the line on public expenditures. These grew by only 15 percent from fiscal year 1996/97 to 2000/01 (the fiscal year is April–March), even though oil revenue almost doubled over the same period and non-oil revenue grew through increases in fees and charges. Consequently, the overall fiscal balance switched from a deficit that peaked at over 10 percent of GDP in 1998/99 when global oil prices collapsed to a surplus estimated at about 7 percent of GDP in 2000/2001, with much of the recent windfall oil gains going toward building up government assets.

Qatar’s improved performance is evident in . . .

1Excluding Kuwait between 1990 and 1993.

2Excluding Banks.

3Defined as overall fiscal balance excluding oil revenue.

Data: Qatari authorities; and IMF staff estimates

Largely because of the restrained expenditure growth, the non-oil fiscal balance in relation to GDP—a useful indicator of underlying fiscal trends in oil-exporting countries because it extrapolates from the fluctuations in oil revenue—has gradually improved since the mid-1990s. This implies that government consumption is well on track to be in line with Qatar’s permanent income from its oil and gas wealth, ensuring intergenerational economic equity.

Challenges ahead

So what lies ahead for Qatar? The medium-term prospects remain favorable despite the uncertainty in world oil prices and a deteriorating global environment. Long-term contracts with Asian, Indian, and European firms mean that the volume of LNG exports will surge to over 20 million tons by 2005, toppling crude oil as the most important Qatari export and helping to sustain external current account surpluses in the coming years. The growth of other non-oil activities in the years ahead should remain strong as well, reflecting investment in the electricity and water sectors, rising output capacity in gas-based industries, and buoyant construction associated with a proposed regional gas pipeline network. On the fiscal front, successful reforms implemented over the past few years will help Qatar continue to record fiscal surpluses—albeit moderate ones—even if the global crude oil price drops below about $20 a barrel.

Even so, now is the time for Qatar to take critical steps to position itself to take fuller advantage of an integrated, though uncertain, global economy. These include

• maintaining an overall fiscal surplus as a precaution against likely continued dependence on volatile oil receipts for revenue over the foreseeable future.

• casting fiscal policy in a medium-term framework, based on a conservative long-run oil price for both oil revenue and expenditures while broadening the tax revenue base. It is encouraging that the central government’s budget for this fiscal year is based on a relatively low price of $16.50 a barrel for Qatari crude oil and a 7 percent cut in spending with respect to actual outlays in the previous fiscal year—entirely accounted for by lower current expenditures. For the first time in over a decade, the budget thus aims for a small surplus equivalent to about 1 percent of GDP, with the non-oil fiscal balance showing further improvement.

•overhauling the welfare system—which has remained extremely generous despite the high per capita income and living standards achieved by Qatari nationals—to improve resource allocation and, in particular, reduce waste. This means changing to targeted subsidies from currently widespread free or subsidized access to government services and utilities.

•adopting a market-based industrial incentive structure from one based on subsidies and tax holidays.

•expanding the role of the private sector. Although public enterprises seem to be efficiently run and contribute to the budget, privatization will likely help broaden the range of activities in which the private sector can operate, promote the stock market, and attract foreign investors and expertise.

•relying on market-based mechanisms, such as providing appropriate training and education, curtailing the role of the government as employer of first resort, and improving job placement services, to enhance the employability of the local labor force without hindering competitiveness. These measures are vital, given that demographic dynamics point toward a rapidly growing indigenous labor force over the medium term.

• improving public access to updated economic and financial data on Qatar to reduce what the capital markets have labeled information risk and, therefore, the cost of external borrowing.

In sum, Qatar’s development strategy has increased its ability to weather adverse oil shocks, while a conservative expenditure policy has made the budget more resilient to these shocks. In this context, continued fiscal discipline, a strong financial sector, a flexible labor market, and privatization remain key to sustaining the country’s growth momentum, generating employment, and attracting foreign investment in the period ahead.

Laura Wallace

Editor-in-Chief

Sheila Meehan

Senior Editor

Elisa Diehl

Assistant Editor

Natalie Hairfield

Assistant Editor

Lijun Li

Editorial Assistant

Maureen Burke

Editorial Assistant

Philip Torsani

Art Editor/Graphic Artis

Jack Federici

Graphic Artist

Prakash Loungani

Contributing Editor

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