Qatar has recently taken steps toward introducing a medium-term budget framework (MTBF) to enhance the predictability of spending decisions in the country. However, implementing medium-term fiscal planning requires formal procedural fiscal rules and parallel efforts to enhance the credibility of the annual budget. Given Qatar’s significant exposure to hydrocarbon price movements and its long-lasting hydrocarbon reserves, such fiscal rules would need a certain degree of flexibility and, at the same time, should be set to maintain consistency with long-term fiscal sustainability.

Abstract

Qatar has recently taken steps toward introducing a medium-term budget framework (MTBF) to enhance the predictability of spending decisions in the country. However, implementing medium-term fiscal planning requires formal procedural fiscal rules and parallel efforts to enhance the credibility of the annual budget. Given Qatar’s significant exposure to hydrocarbon price movements and its long-lasting hydrocarbon reserves, such fiscal rules would need a certain degree of flexibility and, at the same time, should be set to maintain consistency with long-term fiscal sustainability.

I. Medium-Term Budget Framework in Qatar1

A. Introduction

Qatar has recently taken steps towards introducing a medium-term budget framework (MTBF) to enhance the predictability of spending decisions and link its medium-term development plans to the budget. As a resource-rich country with volatile fiscal revenues and a commitment to a mega infrastructure spending program, multi-year fiscal planning is both a much needed reform and a very challenging task. Going forward, successfully implementing medium-term fiscal planning requires parallel efforts to enhance the credibility of the annual budget and of macroeconomic forecasting through a macro-fiscal unit, as well as to build and enhance capacity at the Ministry of Economy and Finance (MoEF) and line ministries. Furthermore, a formal fiscal rule is a way of reinforcing the fiscal framework. Given Qatar’s significant exposure to hydrocarbon price movements and its long-lasting hydrocarbon reserves, such rules would need a degree of flexibility and, at the same time, should be set to maintain consistency with long-term fiscal sustainability.

B. Components of Medium-Term Fiscal Planning and Current Arrangements in Qatar

1. Sound fiscal policy in Qatar is at the forefront of economic development, stabilization, and timely and efficient implementation of the planned mega infrastructure projects. This assumes more importance given Qatar’s significant reliance on volatile hydrocarbon revenues and the limited independence of monetary policy under the exchange rate peg. Qatar’s multi-year budget framework from FY 2012/20132 will help “ensure that budgets perfectly fit in with realizing the key objectives and goals of government policy and increasing its focus on outputs and results recorded by the ministries and government agencies.”3

2. Qatar has started multi-year fiscal planning with a basic MTBF, which is still in its infancy stage. Budget planning now focuses on a 3-year period, with the budget approval done on an annual basis for the upcoming fiscal year. The outer year budgets are determined as a simple inflation adjustment of the first year’s estimates. Ministries requesting more than just a simple inflation adjustment to their budgets are required to explain in their requests (i) how the objectives and services for which they are responsible will improve; (ii) what strategies and techniques they will use to improve those services; and (iii) how their proposals fit in with the Qatar’s national development plan. Thus far, the MTBF aggregates expenditure proposals from about 60 percent of ministries and government agencies representing about 90 percent of total expenditures. In addition, the framework is not yet binding and is being used for internal purposes without being published.

3. A recent budget circular issued by the Ministry of Economy and Finance (MoEF) provided the timeline as well the detailed instructions for ministries/agencies to prepare their performance-based budgets starting from 2012–13. First, ministries/agencies will be given more time to prepare budgets. For instance for 2012–13, the process started in August 2011 and final drafts were submitted by the line ministries/agencies in January 2012. During this period, first drafts as well as formal semi-monthly reports about progress in budget preparation were submitted by ministries, and meetings were held with the Public Budget Department of MoEF to determine whether adjustments to the content or the required funds or both are required. Second, ministries/agencies are required to provide (qualitative or quantitative) performance indicators for outcomes achieved under approved budgets. A small percentage of ministries and government agencies responded according to the guidelines provided in the circular. In order to help achieve better responses, a revised version of the circular will be issued soon with more clarifications, and training workshops for ministries are in the pipeline.

4. This paper is organized as follows. Section C discusses the desired objectives of Qatar’s adoption of the MTBF, and Section D analyzes its current standing in satisfying the key pre-requisites for successful multi-year fiscal planning. In doing so, the paper assesses the challenges posed for resource-rich countries in running successful MTBFs, and draws from international country experiences. Section E presents simulations addressing the potential eventual adoption of an appropriate fiscal rule in Qatar. Section F concludes.

C. Medium-Term Budgeting in Qatar: Objectives and Focus

5. The MTBF in Qatar should be centered on (i) managing volatility of spending and shielding it from hydrocarbon revenue uncertainty, (ii) achieving macro-fiscal stability, and (iii) ensuring efficient execution of large infrastructure projects. Given that resources are likely to be relatively unconstrained in the medium-term, Qatar’s MTBF should be embedded in a long-term sustainability framework that reflects the time profile of non-renewable reserves and intergenerational choices. This would contribute to a more stable macroeconomic framework in which Qatar would save more for building strong buffers and for intergenerational equity purposes.

6. The volatility of growth and inflation in Qatar over the last two decades underscores the importance of sound fiscal policy through the MTBF as a key tool for stabilization. Over 1990–2011, the volatility of these key aggregates in Qatar has been higher than in other GCC economies, and increasingly so for both measures over the last 2 decades (Table I.1). The high volatility of non-oil growth in the 2000s can be linked to strong and rapid growth in the construction sector.

Table I.1.

Macroeconomic Volatility in Qatar, 1990–2010

article image
Sources: Country authorities; and IMF staff calculations.

7. Furthermore, insulating fiscal policy from oil price volatility remains a key challenge in Qatar. The link between fiscal spending and oil revenues has significantly increased over the last 2 decades, relative to other GCC countries, based on simple correlations. The response of fiscal policy to changes in domestic demand, as first measured by the simple correlation between real expenditure growth and real non-oil GDP growth has increased in Qatar between the 1990s and 2000s, suggesting a more procyclical response during the boom in oil prices in 2000s compared to the ‘relative’ bust in the 1990s (Table I.2).4 Lower procyclicality in busts can be explained by the fact that an unconstrained country like Qatar can indeed afford to spend more in relatively bad times (for instance from returns on accumulated financial assets). The key challenge is then to revert the fiscal expansion in good times, to avoid spending pressures, and instead to save more, thus preventing fiscal policy from amplifying the boom in business cycles. This correlation has instead decreased in all other GCC countries, and in fact characterized as having graduated to countercyclical policy in the 2000s in Frankel, Végh, and Guillermo (2011).5

Table I.2.

Volatility of Government Spending, 1990–2010

article image
Sources: Country authorities; and IMF staff calculations.

8. The annual budget cycle encourages more procyclical policy responses during booms and busts. Delinking the annual budget from the short-term volatility in oil revenue, and basing spending decisions on a longer-term perspective is in this respect particularly important in preventing volatile annual revenues from translating into expenditure fluctuations that can destabilize the economy and reduce the quality of government spending. During good times when oil prices or production rates are high, a multi-year framework can help governments resist the pressure to increase spending and buildup reserves, which can be used in bad times without compromising long-term policy objectives. In that respect, MTBFs can help protect priority expenditures and maintain the strategic focus of policy plans.

9. Anchoring spending decisions in a medium term framework is key to avoiding over-committing future budgets. Between 2007 and 2011 development expenditures rose in line with the actual oil price—an increase of about 50 percent—while the hike in current expenditures was much more significant at 130 percent (Figure I.1). Without a well-functioning and detailed MTBF, ad-hoc increases in current expenditure, which are typically difficult to unwind, have imposed budget rigidities. This comes at a time where adjustments from the capital expenditure side should not be an option for two reasons. First, they involve reputational risk given Qatar’s commitment to complete the investment program by 2020. Second, capital investments are expected to be key non-hydrocarbon and overall growth drivers in Qatar over the medium term when hydrocarbon growth reaches minimal levels due to the moratorium on further developments on hydrocarbon projects. In that respect, the MTBF can help enhancing prioritization processes, and the quality of investments through the evaluation, choice, and management of projects, and thus alleviate risks of long-term project viability, which can otherwise be compromised if ongoing capital projects entail significant operating and maintenance costs.

Figure I.1.
Figure I.1.

Composition of Current Expenditure, 2007–12

(In QR billions, left scale)

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities and IMF staff calculations.

10. A consequence of increased spending pressures is the rapidly increasing fiscal break-even oil prices—the oil price levels that balances the budget at a given level of spending—in Qatar over the medium term. While these prices are projected to remain below the WEO baseline oil price, the gap is significantly tightening. A downside scenario, calculated based on one standard deviation ($28) drop in oil prices, imply that after 2015, WEO prices will fall below fiscal breakeven prices, requiring significant and disruptive fiscal adjustments (Figure I.2).

Figure I.2.
Figure I.2.

Fiscal Break-Even Oil Prices, 2009–17

(US$)

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Source: IMF staff calculations.

11. Medium-term budgeting can help secure effective implementation of the government’s large capital spending program, and achieve the full growth potential of capital spending. A credible medium-term orientation to the budget would help boost public investment management capacity by providing a coherent and rigorous set of procedures for project selection, appraisal, and programming that would enhance efficiency, accountability and governance. In addition, it helps take into account the recurrent costs of completed investment projects and budget adequately for them in the medium and long term. This would in turn help alleviate domestic supply constraints and shortcomings in institutional capacity that might otherwise increase the cost and reduce the efficiency of capital investment.6 This is all the more important to avoid delays and inadequate execution of the mega investment program.

12. In that respect, several ‘budget management’ mechanisms that ought to be in place under a successful multi-year fiscal framework would help ensure timely and on-budget execution of large infrastructure projects. These include:

  • Commitment mechanisms that define the nature, level, and terms of the restrictions being placed on future budget decisions.

  • Expenditure prioritization mechanisms that ensure that expenditure is allocated within those multi-year restriction in a manner that reflects the government’s policy priorities.

  • Multi-year control mechanisms through which the consistency between updated medium-term expenditure projections and approved medium-term expenditure plans are monitored and enforced.

  • Transparency and accountability mechanisms through which adherence to stated medium-term objectives can be assessed by “outsiders.”

D. Pre-requisites of MTBF in Qatar

13. In general, a medium-term fiscal framework (MTFF) together with a fiscal strategy document should be first put in place before introducing a more binding MTBF. More specifically, in the short term, a simple MTFF would provide a projection of the fiscal balance, non-oil balance and include estimates of government revenues and spending at a more aggregate level. A fiscal strategy document would follow as the basis for annual budget preparation, translating the MTFF into a statement on fiscal policy priorities. This document could also contain fiscal risk analysis, indicating the sensitivity of fiscal plans to varying assumptions regarding the economy, the hydrocarbon sector, contingent liabilities, and other uncertain events. In a second stage, a simple MTBF could provide guidelines (envelopes) to line ministries to prepare medium-term spending plans. Further reforms should aim at developing a more binding framework.

14. A full and effective MTBF requires several critical pre-requisites, including (i) credible annual budgets, (ii) accurate medium-term macroeconomic forecasts, and (iii) a comprehensive and unified top-down budget process. These requirements which are based on the experiences of countries that have successfully introduced MTBF, explain why the adoption of MTBFs is a relatively recent phenomenon, with mixed success rates. In addition, challenges specific to resource rich countries include the difficulty to assess long-term fiscal sustainability in the face of uncertain prices and resource stocks and to translate long-term fiscal sustainability into intergenerational equity while responding to investment needs and ensuring high-quality projects.

15. The first foundation for the medium-term revenue and expenditure projections is a credible annual budget. In Qatar, this prerequisite is yet to be fully met. The annual budget is based on a very conservative oil price assumption, which is consistently much lower than actual oil prices. As a result, actual outturns have deviated from budgets, with spending and revenue outcomes typically far above the initial allocations (Figure I.3). In that respect, the recent upward revision in budget assumptions from $55 to $65 per barrel is a welcome, yet insufficient, step given currently high oil prices. In Qatar, like in any resource-rich country, using more realistic oil price assumptions in the preparation of the budget is key in avoiding consistent deviations of actual oil prices from budget and the ad-hoc elements in spending decisions that they often cause

Figure I.3.
Figure I.3.

Budgeted vs. Actual Outcomes, 2008–11

(In QR Billions)

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities and IMF staff calculations.

16. Second, medium-term macroeconomic projections need to be anchored in the government’s multi-year projections of revenue and expenditure. A macro-fiscal unit has been recently established in Qatar, consistent with previous staff advice, but is still not functional. The MoEF needs to develop capacity to formulate medium-term macroeconomic forecasts.7 Nevertheless, in Qatar as in any other resource-rich country with resource price and production uncertainty, medium- to long-term resource revenue forecasts are clearly a challenge. Furthermore, avoiding a usually observed pattern of overly optimistic forecasts in boom times is warranted (Frankel, 2011).

17. A fiscal risk management framework would help plan for contingencies. The multi-year fiscal framework could help develop strategies to deal with the volatility and uncertainty in oil and gas prices and help assess risks and identify longer-term implications of present policies. This highlights the need to prepare, as a part of the forecasting exercise, a sensitivity analysis to varying assumptions regarding price, cost, and production, and to adequately plan for contingency reserves to smooth spending over the medium term in the face of shocks.

18. Third, a comprehensive and unified top-down budget process is also required for medium-term budget planning to shape fiscal policy in line with the government’s overall objectives. To ensure that medium-term ceilings or estimates shape the annual budget, three elements need to be in place. First, the budget process should follow a top-down sequence in which the expenditure aggregates should be determined before the distribution of expenditure within that aggregate is discussed and decided. Second, both the budget and the budget process should be unified so that all major expenditures decisions are taken at one time. Finally, the budget should be comprehensive and relatively unencumbered by extensive earmarking or standing expenditure commitments governed by other legislation. In the case of Qatar, there is still no top-down process, and ad hoc budget decisions are still taken throughout the year.

19. Finally, parallel and essential to all pre-requisites is capacity building at ministries and government agencies, including the MoEF, to enhance budget preparation and ensure quality of spending. Areas to be strengthened include the identification of priorities and policy options, costing of new initiatives, reporting and monitoring, and transparency.

20. The MTBF also needs to be anchored in and guided by the country’s fiscal objectives. A transparent and simple medium-term fiscal objective or rule can provide much needed anchor for the formulation of medium-term expenditure ceilings or projections in MTBFs. This is discussed in greater detail below.

E. Going Forward: Fiscal Rules

21. A well-designed fiscal rule could be considered as a way of reinforcing multi-year fiscal framework, as it provides an anchor for the formulation of medium-term ceilings or projections. Different fiscal rules have very different implications for the manner in which fiscal policy delivers objectives and responds to shocks. Policymakers’ choice of appropriate fiscal rules is thus key in ensuring its success.

22. Given the volatile nature of resource revenues, Qatar would benefit from a framework that includes a procedural fiscal rule, rather than a permanent strict numerical target. A procedural fiscal rule would include (i) principles for fiscal policymaking, (ii) a requirement for the government to set a target for one or more fiscal indicators, (iii) the content of the fiscal strategy statement in which those targets are set, (iv) the arrangements for reporting performance against those targets; and (v) an escape clause to deal with exceptional circumstances which prevent the government from meeting its fiscal objectives. A procedural rule in a volatile environment thus argues for allowing the MoEF the flexibility to change its quantitative fiscal targets within a principle-based framework. This indeed suggests a trade-off between a rigid fiscal rule with high risks of becoming obsolete and a flexible yet less credible rule. In that respect, having explicit revision clauses in place (e.g., targets to be reassessed every four years, for example) will help avoid undermining the credibility of the framework with too frequent changes.8

23. Staff carried out simulations to illustrate how the Qatari budget would have performed under two potential suitable rules: the Non-Oil Primary Balance Rule (NOPB) and the Expenditure Rule (ER).9,10 The objective of the simulations, which are for illustrative purposes, is to provide policymakers in Qatar with a view of how fiscal outcomes compare to the potential outcomes under the various rules, and illustrating the impact these rule would have had on countries’ savings. In particular, each rule will imply different outcomes in terms of whether it ensures fiscal sustainability and/or entails a demand management mechanism that could dampen temporary economic fluctuations.

24. The Non-oil Primary Balance Rule (NOPB) would have required larger budget surpluses in 2011 for Qatar. The NOPB rule is implemented by calculating the sustainable level of spending according to the permanent income hypothesis (PIH) methodology.11 For this calculation, projected oil prices depend on when the projection is made, with prices for each year from 1990 assumed to stay constant in real terms at their average level in the three preceding years. For Qatar, the NOPB rule would have implied larger deficits for most of the period since 1990, and the deterioration in the fiscal balance over the last few years went beyond that called for by the rule (Figure I.4). These results illustrate how the NOPB rule can limit the scope for countercyclical action, underscoring the case for escape clauses. The estimation and communication of the equilibrium level for fiscal sustainability would also pose practical challenges. In particular, the PIH results are highly sensitive to assumptions regarding future oil prices and other key parameters that are highly uncertain such as long-term rates of interest and population growth. Therefore, the focus of the PIH should not be on a point estimate but rather be illustrative of an available fiscal space path.

Figure I.4.
Figure I.4.

NOPB Rule Simulations, 1990–2011

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities; and IMF staff calculations.

25. The Expenditure Rule would need careful calibration for Qatar. This simulation imposes ceiling on the rate of real expenditure growth that is equal to long-term rate of real GDP growth.12 By setting expenditure growth this way, the rule ensures that the expenditure-to-GDP ratio remains constant over the cycle, allowing for temporary counter-cyclical deviations in the short run. However, as the ER relates the expenditure growth ceiling to the estimated long-term trend of output, the behavior and length of the output sample is crucial. The large fluctuations in GDP growth rates and the short sample complicate the calibration of the expenditure rule. In addition, this rule is sensitive to the level of the fiscal balance in the starting year of implementation, therefore calibrating the rule in the context of highly fluctuating fiscal balances as in Qatar needs special care. For our simulation, the average of the overall balance that would be consistent with the historical sustainable non-oil primary deficit was used as our starting point (Figure I.5).13

Figure I.5.
Figure I.5.

Expenditure Rule Simulations, 1990–2011

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities; and IMF staff calculations.

26. While the expenditure rule would have promoted better demand management policies over the cycle, it needs to be supplemented by an additional mechanism to ensure long-term sustainability. An important drawback of this rule is that it leaves revenues outside the coverage of the rule. Hence, where revenues were falling as a share of GDP, the rule could allow for widening deficits over time, since the expenditure-to-GDP ratio would remain broadly constant under the rule. An additional mechanism (e.g., debt brake or link to a NOPB rule) that could control for this shortcoming might need to be considered. Nevertheless, under this rule, additional savings would have been accumulated or the debt reduced compared to the actual outcomes.

27. Globally, fiscal rules are increasingly used to guide policy. In recent years, the number of countries adopting fiscal rules has risen from 10 in 1990 to about 80 at end-2009 (see IMF, 2009). This comprises 21 advanced economies, 33 emerging markets, and 26 low-income countries.

28. As elaborated thus far, designing and implementing a successful MTBF and subsequent fiscal rules is a challenging task, and can be even more so in a resource rich country. Experiences are mixed (Box I.1) and no country can be presented as a model for Qatar. More specifically, a number of them have introduced fiscal rules and/or fiscal responsibility laws (FRL) to reduce pro-cyclicality of fiscal policy and to promote long-term savings and sustainability.14 These have been relatively successful in some countries, particularly in Chile and Norway, whereas in some countries, such as Azerbaijan and Ecuador, the frameworks have not been followed or have been abandoned.

Country Experience with MTFF/MTEFs in Resource-Producing Countries

A number of resource-producing countries have been re-orienting their budget processes to lengthen the period covered by their fiscal frameworks. Many reform initiatives have included: a fiscal policy statement establishing a medium-term path for expenditure aggregates; medium-term macroeconomic forecasts; requirements for ministries to maintain budget estimates beyond the budget year and to explicitly cost new measures; and hard cash budget constraints for ministries.

In a number of cases, countries have introduced legislation on medium-term budget planning.

  • In Azerbaijan the organic budget law requires the preparation of a budget for the upcoming year as well as for the three following years. The government prepares medium-term economic forecasts that include the government priorities and the public investment plan, which are updated annually.

  • In Russia, since 2007, the parliament approves a full-fledged rolling three-year federal budget. Russia’s Budget Code mandates a target of the non-oil deficit of 4.7 percent of GDP (although the target was suspended in April 2009 until end-2013 as a result of the global financial crisis). To capture the full effect of spending decisions and to create stability in the budget process, Russia has introduced rolling three-year budget plans, where existing policy is explicitly linked to key parameters (inflation, volumes in transfer systems, etc), and a specific fiscal space available for new policies is determined before the start of each round of budget preparation. Russia also maintains two oil funds: The Reserve Fund (a rainy- day fund) and the National Wealth Fund, oriented toward long-run savings.

  • In Timor-Leste, the 2005 petroleum fund law establishes the country’s petroleum fund as the repository for all petroleum revenues and specifies how the fund is integrated with the state budget. The law includes a formula—based on the permanent income hypothesis—that derives the estimated sustainable income from petroleum and guides transfers from the petroleum fund to the budget. Timor- Leste is also making efforts to include rolling three-year budget projections in the budget documents.

  • In Norway, a key concern is the use of oil reserves to cover future non-oil deficits resulting from not only the depletion of oil reserves but also from pension liabilities. The authorities’ fiscal policy is based on a fiscal guideline—over the cycle the non-oil deficit should average 4 percent of the financial wealth accumulated in the oil fund (approximately equal to the average real rate of return on financial investments). This rule implies limited use of oil wealth in the short term, but increasing over time. The Norwegian fiscal guideline is also unusual as it isolates the annual budget from oil price volatility, but makes it sensitive to variations in the value of the financial wealth accumulated in the oil fund, for example due to changes in the stock market.

Some countries have introduced fiscal responsibility laws (FRLs). In Chile, a structural balance guideline was institutionalized in the 2006 fiscal responsibility law. Adjustment is done by long-term price of copper and molybdenum (10-year forecast) as determined by an independent committee. Targets have been changed over time. The framework is supported by two funds (stabilization and savings). Mexico’s FRL, approved in March 2006, mandates the inclusion of five-year quantitative projections and costing for new fiscal measures in the budget documents. It also envisages a balance-or-surplus rule and the use of a reference oil price to smooth expenditures. With a view to addressing oil revenues’ exhaustivity, Ecuador’s FRL, approved in 2002, required a reduction in the nonresource deficit of the central government by at least 0.2 percent of GDP per year until the non-oil balance reaches zero. Targets were not observed in practice, and the FRL was revised in 2005. Ecuador abolished its oil funds in 2008.

Main sources: Ossowski et al. (2008), Dabán and Hélis (2009), Baunsgaard et al. (2012).

F. Conclusion

29. Qatar is the first GCC economy to have initiated steps to formally adopt a MTBF, which is considered as key towards aligning its national medium-term development strategy with the budget and ensuring efficient sectoral planning and better utilization of resources by ministries and government agencies. This is a welcome and much needed reform as Qatar embarks on a mega infrastructure investment plan to diversify the economy and boost competitiveness. The process needs to be strengthened further by ensuring a more comprehensive coverage of line ministries as also make the outer years’ allocations more binding.

30. Going forward, a few prerequisites need to be in place to successfully implement a full-fledged MTBF. For Qatar, this requires parallel efforts to enhance the credibility of the annual budget and of macroeconomic forecasting—through a macro-fiscal unit, as well to build and enhance capacity at the MoEF and line ministries.

31. Furthermore, a formal procedural fiscal rule would reinforce the fiscal framework. Given Qatar’s significant exposure to hydrocarbon price movements and its long-lasting hydrocarbon reserves, such rules would need a degree of flexibility and, at the same time, should be set to maintain consistency with long-term fiscal sustainability.

Appendix I. Potential Fiscal Rules

The discussion below compares three fiscal rules that can potentially be suitable for Qatar on the basis of four criteria: simplicity, guidance, countercyclicality and sustainability. The area of the diamonds in the figures summarizes staff’s view on how the rule performs on each criterion, with a rank of four being the highest score.

  1. The Non-oil Primary Balance Rule (NOPB) sets a ceiling on the non-oil (primary) fiscal deficit.1 Timor-Leste has such a rule. A NOPB rule could mitigate some of the procyclicality problem by eliminating oil revenue from the targeted budget balance. The advantage of this rule for a country like Qatar is that it takes into account fiscal sustainability in the context of inter-generational equity. Moreover, it is simple to monitor, and provides some fiscal flexibility that would insulate the budget to some degree from oil price fluctuations (Figure I.6). Specifically, oil revenue windfalls could be saved rather than spent, building buffers for bad times and leaving some of the oil wealth for future generations. The downside of this rule is that while it is closely anchored on fiscal sustainability, it does not entail a demand management mechanism that could dampen temporary economic fluctuations (other than in oil revenues). Finally, since the rule in the context of oil producers would depend highly on long-term forecasts of oil prices, there will be need for periodic revisions of the rule to reflect changes to these forecasts.

  2. The Expenditure Rule (ER). This rule puts a cap on nominal or real expenditure growth within a credible MTBF. The rule is simple to monitor and provides clear guidance on how to conduct fiscal policy over time (Figure I.7). Botswana, Canada, and Costa Rica have adopted this rule. The rule embeds a demand management side, as the expenditure-to-GDP ratio would rise (fall) during recessions (booms). However, it is not always anchored in debt sustainability.

    While the control on expenditure could be easily achieved with a credible and reliable MTBF that would be based on an expenditure rule, the revenue side is not taken into account by the rule. Consequently, although the expenditure-to-GDP ratio would remain broadly constant over the cycle, this does not guarantee that the deficit is on a sustainable path. In practice, the rule could be supplemented with a correction mechanism (i.e. “debt-brake,” or a medium-term correction mechanism based on an NOPB rule) to ensure fiscal sustainability, but at the expense of heightened complexity.

  3. The Debt Brake Mechanism. Under this mechanism, an automatic fiscal adjustment, effectively arresting an undesired build up in public debt, is triggered when cumulative deficits exceed a predetermined threshold. The rules adopted in Switzerland and Germany incorporate this mechanism. It would help ensure debt sustainability while retaining some counter-cyclicality, although at the expense of higher complexity (Figure I.8). It could be combined either with the non-oil fiscal deficit rule or with the expenditure rule.

Figure I.6.
Figure I.6.

Properties of the Non-oil Balance Rule

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities; and IMF staff calculations.
Figure I.7.
Figure I.7.

Properties of the Expenditure Rule

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities; and IMF staff calculations.
Figure I.8.
Figure I.8.

Properties of the Debt Brake Mechanism

Citation: IMF Staff Country Reports 2013, 015; 10.5089/9781475571455.002.A001

Sources: Country authorities; and IMF staff calculations.

Other rules such as the Budget Balance Rule and the Structural Balance Rule are not suitable for an oil-producing country like Qatar. The former rule, which imposes ceilings on government debt and/or the overall fiscal deficit in percent of GDP, could lead to a highly procyclical stance. For instance, the rule could trigger an unrealistic consolidation in the event of a severe shock in oil revenues or allow excessive spending during boom periods. The implementation of the latter rule involves estimating the output gap and the long-term price of oil, and could prove difficult to implement in Qatar owing to the complexity in estimating the output gap and projecting the long-term price of oil

References

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1

Prepared by Ghada Fayad (MCD) and Sami Ylaoutinen (FAD).

2

The fiscal year runs from April to March.

3

Based on MoEF budget circular issued in June 2011.

4

The problem of procyclicality or pronounced economic cycles in resource-rich countries like Qatar is to some extent inevitable, but its impact can be mitigated by sound and well-chosen policies and institutions. The main reason for the observed procyclicality of fiscal spending in resource-rich countries is that governments cannot resist the temptation or political pressure to spend in booms, often borrowing more to finance such spending, exacerbating the adjustment process during busts when credit is not available and debt repayments come due. In a recent study, Frankel, Végh, and Guillermo (2011) show that institutional quality was a critical determinant of the graduation of many developing countries into countercyclical fiscal policy in the last decade. Also see Medas and Zakharova (2009) for a discussion on procyclicality of fiscal policies in resource-rich economies.

5

We back up this simple correlation analysis with an annual VAR model estimated on each of the GCC countries, linking real world GDP (to capture the effect of the global environment on GCC business cycles), real government expenditure, and non-oil real GDP. Our measure of cyclicality is the orthogonalized impulse response of government spending to shocks in non-oil GDP. Endogeneity concerns arising from reverse causality between spending and growth are usually dealt with by using quarterly data such as in Ilzetzki and Végh, (2008). However, since this is not available for GCC countries, our identification strategy assumes that fiscal policy cannot react within a year to news on non-oil GDP growth, and the VARs may underestimate the reactivity of fiscal policy. Despite this underestimation, our results show that Qatar’s fiscal policy has been procyclical, and more so than other GCC members, some of which were found to have countercyclical fiscal policy.

6

At the macro level, Qatar (and the GCC in general) has had an easy access to a perfectly elastic supply of foreign workers, which has thus far eased any bottleneck pressures.

7

Such forecasts exist in the General Secretariat for Development Planning, which is a governmental agency mandated to draw a national development vision for Qatar which became Qatar National Vision (QNV) 2030.

8

See the appendix for a detailed description of potential fiscal rules for Qatar, and their ranking on the basis of four criteria: simplicity, guidance, countercyclicality and sustainability.

9

The simulations are carried out using historical data for the period 1990–2011. The first step in the simulations is to determine the fiscal balance in each fiscal year based on each rule. For the expenditure rule, if the actual/projected fiscal balance (or expenditure growth, depending on the rule) has a better outcome compared to the ceiling implied by the rule, then the rule will not be binding and actual fiscal outcomes are used for that year. Otherwise, the fiscal outcome will be bound by the rule-implied ceiling or target. For the NOPB rule, the estimated sustainable spending level is assumed to be followed in each year. For both rules, the next step is to link the impact of the fiscal balance to the accumulation or reduction of debt or to building savings.

10

Designing a fiscal rule that would yield the right mix of sustainability, simplicity, counter-cyclicality, and policy guidance for Qatar is a complex exercise that goes beyond the scope of this paper.

11

Under the PIH, the sum of financial wealth is added to the net present value of projected future hydrocarbon revenue to calculate an annuity that maintains constant wealth per capita for future generations. This benchmark is then used to determine the sustainable path for the non-hydrocarbon primary deficit (the NOPB rule).

12

As a proxy for long-term growth, the 10-year moving average of real GDP growth for each year.

13

This corresponds to the overall balance using the sustainable non-oil primary balance and the actual oil-related revenues recorded over the simulation period.

14

While often incorporating fiscal rules, FRLs provide a deeper guide to fiscal policy making, laying out the principles and process under which fiscal policy will be made, who is responsible for particular elements and, the reporting requirements for fiscal documents.

1

Non-oil fiscal primary deficits are calculated by excluding interest and oil-related revenue and expenditure from the budget balance.

Qatar: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.