Abstract
This Selected Issues paper discusses strengthening of fiscal policy and fiscal frameworks in Qatar. It proposes ways to ensure that sustainable fiscal policy is maintained in the medium to long term in Qatar. Fiscal policy remains sustainable, but given the large drop in oil prices, revenue-raising and expenditure-containing measures need to be considered to ensure intergenerational equity. Measures aimed at containing current spending, prioritizing capital expenditure, and raising nonhydrocarbon revenues would help bring fiscal policy back to consistency with intergenerational equity. Strengthening fiscal frameworks would help achieve the desirable fiscal policies.
Strengthening Fiscal Policy and Fiscal Frameworks in Qatar1
Fiscal policy remains sustainable, but given the large drop in oil prices, revenue-raising and expenditure-containing measures need to be considered to ensure intergenerational equity. Measures aimed at containing current spending, prioritizing capital expenditure, and raising non-hydrocarbon revenues would help bring fiscal policy back to consistency with intergenerational equity. Strengthening fiscal frameworks would help achieve the desirable fiscal policies.
1. This paper proposes ways to ensure that sustainable fiscal policy is maintained in the medium to long term in Qatar. It provides an overview of government’s revenue and expenditure developments. The paper discusses various measures to increase nonhydrocarbon revenue such as broadening corporate income tax and introducing a low rate-broad based value added tax. The paper also proposes measures to contain expenditure growth—controlling the public wage bill, reducing subsidies, freezing administrative expenses, and prioritizing investment projects. It also proposes ways of strengthening fiscal frameworks to support fiscal policy implementation, and presents the Korean experience in setting up a successful medium-term expenditure framework.
A. Sustainable Fiscal Policy
Revenue and expenditure path
2. Total revenue and expenditure of central government have increased substantially since 2000 in real terms (Figure 1). Driven by increases in the oil price and hydrocarbon production, real total revenue grew by 20 percent on average in FY2000-13. Such strong growth in revenue allowed increasing total expenditure substantially, by more than 15 percent on average in real terms in the same period.
Total Revenues, Expenditures and the Oil Price, FY2000–14
(In real QR billions)
Citation: IMF Staff Country Reports 2015, 087; 10.5089/9781484309995.002.A001
Sources: Country authorities; and IMF staff estimates.3. Central government revenue depends strongly on hydrocarbon prices and production (Figure 2). While direct oil and gas revenue amounts to about 60 percent of total revenue, more than 90 percent of total revenue is in fact hydrocarbon revenue (in FY2013).2 Practically all of investment income and bulk of corporate income tax comes from Qatar Petroleum (QP), Qatar’s largest public enterprise comprising upstream and downstream hydrocarbon companies. Nonhydrocarbon revenue consists of corporate income tax of 10 percent levied on foreign companies, withholding tax of 5 to 7 percent levied on certain payments to non-residents, customs duties of 5 percent, and some fees.
Central Government Revenues, FY2000–13
(In percent of GDP)
Citation: IMF Staff Country Reports 2015, 087; 10.5089/9781484309995.002.A001
Sources: Country authorities; and IMF staff estimates.1/ Dividends paid by Qatar Petroleum and other state-owned enterprises.2/ About 85 percent of corporate income tax comes from Qatar Petroleum.4. Total expenditure of central government increased because of strong growth in both current and capital spending (Figures 3, 4). Current expenditure grew by about 15 percent on average in FY2000-13 in real terms, out of which wages increased by 11 percent annually. Wage growth was especially sizable in the last five years, reaching about 20 percent on average annually, not least due to the complex geopolitics of the MENA region. Capital expenditure rose more strongly, by about 25 percent annually in FY2000-13 in real terms, as Qatar has been implementing its ambitious National Development Strategy. As a result, the share of capital expenditure in total expanded from 10 percent in FY2000 to 29 percent in FY2013. Relative to GDP, total expenditure stayed unchanged in the same period as higher capital expenditure was offset by lower current expenditure.
Government Expenditure, FY2000–14
(In real QR billions)
Citation: IMF Staff Country Reports 2015, 087; 10.5089/9781484309995.002.A001
Sources: Country authorities; and IMF staff estimates.Government Expenditure, FY2000–14
(In percent of GDP)
Citation: IMF Staff Country Reports 2015, 087; 10.5089/9781484309995.002.A001
Sources: Country authorities; and IMF staff estimates.Subsidies
5. Low energy and fuel prices resulted in large subsidies, direct or implicit, as in other GCC countries (Table 1). On-budget subsidies in Qatar amounted to 2 percent of GDP in 2010; implicit energy subsidies are estimated at 3.5 percent (IMF, 2014).3 Water subsidies may also be sizable, as water consumption rates and technical losses are high in Qatar, as in other GCC countries (Box 1). Subsidy reforms so far were mainly raising retail gasoline and diesel prices (in 2011 and 2014), which are still way below international market levels (by about 50 percent compared to the US prices).
Costs of Low Energy and Water Prices in the GCC
For Kuwait and Oman, official budget amounts are shown. For Bahrain, the number includes on-budget and off-budget subsidies. For Qatar, Saudi Arabia, and United Arab Emirates, the estimates of pre-tax subsidies are used (IMF, 2013).
Costs of Low Energy and Water Prices in the GCC
| In percent of GDP 1/ | Recent reforms | |
|---|---|---|
| Bahrain | 12.5 | Industrial tariffs for gas in Bahrain were increased by 50 percent on January 1, 2012. Tariffs for electricity and water for non-domestic use were also raised (in October 2013). |
| Kuwait | 7.0 | A study on the impact of a differentiated electricity and water tariff structure has been completed in 2014. Subsidies on diesel have been discontinued. |
| Oman | 6.2 | Plans to double the feedstock gas prices by 2015. An energy sector study is ongoing, with a view to gradually reduce the overall fuel subsidy. |
| Qatar | 3.5 | Qatar raised the pump prices of gasoline by 25 percent and of diesel by 30 percent in January 2011. Diesel prices were again raised in May 2014, by 50 percent. Efforts are underway to improve desalination technologies and promote public awareness of sustainable use of energy. |
| Saudi Arabia | 9.9 | Saudi Arabia increased the average price of electricity sold to nonindividual users by 9.6 percent on July 1, 2010. Currently, to curb the rapid growth in energy consumption, the authorities are strengthening building and appliance energy efficiency standards, including in industry. Tighter vehicle emission standards and public transportation networks are planned over the medium-term. |
| United Arab Emirates | 5.7 | UAE increased gasoline prices in 2010 to the highest level in the GCC, but still below international prices. Abu Dhabi is developing a comprehensive electricity and water consumption strategy, which led to an increase in tariffs from January 2015. Dubai raised water and electricity tariffs by 15 percent in early 2011. |
For Kuwait and Oman, official budget amounts are shown. For Bahrain, the number includes on-budget and off-budget subsidies. For Qatar, Saudi Arabia, and United Arab Emirates, the estimates of pre-tax subsidies are used (IMF, 2013).
Costs of Low Energy and Water Prices in the GCC
| In percent of GDP 1/ | Recent reforms | |
|---|---|---|
| Bahrain | 12.5 | Industrial tariffs for gas in Bahrain were increased by 50 percent on January 1, 2012. Tariffs for electricity and water for non-domestic use were also raised (in October 2013). |
| Kuwait | 7.0 | A study on the impact of a differentiated electricity and water tariff structure has been completed in 2014. Subsidies on diesel have been discontinued. |
| Oman | 6.2 | Plans to double the feedstock gas prices by 2015. An energy sector study is ongoing, with a view to gradually reduce the overall fuel subsidy. |
| Qatar | 3.5 | Qatar raised the pump prices of gasoline by 25 percent and of diesel by 30 percent in January 2011. Diesel prices were again raised in May 2014, by 50 percent. Efforts are underway to improve desalination technologies and promote public awareness of sustainable use of energy. |
| Saudi Arabia | 9.9 | Saudi Arabia increased the average price of electricity sold to nonindividual users by 9.6 percent on July 1, 2010. Currently, to curb the rapid growth in energy consumption, the authorities are strengthening building and appliance energy efficiency standards, including in industry. Tighter vehicle emission standards and public transportation networks are planned over the medium-term. |
| United Arab Emirates | 5.7 | UAE increased gasoline prices in 2010 to the highest level in the GCC, but still below international prices. Abu Dhabi is developing a comprehensive electricity and water consumption strategy, which led to an increase in tariffs from January 2015. Dubai raised water and electricity tariffs by 15 percent in early 2011. |
For Kuwait and Oman, official budget amounts are shown. For Bahrain, the number includes on-budget and off-budget subsidies. For Qatar, Saudi Arabia, and United Arab Emirates, the estimates of pre-tax subsidies are used (IMF, 2013).
Water Consumption in the GCC
On a per capita per annum (pcpa) basis, GCC countries consume about 65 percent more water than the world average — 816 cubic meters (m3) pcpa, versus 500 (m3) pcpa. Renewable resources, notably from rainfall and groundwater are in short supply, and these countries depend on desalinating seawater, which is energy intensive, imposing a cost on the economy and the environment. For example, Saudi Arabia and the United Arab Emirates (UAE) consume between 10 and 39 times the amount of renewable water available to them, depleting their aquifers at much faster rates than they can be replenished by rainfall. Only Oman comes close to having enough water from renewable sources to meet its domestic demand. Reflecting the average population growth of about 3 percent and a sizable influx of expatriates since 1970, per capita freshwater availability dropped substantially, from 680 cubic meters in1970 to 180 cubic meters in 2000. The water shortages are expected to deteriorate further, if population continues to grow at the same speed.
To satisfy the growing demand, the GCC has been building and operating costly desalination plants. Desalination provides two-thirds or more of the potable water used in most of the GCC, but it carries enormous economic and environmental costs. Despite a considerable improvement in efficiency in the last decades, the cost to desalinate seawater is still a relatively expensive way of producing potable water. Moreover, seawater desalination is an energy-intensive process, accounting for 10–25 percent of energy consumption in the GCC on average (about 50 percent in Qatar). The desalination process has increased the temperature and salinity of the Gulf, with the latter estimated to have risen by around 2 percent over the last 20 years, with a negative impact on marine life and ecosystems.
Inefficient agriculture, weak institutional arrangements, and poor management practices present a significant drain on water resources. Demand from the agriculture sector in the GCC constitutes up to 80 percent of total water demand (the sector enjoys quite a few privileges such as the absence of agricultural water tariffs and various incentive programs that result in excessive cultivation of water-intensive crops and depletion of groundwater). At the same time, agriculture contributes only a few percentage points of GDP to the GCC’s economies. There are also enormous irrigation losses, up to 40 percent. Some of the GCC countries are now trying to limit water overconsumption in agriculture (e.g. by encouraging local farmers to grow crops that need less water and phasing out projects to export wheat). Weak institutional arrangements and poor management practices are also contributing to wastefulness of water resources. On average, a little over 20 percent of domestic water is either lost to leakage or is not metered.
Sizable subsidies finance the inefficient structure that results in high water consumption rates and presents fiscal risks in the long term. Qatar, Saudi Arabia, and the United Arab Emirates consume almost twice as much as the global average for water consumption, while other GCC countries are also above the global average. While data on water subsidies in the GCC are generally not available, they may reach up to a few percentage points of regional GDP. Rationalizing the water usage and reducing waste could reduce consumption substantially (up to 40 percent in Qatar, for example).
Intergenerational equity
6. While fiscal policy was consistent with intergenerational equity until recently, with lower oil prices, the situation has changed. The significantly lower oil prices led to nonhydrocarbon deficits higher than the relevant intergenerational equity thresholds by about 5 percent of non-hydrocarbon GDP.4 The fiscal break-even oil price of general government is estimated to rise to $77 per barrel by FY2020, an indication of emerging risks associated with permanently low oil prices (the fiscal break-even price taking into account the returns and capital gains of the QIA is projected at $68 by FY2020). Existing fiscal buffers allow Qatar to implement policy adjustment in a gradual manner.
Expenditure measures
7. Containing current spending and prioritizing capital expenditure would help achieve intergenerational equity, while buttressing fiscal sustainability. Policies should include the following:
Controlling the public wage bill. The authorities need to develop a clear medium-term strategy for the public wage bill and conduct civil service reviews to help identify and gradually eliminate non-essential positions. This would help keep wages broadly constant as a share of GDP going forward.
Freezing administrative expenses between FY2016 and 2020 would provide substantial savings in current expenditure (these expenses increased by 25 percent on average annually between FY2008 and 2012).
Reducing subsidies while gradually eliminating them altogether for producers. Raising electricity, water, and fuel prices, while protecting those in need, modernizing agriculture, collecting more renewable water, and improving allocation and stemming water losses through better regulation would help strengthen fiscal positions and/or increase priority expenditure such as education and health.
Prioritizing investment projects would also help control spending growth. Smooth spending path would reduce overheating risks in the short term and overcapacity risks in the medium term. Capital spending should be based on a careful scrutiny of public investment projects and not deviate from the resource envelope prepared by the new Public Investment Management unit at the MOF.5
A contingency plan for spending, including for capital projects, is needed given the fiscal risks. Any reforms should be accompanied by a communication strategy and targeted mitigating measures to reduce implementation risks.
Revenue options
8. Parallel efforts to raise nonhydrocarbon revenues would strengthen sustainability and intergenerational equity. Two main principles should guide tax policy making in Qatar given its significant surpluses from hydrocarbon revenues. First, low tax rates and very broad bases generally would not affect investor and consumer behavior. This principle would also be consistent with economic diversification strategy. Second, a corporate income tax (CIT) with broader coverage, which could be achieved by including Qatari (and GCC) companies, would be seen as more equitable by foreign investors. In addition, a broadened CIT, if applied to unincorporated companies, could provide some progressivity in taxation and would lessen the need to introduce a general income tax on individuals. This measure is estimated to yield 2 percent of non-hydrocarbon GDP (Table 2).
Illustrative Menu of Options for Fiscal Adjustment
In percent of non-hydrocarbon GDP.
Illustrative Menu of Options for Fiscal Adjustment
| Estimated gains 1/ | Comments | ||
|---|---|---|---|
| Revenues | 3.5 | ||
| CIT | 2.0 | Applying the CIT of 10 percent to Qatari and GCC companies | |
| VAT | 1.5 | Introducing a 5 percent VAT | |
| Expenditures | 4.5 | ||
| Administrative expenses | 3.5 | Freezing administrative expenses between 2016-2020 | |
| Water and electricity subsidies | 1.0 | Removal of water and electricity subsidies | |
In percent of non-hydrocarbon GDP.
Illustrative Menu of Options for Fiscal Adjustment
| Estimated gains 1/ | Comments | ||
|---|---|---|---|
| Revenues | 3.5 | ||
| CIT | 2.0 | Applying the CIT of 10 percent to Qatari and GCC companies | |
| VAT | 1.5 | Introducing a 5 percent VAT | |
| Expenditures | 4.5 | ||
| Administrative expenses | 3.5 | Freezing administrative expenses between 2016-2020 | |
| Water and electricity subsidies | 1.0 | Removal of water and electricity subsidies | |
In percent of non-hydrocarbon GDP.
9. The value added tax (VAT) would serve well as a low rate-broad base tax. VAT is generally viewed as the most stable revenue source, which has the least detrimental effects on investments. In such a macro-fiscal environment as in Qatar, a low rate, for example 5 percent, VAT could be considered. A broad-based consumption tax such as VAT would raise revenue proceeds at a low efficiency cost. At the same time, its equity implications would be relatively insignificant and tax administration would receive a significant and positive boost. The progress in this area depends on how soon VAT frameworks are agreed within the GCC, which are committed to implement a VAT in the medium term.6
10. Fees and charges for government-provided services should not be seen as a substitute for taxes. If fees are lower than the cost of government goods and services (other than public goods and services), raising those fees would be a welcome step. Raising fees for revenue generating purposes could, however, become a complex and inefficient process. A number of relevant shortcomings are as follows: (i) fees distort supply and demand by (for example) encouraging government to keep supplying goods and services it is not efficient at producing; (ii) fees are inequitable and not transparent; (iii) fees are generally more expensive to administer. In addition, the only way to tax private transactions would be to extend fees to private contract – for example, in the form of stamp duties. The alternative to the fee system would be to introduce a single-rate transaction tax on provision of all goods and services, whether by government or private entities (e.g. VAT).
Impact of fiscal measures
11. These illustrative revenue and expenditure options could result in substantial savings in the medium term. Freezing administrative expenses and removing water and electricity subsidies could generate savings of about 4.5 percent of non-hydrocarbon GDP in the medium term. Applying the CIT of 10 percent to Qatari and GCC companies and introducing a 5 percent VAT could yield another 3.5 percent of non-hydrocarbon GDP (Table 2).
B. Strengthening Fiscal Frameworks
12. Qatar has taken steps in the past towards introducing a medium-term budget framework (MTBF), but with limited success. The MTBF was supposed to focus on a 3-year period, with the budget approval done on an annual basis for the upcoming fiscal year. However, the MTBF in Qatar has remained a stand-alone, internal document and has not been integrated in the regular budget process. Given the lack of a strong budget framework, expenditures were repeatedly raised from planned levels during the fiscal year (with current spending being the driving force). Spending and revenue outcomes have typically been far above the initial budget allocations due to low oil price assumptions (e.g. $65 in the last three fiscal years). Moreover, supplementary spending decisions have often been made on an ad-hoc basis.
13. To accelerate budget reforms and ensure their effective implementation, the new Minister of Finance has revamped the MOF’s organizational structure and initiated a more rigorous approach to reform implementation.7
The Macro-Fiscal Unit (MFU) has been established in the MOF as part of the new Research and Studies Department (RSD). The MFU’s tasks are to conduct macroeconomic modeling and forecasting, which will be used by the Public Budget Department (PBD) and the newly created Public Investment Management Department (PIMD) in preparing annual and medium-term budgets. The Statistics unit, another unit of the RSD, will build and regularly update a database of fiscal and economic data.
Another crucial component of budget reforms—the introduction of the Government Finance Management Information System (GFMIS)—started in 2013 and is expected to be completed in the second quarter of 2015. The GFMIS will connect all spending institutions with the MOF to transparently allocate, use, control, and monitor public resources in all ministries. It will strengthen many areas of public finance management, including public investment, governance, risk, and compliance management. The Statistics unit is expected to start supplying GFS 2001 fiscal data to the MFU at end-2015.
The MOF has started to develop performance-based budgeting to align government spending with the government’s goals emphasizing the link between planning, funding, and the expected results in terms of outcomes. MOF issued a budget circular (on a pilot basis) with instructions for the Ministry of Health to prepare its performance-based budgets until FY 2016. Going forward, the performance-based budgeting will be applied to all ministries, which will be required to provide performance indicators for outcomes achieved under approved budgets. To facilitate this process, the MOF has established a Performance-Based Budget Committee and Task Force in coordination with other ministries to lead the design and implementation of the State of Qatar performance-based budget framework.
To facilitate the reforms, the Fiscal Policy Committee has been established in the Ministry of Finance, headed by the Minister.
14. Korea’s experience in introducing medium-term budgeting can identify useful policy lessons. As in Qatar, there were no imminent serious fiscal issues in Korea. Rather, there was widespread perception in the country of the need of budget reforms. Supported by top policy makers, Korea successfully introduced the MTEF in 2004 to incorporate longer term perspectives into the regular budget process. The Korean case highlights the importance of (i) having strong support for a MTEF from top decision makers; (ii) finding ways of integrating a MTEF into the budget process; and (iii) building capacity of relevant stakeholders (Box 2).
Korea’s Experience in Introducing Medium Term Budgeting1
The Korean case is interesting because there were no urgent serious fiscal issues to commence the reforms. The medium-term expenditure reform (MTEF) was initiated because of a strong demand for budget reform agenda from a new administration and widespread perception in civil society organizations and public officials of the need for PFM reform. The MTEF was introduced to incorporate longer term perspectives such as increasing government debt, aging population, and increasing social welfare spending, into annual budget process.
The MTEF or “National Fiscal Management Plan” (NFMP) was introduced in Korea in 2004 and has been successfully implemented since then.2 The reform package consisted of MTEF, top-down budgeting, performance-oriented budgeting, and an integrated financial management information system. The Ministry of Strategy and Finance (MSF) prepares macroeconomic projections for the next four years; line ministries provide cost estimates of their programs and submit their own medium-term fiscal plans. Based on these, the MSF develops the first draft of the NFMP that covers major policy directions, the fiscal aggregates, and tentative ceilings for line ministries. The Fiscal Strategy Cabinet Meeting is then held to finalize the spending ceilings for line ministries. Subsequently, guidelines to budget preparation are issued to line ministries, which develop budget requests for submission to the MSF. Following negotiation between line ministries and the MSF, the NFMP and budget draft are finalized. Each NFMP covers five years: the current year, the budget year, and three following years. The NFMP is a rolling document, which is revised every year.
The Korean case provides three main policy implications for MTEF reform.
First, strong support from top decision makers is crucial for MTEF to cover the entire government. In the Korean case, the support of top decision makers sustained the medium-term budgeting reform until the institutionalization of MTEF in the National Assembly was achieved.
Second, a MTEF must be integrated into the budget process. In the Korean case, the link between the MTEF and annual budgeting was top-down budgeting. This implies that the MSF had an important task of preparing credible spending ceilings with the active involvement of the central budget office, which is responsible for annual budgets. As Korean reformers realized, a MTEF developed without the cooperation of the budget office is unlikely to maintain credible spending ceilings. As a result, a MTEF may not be integrated into annual budgeting in practice.
Third, enhancing the capacity of line ministries was essential to fully realizing the benefits of a MTEF. With the reform, line ministries’ budget divisions required the capacity to develop ministerial budget drafts, aligned with government-wide priorities. To strengthen the ministerial budget divisions, the MSF upgraded the teams’ status and added personnel. Successful medium-term budgeting reforms usually require plans for building the capacity of stakeholders that will implement the reforms.
15. The paper proposes the following phases of strengthening a medium-term budgeting approach in Qatar.
First phase (to be completed by mid-2015). The MFU would prepare a top-down resource envelope, or in other words the medium-term fiscal framework (MTFF), which is basically a macroeconomic framework projecting revenues, expenditures, nonhydrocarbon balances, and debt projections and risk assessment. The MFU would also prepare a medium-term fiscal strategy document that would serve as the basis for annual budget preparation, translating the MTFF into a statement on fiscal policy priorities. Fiscal risk analysis indicating the sensitivity of fiscal plans to different macroeconomic, hydrocarbon sector, and contingent liabilities’ assumptions would also be part of this document. The authorities are on track to complete this phase on time.
Second phase (to be completed by end-2016). The authorities would match a top-down resource envelope with a bottom-up estimation of the costs of existing policy (or in other words preparing the MTBF). The PBD would engage in bottom-up reviews by scrutinizing sector policies aiming at integrating the bottom-up sector programs with the top-down resource envelope. At the end of this phase, a MTBF would be fully functioning and integrated in the annual budget process.
Third phase (to be completed by end-2017). Once the MTBF is fully-functioning, the authorities would gradually turn it into a performance-based medium-term expenditure framework (MTEF). As mentioned above, the MOF has already embarked on developing performance-based budgeting. This work should continue in parallel with the first two phases of budget reforms proposed above. This will result in enhanced capacity of line ministries and will facilitate the completion of the fourth (final) phase of reforms. At this phase, budget funding will be linked to results (shifting the focus from controlling inputs to controlling outcomes and allocating resources according to the results achieved by programs). Sectoral ministries and agencies should have medium-term sector strategies in place, which need to be regularly updated, and thus will need to develop competency in policy analysis and performance management.
16. A MTBF would result in improved fiscal discipline and greater predictability and credibility of the budget, while a subsequent MTEF would ensure resources are better allocated. Strengthening fiscal discipline is especially important in the context of an ongoing large investment program. Avoiding frequent mid-year budget amendments would help anchor fiscal policy and support macroeconomic stability. A strong MTBF would provide a disciplining device to help build buffers and resilience when hydrocarbon prices are high, while providing more clarity about the government’s fiscal policy intentions. The formulation of the MTBF would also provide a helpful platform for a political discourse over the appropriate spending and savings levels. A MTEF would lead to better resource allocation through linking policy, planning, and budgeting, and therefore, more efficient use of public finances.
17. It is important that the medium-term budgeting is fully integrated in the regular budget process. In practice, achieving such integration is challenging and a MTBF/MTEF can remain a stand-alone document. For a MTBF/MTEF to successfully integrate in the regular budget process, credible top-down resource envelope will need to be developed (during the first phase as mentioned above), while close coordination among the relevant departments at the MOF would be essential. It will also be important that to solve any budget issues line ministries communicate with the MOF through a relevant sector team, rather than going directly to different units and departments.
18. Strong Public Finance Management (PFM) systems and increased guidance by flexible fiscal rules are also important components of the needed budget reforms. These include firm expenditure controls and timely and reliable fiscal reporting based on international standards. Preparing for an adoption of some flexible fiscal rules could delink spending decisions from volatile revenues (e.g. the structural balance rule, or the nonhydrocarbon primary balance rule, or the expenditure rule).8 Expanding fiscal coverage to include extra-budgetary revenues and expenditures, state-owned enterprises and other government-related entities would help better assess the impact of public sector spending on the economy. Greater transparency of fiscal accounts is also essential: an accurate assessment of the Qatar’s fiscal position is difficult given limited disclosure of financial transactions and no official information on the size of the sovereign wealth fund.
C. Conclusions
19. Fiscal policy remains sustainable, but given the large drop in oil prices, revenue-raising and expenditure-containing measures need to be considered to ensure intergenerational equity. Driven by increases in the oil price and hydrocarbon production, total revenue and expenditure of central government have increased substantially since 2000, presenting risks for fiscal sustainability in the medium to long term, especially in the context of low hydrocarbon prices. Measures aimed at containing current spending, prioritizing capital expenditure, and raising non-hydrocarbon revenues would help bring fiscal policy back to consistency with intergenerational equity. The proposed measures include controlling the public wage bill, freezing administrative expenses, reducing subsidies, and prioritizing investment projects. Broadening CIT to include Qatari (and GCC) companies and introducing a low rate-broad based consumption tax such as VAT could also be considered.
20. The paper proposes several phases of strengthening a medium-term budgeting approach in Qatar. During the first phase (by mid-2015), the MFU would prepare a top-down resource envelope, or a MTFF, and a medium-term fiscal strategy document with fiscal risk analysis, translating the MTFF into a statement on fiscal policy priorities. The second phase (by end-2016), would cover the preparation of a fully functioning MTBF. At the end of this phase, a MTBF would be integrated in the annual budget process, resulting in improved fiscal discipline and greater predictability of the budget. During the third phase (by end-2017), the authorities would gradually turn the MTBF into a MTEF, with budget funding linked to results leading to better allocation of resources. Sectoral ministries and agencies would develop competency in policy analysis and performance management. Strong PFM systems and increased guidance by flexible fiscal rules are crucial components of these budget reforms.
References
Achieving Medium-term Expenditure Framework Reform, A Case Study of Korea, Policy Research Working Paper, World Bank, January 2013
Achieving a sustainable water sector in the GCC: Managing supply and demand, building institutions; PWC, 2014.
Energy Subsidy Reform: Lessons and Implications, IMF, 2013
Fiscal Policy in Qatar, Selected Issues Paper, IMF, January 2012
Medium-term Budget Framework in Qatar, Selected Issues Paper, IMF, December 2012
Qatar National Development Strategy 2011–2016
Regional Economic Outlook, Middle East and Central Asia, IMF, October 2014
Subsidy Reform in the Middle East and North Africa, IMF, 2014
Towards Stronger Fiscal Policy and Institutions in the GCC; IMF staff paper prepared for the 2012 Annual Meeting of Ministers of Finance and Central Bank Governors of the GCC
Water Resources in the GCC Countries: An Overview; Water Resources Management 14: 59–75, 2000.
Prepared by Bahrom Shukurov.
Bulk of investment income and corporate income tax comes from hydrocarbon activities.
The on-budget subsidies data are available for 2004-2010 and derived from the GFS Yearbook. The split between food and energy subsidies is not available. The 3.5 percent of GDP in energy subsidies is estimated by the IMF for 2011. The 2014 IMF paper uses the international fuel price as the benchmark price to estimate the cost of subsidies (the country would generally incur an opportunity cost if it simply sold the fuel at the domestic production cost).
This analysis estimates the government spending path and related nonhydrocarbon deficits that deliver a constant real per capita annuity to finance budget spending after hydrocarbon revenues are exhausted. The calculations are made under plausible assumptions about the time horizon of hydrocarbon resource depletion, the real rate of return on financial assets, oil prices, inflation, and population growth.
New investment spending in the context of the Qatar National Vision 2030 and FIFA Cup 2022 is QR 600 billion over the next 10 years.
The GCC policy framework sets out the basic parameters under which countries are to develop their VAT, including for intra-GCC trade, but considerable flexibility is left to countries in the policy and administrative design of their national VAT. Each country is expected to enact its own VAT legislation.
Korean experience suggests that while macroeconomic momentum is important to start budget reforms, it is not sufficient for proper implementation of those reforms. The support of top policy makers significantly boosts the implementation of budget reforms.
For policy options in this area, see, for example, Towards Stronger Fiscal Policy and Institutions in the GCC, IMF staff paper prepared for the 2012 GCC Annual Meeting of Ministers of Finance and Central Bank Governors.
