New measures needed to ensure Qatar’s fiscal sustainability, says IMF

By Pratap John/Chief Business ReporterQatar needs to initiate additional spending and revenue measures worth about 5% of non-hydrocarbon GDP in the medium term to ensure fiscal sustainability in view of the low oil prices, the International Monetary Fund (IMF) has said.“While there is no immediate concern about fiscal sustainability under our oil price assumptions, additional spending and revenue measures warranted over the medium term to secure inter-generational equity in the context of low oil prices,” IMF said in its Qatar report released yesterday.According to the IMF, the large drop in oil prices will lead to a substantial deterioration in fiscal and external balances, although the short-term growth outlook is positive.In sharp contrast to previous years, the budget will be in deficit from 2016 onward and the current account surplus will largely be eliminated.“The ongoing budget reforms are welcome and should be deepened further. Significant progress has been made in setting up the macro-fiscal unit and public investment department, and current expenditure growth has been restrained,” IMF said.  The oil price slump highlights the need for specifying a clear medium-term fiscal framework, including contingency plans. The strategy document currently prepared by the Ministry of Finance should formulate binding medium-term fiscal objectives and communicate expectations about the future trajectory of budget expenditures and taxation. Annual budgeting process should be aligned with this new medium-term framework so that spending overruns are eliminated. Further improvement in the transparency of fiscal accounts would facilitate a more accurate assessment of the Qatar’s fiscal position in the context of low oil prices.IMF said the prospects of persistently low oil prices and slowing medium-term growth called for intensification of diversification efforts. There is scope for further improving the business environment and promoting diversification, including by simplifying business registration, improving enforcement of contracts, and enhancing the quality of educational curricula. Privatisation would also help stimulate private sector activity. Growth would be made more inclusive through labour market reforms.The fixed exchange rate regime remains appropriate for Qatar, IMF said. “The peg to the US dollar has served Qatar well in periods of both high and low oil prices by anchoring prices of tradables and providing stability to income flows and financial wealth. An assessment of the exchange rate level is complicated by the undiversified structure of Qatar’s exports, which are dominated by hydrocarbons, but our estimates do not find evidence of a current account gap,” the International Monetary Fund said.Steps urged to contain inflationPolicymakers in Qatar should slow public sector spending, if inflation accelerates in the country, IMF has suggested.“Consumer price inflation is contained, although real estate prices have grown quickly in Qatar. CPI inflation has eased in recent months, as rent increases stabilised and tradables inflation fell,” IMF said.In the short run, lower international commodity prices, including for food, and a strong US dollar should reduce headline inflation despite the tight rental market. Falling global commodity prices have helped reduce inflation below 3%, despite a tight real estate market. Also, falling import prices should continue keeping inflationary pressures in check.“That said, real estate prices — especially land prices — are increasing particularly fast, and valuations appear on the upper end of a range consistent with fundamentals. Consideration should be given to introducing a differentiated schedule of real estate transaction fees to deter speculators and taking further measures to increase land supply. “Imposing rent controls could prove counterproductive. In case of excessive credit growth, further macro-prudential measures and liquidity withdrawals should be deployed,” IMF said.