Growing Pains

Qatar

Economic News

22 Jul 2010
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While Qatar's stellar growth looks set to continue, the increasing presence of inflation on the fiscal horizon is beginning to take effect.



A report issued by Kuwait-based Global Investment House (GIH) on June 4 said Qatar would continue to perform well throughout 2008. GIH predicted the economy would expand by 15.5% this year, up from the 12.5% of 2007 but short of the average 34% growth for the preceding three years.



"Qatar's medium term outlook is very favourable, with continued strong growth expected to be driven by the hydrocarbon sector, as well as by diversification into higher value-added petrochemicals and other sectors such as real estate, financial and service sector related industries," the report said.



However, high inflation, which hit a near record 14.75% in March, was a challenge that had to be addressed, with GIH forecasting inflation of 10% to 12% for 2008.



Gerard Lyons, chief economist with Standard Chartered Bank, echoed these concerns, warning that Qatar could face harder times ahead if it does not move to control the burgeoning economy.



"The first and foremost challenge is to get Qatar's macroeconomic policy right," Lyons told the local press on June 5. "Inflation is a big worry for Qatar and the region as a whole," he said. "If you don't address the inflation problem, it is going to keep picking up and up and a boom will be created. And if you don't manage the boom effectively, you end up in a bust and then may start talking about riyal devaluation instead of revaluation in about four years time."



Lyons said key components for future growth and sustainability included responsible spending on infrastructure to meet the needs of the expanding economy, the development of a robust manufacturing base and the development of the service sector.



"If you need to achieve sustainable growth, you have to have private sector sustainability. You must build the infrastructure upon which the private sector can grow," he said.



Qatar's current infrastructure programme is in fact one of the factors contributing to inflation. Investment in infrastructure has come at the same time as a surge in private sector construction, and supply side shortages have led to spiralling materials prices and a tightening of the labour market.



GIH recommended a more conservative approach to spending in order to balance inflation with growth.



"Containing inflation over the medium term calls for restraint on current expenditures and the phasing of development expenditures as part of a well-designed fiscal policy, as well as for continuing efforts to address problems related to supply-side bottlenecks, especially housing shortages," the report said.



Many analysts have suggested that part of the solution would involve Qatar following the lead of Kuwait and dropping its currency peg with the US dollar. Though officials have in the past rejected such a step, support is mounting for the move as inflation continues its upward trend.



While there were a number of constraints on severing the link with the dollar, especially the question of whether Qatar would take the step alone or in concert with other Gulf Cooperation Council (GCC) member states, the time may have come to cut the long standing tie, said Ibrahim Al Ibrahim, economic adviser to Qatar's Emir Sheikh Hamad bin Khalifa Al Thani.



"We have to delink," Al Ibrahim said. "It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."



Despite pressure by Washington on the Gulf states to maintain their currency pegs, including a whistle stop tour of the region by Henry Paulson, US treasury secretary, in early June, the need to fight inflation and sustain growth may see Doha cut a historic tie to ensure the future.

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