Tackling Inflation

Qatar

Economic News

22 Jul 2010
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While Qatar's economy has maintained a high level of expansion, riding on the back of the energy boom and strong growth in the construction, real estate and financial sectors, this very success has also brought with it the spectre of double digit inflation.



Addressing the opening of the 35th regular session of Qatar's Advisory Council on November 14, Emir Sheikh Hamad bin Khalifa Al-Thani outlined the objectives of the government for the forthcoming year. Among these was a commitment to further liberalise investment procedures, encourage wider activity in the private sector and to dedicate 2.8% of GDP to research and development.



However, it was inflation that the Emir clearly had in his sights in his address, which he said was mainly being driven by sharp rises in the housing sector, both rental and sales. While he said there were other factors that were also contributing to inflation, such as the international increase in the cost of imports, bottlenecks in supply caused by the rapid growth of the Qatar economy, price hikes in the property market were the biggest problems.



"The rise in prices in the housing sector was one of the most important elements in this inflation which was reflected on other sectors such as the foodstuffs, services and hotels," the Emir said, adding that steps taken to date by the government had failed to adequately address the problem.



Recently released data from Qatar's Planning Council showed that the country's inflation rate to the end of October is running at an annualised 8.2% and could nudge 10% by year's end. However, rental increases for the first six months of 2006 have averaged out at 17.4%, coming on top of an average rise of 27% last year. Both the overall inflation rate and rental cost increases are far above those in neighbouring Gulf states, with the average inflation rate across the Gulf Co-operation Council (GCC) countries predicted to come in at 3.2% for 2006.



Such has been the pressure of inflation in the rental market that local media has reported a new trend among overseas workers, that of sending their families home and sharing accommodation in order to cut costs.



The country's business community welcomed the commitment by the Emir that the government would move to curb inflation. Sheikh Khalifa bin Jassim bin Mohammed Al-Thani, chairman of the Qatar Chamber of Commerce and Industry (QCCI), summed up the response by saying the speech had addressed the issue of inflation frankly and objectively.



"The Emir spoke about one of the most important issues concerning the business community, which is the problem of high rents," he said. "Any increase in rent values will reflect negatively on the national economy, whether through higher prices or loss of purchasing power."



One of the measures that have been proposed to combat rising prices was the tightening of regulations mandating rent pegging. At the beginning of the year, legislation was approved restricting rental increases to 10% annually. However, this was one of the steps taken by the government that the Emir referred to as having been less than successful, as the average rate of increase shows. While rent pegging goes to the heart of Qatar's rising inflation rates it has not found much favour with property owners and developers.



Another and longer term proposal has been an easing of construction restrictions to allow the private sector to develop residential land outside Doha's city limits, thus reducing population density and demand.



Inflation has been putting Qatari employers under pressure, forcing them to raise wages in order to keep many of their expatriate staff and attract new employees from overseas. In August, Qatar recorded the highest rate of increase in salaries paid across the GCC states, 11.1%, coming on top of a 7.9% hike in 2005.



Though inflation is not likely to put the Qatari economy back on its heels, it does have the potential to put the brakes on its strong growth if not reined in, especially in the private sector that is bearing many of the costs so far.



In mid-October, a report by the International Monetary Fund said that Qatar's real economy would expand by just 4.7% next year, below the expected GCC average of 6.1%, while inflation would continue to hover around the 8% mark.

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