Like many of its neighbours across the Gulf region, Qatar has seen rapid GDP growth over the past two decades, on the back of significant state-led investment in the energy sector and non-hydrocarbons-related economic activities carried out by the government and private industry alike.
Since 1997 – when production of natural gas at Qatar’s North Field came on-line for the first time, causing GDP to expand by 30% in one year – the nation has registered average annual economic growth in the double digits. More recently, however, the pace of expansion has slowed, in line with the declining price of oil on international markets. “In light of the challenges facing the hydrocarbons market, a greater discipline has become urgent in the assessment and spending of development budgets for all programmes and projects,” Saleh bin Mohamed Al Nabit, minister of development planning and statistics, told local media in late 2015. “It has become an urgent need to consider issues such as the rationalisation of support and providing it to target groups, development of the tax system, and supporting the revenue side of the budget.”
Planning Ahead
According to government forecasts, these efforts will contribute to maintaining Qatar’s fiscal health and headline GDP growth. However, according to the IMF, ensuring that the country’s economic productivity continues to expand in an era of cheap oil will require a series of more fundamental reforms, including improving the efficiency of public investments and the quality of the workforce. In short, as noted in a mid-2015 IMF report, the government must work to ensure that despite slowing input growth, output growth will continue apace. Qatar’s economy has benefitted from government spending. With this in mind, the important question is how the state can fulfil its goal of moving away from public expenditure and towards a more knowledge-based economy.
Output
While GDP is an essential metric for comparing the size of countries over long periods, it is seen as less useful as a means of understanding growth dynamics and causes within a single economy. According to the IMF, Qatar, for instance, posted average annual GDP growth of 8.25% between 1984 and 2013, making it one of the world’s fastest-growing economies over these three decades. In 2015 real GDP growth was 3.7%. However, to unpack how much of this top-line expansion was the result of input spending – such as employment, government investment and increases to Qatar’s capital stock – rather than productivity-led growth, other metrics are required.
For starters, the IMF notes that population growth and capital accrual have been major factors in Qatar’s GDP growth in recent years. By the end of 2015 more than 2.4m people lived in Qatar, up more than 60% from 2008 and double the figure in 2005. Indeed, the country’s population has grown by more than 7% annually during the period 1984-2013, largely due to the arrival of foreign workers.
Government expenditure, which has been a key economic driver in Qatar, also contributes to driving GDP growth, while not necessarily generating productivity increases. As the IMF noted, while government investment correlates with rising GDP, this is a result of the demand effect of public expenditure, and should not be confused with productivity gains. Similarly, since the early 1990s Qatar has seen an increase in gross capital formation. Growth in the country’s capital stock peaked in 2008, with expansion of more than 20% for the year, according to the IMF. Rapid capital accumulation is a major contributor to GDP growth, but does not automatically result in productivity gains. Indeed, the large rises in inputs such as capital stock and employment help to explain Qatar’s top-line GDP growth, with little evidence of increased productivity.
The IMF has tracked the disconnect between input and output growth in Qatar using total factor productivity (TFP), a measure of how efficiently all inputs – including labour and capital – have been used in production. For the period 2006-13 IMF data showed that while the country’s total output grew by 12.3%, physical capital, employment and human capital expanded by 13.2%, 14.5% and 2.5%, respectively, generating an estimated decline in TFP of 2.78%. As the IMF noted, this data suggests that for the period in question “rapid output growth did not keep pace with even faster input growth.”
Impact Forecast
The implications of this in the current era of cheap oil are manifold. According to the IMF, hydrocarbons output in Qatar will be flat for the next five to seven years. Non-hydrocarbons activity, meanwhile, is expected to drive growth for the foreseeable future, particularly activities linked to the government’s ongoing $220bn infrastructure investment programme, which is being rolled out partly in preparation for the 2022 FIFA World Cup. At the same time, both Qatar’s government and the UN foresee slowing population growth in the nation in the coming years, as demand for new workers – and, hence, immigration – tapers off. This slowdown is expected to proceed alongside a parallel decline in public expenditure, with the former expected to peak in the next few years before falling off through at least the early years of the 2020s.
Given the TFP trend illustrated above, declining input growth will likely result in a slowdown in Qatar’s GDP growth in the coming years too. Economic forecasts published by the Ministry of Development Planning and Statistics (MDPS) in early 2016 echo this sentiment, showing GDP growth of 3.7% in 2015, and projected growth of 4.3% in 2016 and 3.9% in 2017, for instance. Early 2016 estimates by Standard Chartered, meanwhile, put average annual GDP growth for 2015-16 at 5% (real GDP growth was 3.7% for 2015). Finally, according to the IMF, Qatar is expected to post real GDP growth of 6% in 2016, 5.5% in 2017 and 4.5% in 2018-20.
Productivity Boost
However, as the input-output growth differential indicates, slowing top-line GDP expansion could be mitigated by productivity improvements. The IMF outlines two potential ways forward here. First, the fund suggests that the government work to boost investment efficiency, effectively improving the productivity of Qatar’s capital expenditure. The state has taken a number of positive steps in this direction in recent years, including strengthening the country’s fiscal management, tendering processes, and budgetary planning and oversight. For example, the recent establishment of a new public investment management department at the Ministry of Finance is expected to result eventually in both higher-quality public investment data being made available and, subsequently, improved oversight.
Second, the IMF report points out that a key means of boosting economic productivity is investing in human capital. In short, this involves both improving the quality of education at all levels in Qatar and expanding access to higher and vocational education. As the IMF noted, “Although there is no automatic and guaranteed link between educational attainment and productivity, further investments to increase enrolments and improve the quality of educational curricula may be an important avenue for increasing productivity.” Other potential areas of focus for improving Qatar’s economic productivity include encouraging the continued expansion of the country’s nascent entrepreneurial and small and medium-sized enterprise segment; improving public administration efficiency and streamlining bureaucracy; and ensuring that the legal environment is in line with international standards.
Improving economic productivity is at the heart of the nation’s long-term economic development strategy, Qatar National Vision 2030. Promoting human development and efficient public institutions are key tenets of the MDPS’s medium-term National Development Strategy (NDS), which aims to move Qatar towards the long-term objectives laid out in the 2030 plan. Under the NDS the state has worked to expand training opportunities for Qataris in an effort to boost labour force productivity, improve education access and quality, enhance scientific research and boost links between scientific activities and industry, and increase private sector employment among Qataris.
In terms of public institutional improvements, meanwhile, the 2011-16 plan lays out initiatives aimed at developing and modernising governmental institutions and improving organisation and oversight, for example. These efforts are expected to increase under the next NDS, which covers the period 2017-22. In 2015 the MDPS launched preliminary consultations on the new plan, in conjunction with the World Bank and private sector players.
Read More from OBG
