Confidence is not a commodity in short supply in Doha. Record-breaking gross domestic product (GDP) growth rates have given Qatari policymakers a heightened sense of self-belief, despite the serious inflationary side effects that have buffeted the economy over the past year.

The source of their confidence is the massive increase in income, which since 2000 has led to a cumulative rise in GDP of 80 per cent. The International Monetary Fund (IMF) estimates that nominal dollar GDP expanded by 29 per cent in 2007.

It is not surprising, therefore, that Doha’s economic planners have been ambitious about the future shape of their hydrocarbons-dominated economy. They are pushing to mimic the UAE’s successful diversification effort, promoting ‘knowledge economy’ sectors that can delink the country from the influence of its still overweening oil and gas sector.

Doha looks to have set itself an impossible target with an announcement last year by Finance Minister Yousef Hussein Kamal that it will reduce its economic dependence on energy revenues to “zero” by 2020 as it diversifies its economy away from oil and gas production.

Reducing dependence

Behind this strategy is the belief that other business incomes and international investments are sufficient to support the economy. But the government does not expect to achieve this goal in one step, and is preparing to reduce its hydrocarbons dependence in stages. By 2015, it wants to cut its reliance on hydro-carbons to 25 per cent of government spending, from about 60 per cent now.

According to the government, the ‘knowledge economy’ will be a key component of the new Qatari income. The Qatar Science & Technology Park (QSTP) is pitching for companies to go to Doha to develop their own technologies, and assist entrepreneurs in launching technology businesses.

The QSTP already boasts leading universities such as Carnegie Mellon, Texas A&M and Weill Cornell, and has enlisted major corporate blue chips such as the European Aeronautic Space & Defence Company (Eads), the US’ Exxon-Mobil, GE and Microsoft, the UK/Dutch Shell Group and France’s Total. The idea is to commercialise research and development in Qatar, in partnership with the private sector, and catalyse the development of the country as a hub of leading-edge research.

“We expect to be an exporter of knowledge as well as gas,” said Ahmed Hasnah, associate vice-president for higher education at the Qatar Foundation, sponsor of the QSPT, in a conference address given in March. “It is naturally our greatest hope that the new economy will be well entrenched before our gas revenues fall away.”

Support for Qatar’s transformation comes from some unexpected sources. Former US president Bill Clinton has called the presence of US universities in Doha the “building blocks of a diversified economy”.

Undoubtedly, presidential support is welcome, but Doha needs more than praise to make its dreams a reality. The Qatar economy remains highly dependent on hydrocarbons, whether oil and gas exports or the petrochemicals, aluminium and oil-derived products that use oil or gas as feedstock.

Economic prospects are closely tied to the progress of its gas sector. Holding the world’s third-largest gas reserves, Qatar has only recently emerged as the world’s largest liquefied natural gas (LNG) exporter. Oil production is still critical, representing about one-half of the state’s total hydrocarbons output.

Economic diversification

Reducing the contribution of hydrocarbons revenues to government spending to zero within 12 years does not appear feasible, say analysts.

“At best, it is very unlikely that it will achieve hydrocarbon independence any time soon,” says Philippe Dauba-Pantanacce, senior economist at Standard Chartered Bank.

“Even if the argument for diversification is both extremely strong and self-explanatory, it would be – at the other extreme – unwise to discount the incredible windfall that will be inevitably coming from the future oil and, mostly, gas revenue.”

Qatar’s pursuit of eliminating reliance on its hydrocarbons sector looks like an attempt to give vocal support to a perceived need to rebalance the country’s economy, which is where the proposals for transforming into a knowledge-based economy come in.

Qatari leaders acknowledge the charge that they are prone to exaggerating their own potential. One economic adviser to Emir Sheikh Hamad bin Khalifa al-Thani tells MEED there is a temptation for a young, prosperous country like Qatar to try to conquer every sector.

That may be true, but the ruling Al-Thani family have a tradition of engaging long-term strategic thinking – the very quality that allowed them to plot such an impressive transformation in the country’s economic fortunes from the mid-1990s onwards, based on exploitation of its massive North field gas reserves.

But Doha also knows that hydrocarbons are a finite resource. Qatar’s oil reserves, estimated at 15.2 billion barrels, are only expected to last for about 35 years at current rates of extraction. For all the $80,000 per capita GDP rates, the economy remains vulnerable to its dependence on a single commodity.

The close relationship between hydrocarbons and Qatar’s economic performance is evident in the latest figures released by the Qatar Statistical Authority. These reveal that a slowdown in the oil and gas sector led nominal GDP growth to drop to 12.5 per cent last year, from 33.7 per cent in 2006.

According to the data, the economic ‘slowdown’ is due to the decline in the hydrocarbons sector’s rate of expansion, to 9.3 per cent, compared with 28.6 per cent in 2006. This follows a slight drop in crude output in 2007 and a slower rate of increase in oil prices compared with 2006.

Gas endowment

The government is also preoccupied with issues relating to the North field gas reserves. The two-year-old moratorium on new projects confirms the need to take greater care of its lucrative gas endowment.

Like other Gulf states, even gas-rich Qatar has experienced shortages related to the pace of development of reserves. It is now carrying out an extensive study of its North field reserves, which could have vast implications for its future economic development. While it assesses the situation, Qatar wants to plough as much investment into new economic areas as it has into its energy sector over the past decade.

Having a large oil and gas-derived cash surplus will clearly help to achieve this aim. About $142bn has been set aside to develop Qatar’s productive economic sectors.

As part of the diversification strategy, the authorities are gradually ramping up investments in the industrial sector, an essential focus not only to reduce vulnerability to the energy sector, but to create more jobs in a country where one-quarter of the population are below the age of 15.

Fortunately, the government has other means of support available that are not directly related to its hydrocarbons base. Qatar Investment Authority (QIA), its sovereign wealth fund, has accumulated a large stock of foreign assets that provide a potent source of capital diversification.

QIA’s assets are mostly held offshore in foreign currency instruments that include blue chip equities, bonds and real estate. The IMF estimates the size of the QIA’s gross assets is $30-50bn.

The country’s non-hydrocarbons sectors are reporting strong growth, according to a recent sovereign rating on Qatar from Moody’s Investors Service. The IMF also reports that the bulk of Qatar’s growth has come from the non-hydrocarbons sector, which, apart from the 2006 oil boom year, has outperformed oil and gas.

According to estimates from the General Secretariat for Development Planning (GSDP), the oil and gas sector’s share of GDP fell to 55.7 per cent last year, while the non-hydrocarbons sector’s share of GDP rose to 44.3 per cent from 38 per cent in 2006.

This shift, however, does not indicate that the non-oil sector is growing dramatically at the expense of the hydrocarbons area; rather, it is a side-effect of the decline in the oil and gas sector’s rate of expansion last year compared with 2006, when it grew by 28.6 per cent. Doha has much more work to do to boost its non-oil economy.

While tackling inflation has risen to the top of the government’s list of near-term priorities, the authorities appear focused on its ambitious economic diversification programme. The government is ready to incur further debt to achieve its aims. To fund the country’s industrial and infrastructure schemes, Qatar will have to rack up a larger debt burden, which, according to the IMF, will push the total external debt stock up from an estimated 57 per cent of GDP in 2006 to 77 per cent of GDP by 2012.

Kamal says the country is planning to raise $55bn in syndicated loans and $15bn in bonds over the next few years, arguing that Qatar needs the cash to support a portfolio of projects already under bidding or in the pipeline.

Record budget

At the end of March, the government released its biggest ever budget, for the 2008/09 fiscal year, focused on reining-in inflation without affecting social and economic development projects. The budget calls for a 46 per cent increase in total expenditure, to QR95.9bn ($26bn).

Such massive expenditure commitments might appear to run counter to the authorities’ determination to quell inflation, but that is not necessarily true, says Tristan Cooper, senior analyst at Moody’s. “There is a feeling that inflation is a necessary evil,” he says. “The government’s primary focus is on economic development – and only secondarily on inflation. The first priority is to build up the non-hydrocarbons sector.”

So far, the government has not proved particularly effective at disbursing its capital into economically productive sectors. According to budget out-turns, the government spent only QR16.9bn of its QR20bn capital budget in 2006/07.

The much debated knowledge economy growth may eventually fill in some of the gaps. But Doha needs to improve the performance of key non-oil sectors such as petrochemicals, steel and aluminium if it is to generate enough income from such streams to support the economy.

Petrochemicals is a key sector that will drive economic growth, according to the IMF, which predicts it will average 12 per cent a year up to 2012. The petrochemicals complex under development at Mesaieed represents a more advanced attempt to realise the value-added opportunities provided by Qatar’s gas base.

The Qatar Petrochemicals Complex developed by Qatar Holding and South Korea’s Honam Petrochemical Corporation is building four integrated plants that will produce about 2.8 million t/y of petrochemical products, with only 25 per cent of its feedstock sourced form ethane gas. Among a portfolio of projects estimated at up to $8bn, Qatar Holding is planning a melamine plant, which is expected to be completed by 2009.

Aluminium is another cornerstone of the country’s industrial effort. The first metal is due in late 2009 from QP’s world-scale aluminium smelter under construction at Mesaieed Industrial City. The smelter will have a cap-acity of 585,000 t/y but the plan is to double primary aluminium production capacity to 1.2 million t/y.

Industry is not the only driver. Qatar has a long-held commitment to developing the financial sector, with income growth expected to stimulate demand for financial services.

More interesting over the long term is the possibility that the nascent knowledge economy will take up some of the slack. Detail is still vague on what this will comprise.

Some of the projects at the research and technology base at QSTP appear ephemeral – blogs, social networking and unified mes-saging. But Steve Ballmer, chief executive officer of the US’ Microsoft, who recently visited Doha, has highlighted the opportu-nities for developing technology infrastruc-ture and creating a digitally connected society in Qatar.

The presence of some of the world’s biggest blue chips suggests the Qataris’ talk about the knowledge economy is not all hot air. But in the short term at least, the country’s energy endowment will continue to drive its economy.

“Qatar’s main challenge is the dependence on hydrocarbons,” says ,” says Dauba-Pantanacce. “The problem is that even when some revenues are from non-hydrocarbons sectors like manufacturing, it generally always is somewhere dependent on the oil or gas sector.”