QATAR had its annual economic check-up from the IMF in the spring. After 14 days of consultations in Doha, the IMF team returned to Washington to prepare their latest bulletin on the health of the economy. And their diagnosis was encouraging. After four years of no growth, the IMF reported a strong recovery in 1996, with gross domestic product (GDP) rising in real terms by an estimated 10 per cent. Even more promising was the outlook for this year. With inflation at an estimated 2.6 per cent and a 36 per cent rise in oil and gas GDP in prospect, the IMF concluded that Qatar could experience a 15 per cent rise in economic activity in 1997.
The IMF’s most recent Article IV report provides the clearest indication to date that things are finally on the mend after several difficult years. The huge investments in oil and gas are starting to deliver returns. Oil revenues are surging on the back of a 200,000 barrel a day (b/d) increase in production and the firmer prices of the past two years. Non-oil activity is picking up too. After a 5 per cent rise in 1996, an increase of 7 per cent is expected this year.
Nevertheless, the report also makes clear that the economy needs a two- three year period of convalescence before it can be given a clean bill of health. ‘Qatar’s medium-term prospects are highly favourable,’ it says. ‘The planned expansion in crude oil production, together with large investments in LNG, petrochemicals and steel are expected to enhance growth and reduce the financial imbalances over the medium term. However, until these investment projects start to pay off, Qatar will face interim financing constraints, including high levels of external debt and debt service.’
The rising level of external debt is an inescapable consequence of the government’s economic strategy – which the IMF endorses – of exploiting the huge gas reserves in the North Field. But the level of debt is still a matter of concern. While official foreign reserves stood at about $1,500 million in 1996 – equivalent to four months of import cover – external debt surged to $7,300 million, from $4,500 million in 1995. The debt burden will peak in 1998 at $10,000 million, equivalent to 108 per cent of GDP, before falling back to 76 per cent by 2000.
This debt level looks less daunting when looked at in detail. A breakdown of the 1996 data shows that an estimated 60 per cent of the total debt burden was incurred to finance the gas export projects, with the balance covering the government’s fiscal deficit. Since most of the gas-related borrowing has been secured on a limited or non-recourse basis, the government is not the guarantor. Instead, the debt service is tied to the proceeds of the liquefied natural gas (LNG) sales. As a result, the government’s external debt amounts to $2,870 million, or 24 per cent of GDP. An added comfort is that the significant increase in 1996 export revenues drove down the debt service ratio to about 18 per cent from 24 per cent in 1995.
Rising exports will be a feature of the economy over the next three years. The IMF estimates that total export receipts will double by the year 2000, on the back of increases in LNG, petrochemicals and oil production. ‘To ensure a smooth transition to the period when the gas investments will start to pay off, the authorities should aim for an early reduction in the level of official external debt through a strengthened fiscal consolidation programme,’ the report advises.
Such action would maintain the creditworthiness of the Qatari state and reduce the economy’s vulnerability to a possible decline in the oil price and a hike in international interest rates, it says.
Even if Doha decides against retiring part of its debt earlier than scheduled, the government will need to maintain strong fiscal discipline over the short term to achieve its goal of a balanced budget by 2000. On the expenditure side, the fund says that growth in the government wage bill should be curbed and capital spending needs to be rationalised.
In fiscal 1997/98, expenditure is budgeted to rise by 12 per cent as a result of a 16 per cent rise in capital expenditure and an
11 per cent increase in current spending. ‘Reflecting a general salary increase by about 20 per cent and reclassification of certain current expenditure, the wage bill is budgeted to increase by 22 per cent, compared to the estimated outcome for the previous year.’
On the revenue side, consideration should be given to reducing subsidies on government services and introducing new revenue raising measures. These include increases in electricity and water charges, higher petrol prices and the introduction of healthcare charges.
In tandem with a tight fiscal policy, the IMF recommends that the government pursues a prudent monetary policy and further structural reforms. The fund advocates a liberalisation of interest rates by lifting the ceiling on deposit rates and the introduction of marketable government debt instruments. ‘This would help deepen the financial market and lay the foundation for a more effective monetary policy.’ Privatisation should also be stepped up as a way of expanding private sector economic involvement and promoting the recently-established Doha Securities Market (stock exchange).
The tone of the 1997 Article IV report is generally positive. The government can take heart from the economy’s significant improvement in 1996, the fund’s ringing endorsement of its gas-driven investment programme and the bullish assessment of medium and long-term prospects. Even on issues such as liberalisation, Doha can claim with some justification that the pace of economic reform is accelerating. But until the debt mountain has been reduced there is no room for complacency. The economy may no longer require major surgery but it may need further treatment before it is restored to full health early next century.