Confronting inflation in Qatar
Authorities in Qatar are having a daunting task containing inflation. Worse still, prospects for bringing inflationary pressures under control are not promising. Extraordinary economic growth is chiefly responsible for the inflationary pressures in the country. According to the General Secretariat for Development Planning, a governmental agency, inflation rate in Qatar stood at 13.74 per cent by December 2007-end, with the general index up at 159 points compared with 140 points in the year-ago period. More specifically, rents and utility costs increased by 27.7 per cent in the fourth quarter of 2007 versus 28.8 per cent in the previous three months. Also, food, beverage and tobacco costs rose by 10.5 per cent in the last quarter of 2007 up from 6.59 per cent the previous quarter.
Much to their credit, official statistics are in line with independent figures. For instance, the US investment bank, Merrill Lynch, puts the inflation rate in Qatar at 14 per cent in 2007. Nevertheless, existing inflationary pressures in Qatar are a far cry from the past few years. According to the Economist Intelligence Unit (EIU), the rate averaged 2.6 per cent in the period 2002-2004.

Worst rate
To be sure, Qatar’s inflation rate is the worst within the Gulf Cooperation Council (GCC). But, while it is believed that official figures more or less capture inflation in the Qatari economy, the same is not necessarily true of all other GCC member states. Merrill Lynch expects an inflation rate of 12 per cent in the UAE this year. The other GCC countries of Saudi Arabia, Kuwait, Oman and Bahrain are also suffering from inflationary pressures, but are better off as compared to the UAE and certainly Qatar. Several reasons stand behind growing inflationary pressures in Qatar, notably local economic expansion. The EIU calculated the country’s real, adjusted for inflation, GDP (gross domestic product) growth rate at 7.8 per cent in 2007. Again, it expects the GDP to grow by 9.3 per cent in 2008 and still further by 12.4 per cent the next year with expansion of the country’s gas sector. Furthermore, firmer oil prices and declining interest rates translate into stronger availability of liquidity, in turn adding to inflationary pressures. The Qatari riyal is pegged to the US dollar, a policy that dictates importing interest rates from the US.

Rental cap
In 2006, the government placed a 10 per cent cap on annual rise of rental rates as part of its efforts to check runaway prices. However, thanks to steady demand on the back of strong economic growth, attaining the objective did not seem possible from the very onset. A report by the EIU suggests that the policy failed partly because growth in supply could not keep pace with demand. Needless to say, some property owners managed to find different means to counter the restrictions, including charging additional prices for new services, such as increasing security measures in residential compounds. Visiting Qatar in January, one noted that inflation topped the agenda when talking to expatriates. The issue was not the same with regard to the locals, as the government kept on raising salaries for public sector employees, where the majority of Qatari nationals (more than 90 per cent) work. Last year, the authorities raised salaries of public sector employees by a hefty 40 per cent. Additionally, the authorities provide locals with subsidised rates for utility services. Undoubtedly, extending increasing salaries to foreign nationals is not possible for all firms operating in Qatar, specially small and medium sized entities. Expatriates make up the utmost majority of workers in the private sector.

Soaking up liquidity
Certainly, correct information is vital for making decisions designed to counter inflationary pressures, something Qatari authorities are putting into use. According to Qatari Finance Minister, Yousuf Hussein Kamal, officials are contemplating issuing bonds in order to stem excess liquidity available in the market. The matter has become increasingly necessary due to declining interest rates. Qatar has been following moves by the US Fed in cutting interest rates due to the pegging of the riyal against the dollar. The Fed has reduced interest rates several times in the last six months. Low or lower interest rates plus the decline in the stock markets translate into additional liquidity, which only fuels inflationary pressures, as it provides further incentives to buy.

Other steps call for building cheaper homes and controlling costs of building materials as well as placing restrictions on prices. Yet, the policy of imposing price controls can backfire. The EIU has warned that the suggested policy could backfire, as it can turn out to be a disincentive to retailers to stock supplies. In turn, the shortage of materials will add to inflationary pressures. Still, other measures to fight inflationary pressures include strengthening cap on rental rises. One such proposal calls for lowering rental increases that landlords can charge from 10 per cent to 7 per cent per annum. Aided with transparent statistics, the Qatari authorities keep coming up with ideas to help fighting inflation.

Hard choices
Trouble is the authorities do not control key variables causing inflationary pressures. For instance, Qatar has no choice but to follow the US Fed with respect to interest rates, so long as the Riyal is pegged to the Dollar. Certainly, the Qatari government can elect to end the link, as this is a sovereign decision. Else, Qatar could follow Kuwait by adopting a basket of currencies that includes the dollar plus other major currencies, notably the Euro and Yen. Kuwait made the move in May 2007, but judgement is not yet out. Merrill Lynch expects inflation rate in Qatar to reach 14.5 per cent in 2008, up from 14 per cent in 2007. Clearly, Qatar has no choice but to live with inflationary pressures in the foreseeable future. Economic growth comes with a price tag, Qatar being no exception.

By Dr Jasim Husain Ali
An eminent economist and Member of Parliament of Bahrain
 

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