IMF Wraps Up 2023 Article IV Qatar Consultation

Washington, DC: On January 11, 2024,the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Qatar, and considered and endorsed the staff appraisal without a meeting.[2]

Qatar's decade-long efforts to diversify the economy culminated into the successful hosting of the 2022 FIFA World Cup. After very strong performance in 2022 on the back of World Cup-induced buoyancy and high hydrocarbon prices, growth has been normalizing, with real GDP growth in 2023 projected at 1.6 percent. Growth normalization is expected to continue in the near term, with non-hydrocarbon growth supported by investment in public projects, construction of the North Field LNG expansion project, and their spillovers to logistics, manufacturing, and trade. Visibility brought by the WC could continue to boost tourism. Medium-term growth is expected to average around 5½ percent, boosted by significant LNG production expansion and initial reform gains from implementing the Third National Development Strategy (NDS3), set to be released soon. As global commodity prices decline and domestic demand normalizes, headline inflation will likely ease to below 3 percent in 2023, and further to around 2 percent over the medium term.

Amid high hydrocarbon prices, both fiscal and current account positions strengthened significantly in 2022, with surpluses reaching 10½ percent of GDP and 26½ percent of GDP, respectively. Both the fiscal and current accounts will likely remain in sizeable surplus supported by elevated, albeit declining, hydrocarbon prices projected for the medium term, and Qatar's LNG production expansion, coupled with increasing demand from Asia and Europe.

Banks are well-capitalized, liquid, and profitable, with the capital adequacy ratio and return on equity at 19 and 14.6 percent, respectively, in the second quarter of 2023. Banks' nonresident deposits fell by more than one-third from the recent peak, partially replaced by higher public sector domestic deposits, reducing vulnerabilities amid tight global financial conditions. The NPL ratio continued to edge up to 3.8 percent but the provisioning coverage ratio is relatively high, close to 80 percent. Banks were resilient to the financial market turmoil from advanced economies in early-2023.

Structural reforms continue to progress, including to enhance protection and mobility of expatriate labor, improve the business environment, promote public-private partnerships, and further attract private investment through the residency program and broadened foreign ownership provisions. The pension scheme has been expanded to more Qataris in the private sector to promote private sector employment. Digitalization has continued to advance, and many climate initiatives guided by the National Environment and Climate Change Strategy and the Climate Change Action Plan are being implemented. The upcoming NDS3 is expected to provide an ambitious reform agenda to guide the transformation toward a private sector-led, knowledge-based, more diversified and greener economy, as envisaged under Qatar's National Vision 2030.

Risks to the outlook are broadly balanced. Main downside risks stem from an unfavorable global environment. In particular, while the conflict in Gaza and Israel has had no visible impact on Qatar, if it is protracted or worsened, it could potentially affect Qatar through more volatile hydrocarbon prices (although higher prices could improve fiscal and external positions), lower tourism and investment, as well as more costly external funding for banks. Domestically, more protracted or severe real estate market weaknesses could negatively affect the banking system and the broader economy. If downside risks materialize, Qatar has strong policy buffers to mitigate the negative impact. On the upside, accelerated reform efforts guided by NDS3 could further promote diversification and boost potential growth.

Executive Board Assessment

In concluding the 2023 Article IV consultation with Qatar, Executive Directors endorsed staff's appraisal, as follows:

Qatar has remained resilient to the recent global shocks and its economic outlook is favorable. Output growth is normalizing as expected from the 2022 WC-driven boom. The nation's favorable medium-term outlook is supported by the significant expansion of LNG production in the NF and expected gains from the implementation of NDS3. Risks are broadly balanced. Maintaining prudent macroeconomic policy and intensifying reform efforts will support Qatar's resilience to shocks and accelerate its economic transformation.

The fiscal strategy should balance discipline with growth in the near term and facilitate the transition to more diversified, private sector-led growth over the medium term. If downside risks to growth materialize and the ongoing growth slowdown sharpens, some fiscal space could be deployed through productive and efficient spending while maintaining broad fiscal prudence. In the medium term, fiscal strategy should aim at sustaining prudent and countercyclical policy, accelerating revenue diversification including via VAT introduction, enhancing current expenditure efficiency by rationalizing wage bill and gradually removing remaining subsidies, and reorienting expenditure from traditional infrastructure to reforms that facilitate transformation to a private sector-led growth model. A medium-term fiscal framework anchored around maintaining intergenerational equity, complemented by greater fiscal transparency, will support the implementation of the fiscal strategy.

The authorities are encouraged to continue safeguarding financial stability. The QCB should continue its proactive supervision and regulation, supported by regular risk analysis and information sharing among the financial supervisors to help identify emerging vulnerabilities and guide regulatory actions. The authorities' plans to deepen domestic capital markets are welcome as well as measures to mitigate risks associated with banks' exposure to short-term foreign funding, which should be reviewed regularly. Equally important is to carefully balance opportunities and risks associated with the nation's Fintech and green financing initiatives and put in place adequate regulations. Qatar's significant progress on the technical compliance with the FATF Standards is commendable, and the authorities are encouraged to implement the FATF action plan decisively.

The exchange rate peg continues to represent a credible monetary anchor. Qatar's external position in 2022 was assessed to be substantially stronger than the level implied by medium-term fundamentals and desirable policies, mainly due to the elevated hydrocarbon prices. Further efforts to strengthen liquidity management and coordination among the fiscal and monetary authorities are recommended. Deepening domestic financial markets and maintaining low currency mismatches on bank balance sheets would further reduce vulnerabilities and enhance monetary policy transmission.

Reform efforts should be intensified to shift from a traditional state-led growth model to a more dynamic, knowledge-based, private sector-driven one. Attracting more skilled expatriates, improving education outcome, incentivizing Qatari nationals to take up private sector jobs, and raising female labor force participation will enhance human capital and labor market dynamics. In addition, reforms are needed to promote further trade liberalization, ease access to finance, and continue enhancing administrative efficiency. These measures should be implemented comprehensively in a well-sequenced manner to boost potential growth. Furthering digitalization and climate actions are also critical. Broadening gains from economic zones and centers to the wider economy would accelerate economic diversification.