Qatar continues to adjust to the effects of the GCC diplomatic rift

Qatar’s banking sector remains sound, with high asset quality and strong capitalization. The Qatari economy and financial markets continue to adjust to the effects of the diplomatic rift and its fiscal consolidation is proceeding, underpinned by current expenditure cuts and an increase in non-oil revenues.

An IMF team led by Mohammed El Qorchi that visited Doha from August 13-20 to take stock of recent economic developments since December 2016 made the assertions.

Qatar

At the conclusion of the visit, Mr. El-Qorchi issued the following statement:

“The Qatari economy and financial markets are adjusting to the shock associated with the June 5 measures imposed following the diplomatic rift with some trading-partner countries. The measures led to a sharp contraction in imports in June (40 percent year-over-year), with a slight recovery in July. Efforts to diversify sources of imports and external financing and enhance domestic food processing are accelerating. As a result of the authorities’ quick response, some trade has been re-routed and alternative sources of food supply have been established, allaying fears of potential shortages. The initial concern that trade disruptions could impact the implementation of key infrastructure projects has also been mitigated by the availability of an inventory of construction materials and of alternative sources of imports.

“Nevertheless, non-oil growth is projected to moderate to 4.6 percent in 2017 from 5.6 percent in 2016, due to the ongoing fiscal consolidation and trade diversion. Over the medium term, non-hydrocarbon GDP growth is expected to reach 4.8 percent, as structural reforms are implemented. Headline inflation remains subdued (0.8 percent year-on-year-basis in June) even though transportation (8.9 percent) and food costs (2 percent) have edged up and delays caused by rerouting trade have raised operational costs for some businesses. Over the longer term, the diplomatic rift could weaken confidence and reduce investment and growth, both in Qatar and possibly in other GCC countries as well.

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“Fiscal consolidation is proceeding, underpinned by current expenditure cuts and an increase in non-oil revenues. The central government deficit is projected to decline to 5.9 percent in 2017 from 8.8 percent in 2016. The 2018 budget is expected to continue with gradual fiscal consolidation, focusing on the introduction of key tax policy and administration measures, including the introduction of a VAT and excises during the first half of 2018 and further rationalization of recurrent expenditures. The current account position is projected to improve to a surplus of about 3.9 percent of GDP in 2017 from a deficit of 7.7 percent in 2016, on account of contraction in imports and recovery in oil prices.

“Qatar’s banking sector remains sound, with high asset quality and strong capitalization. In the aftermath of the diplomatic rift, banks’ liabilities to non-residents fell sharply. The impact on banks’ balance sheets was mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits. These reactions reflected effective coordination and collaboration among key government’s agencies. Qatar monetary authorities stand ready to meet any future withdrawal of non-resident deposits.

“Structural reforms are progressing. The Supreme Council for Economic Policies and Investment has approved the second national development strategy, with enhanced focus on economic diversification. On labor and residency reforms, Qatar recently announced a visa-free entry program for 80 nationalities to stimulate tourism, created a new permanent-resident status for foreigners and has approved a new law to protect domestic staff.”

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