College of Business and Economics

Principles of Microeconomics

Examining the factors

affecting inflation in Qatar

Professor: Student:
Dr. Mirza Sarvar Baig Sejd A. Huskic

Fall, 2008
 Inflation in Qatar

Table of Contents

Abstract ............................................................................................................................... 3

Introduction ......................................................................................................................... 4

Causes of inflation ........................................................................................................ 5

Effects ........................................................................................................................... 7

Recommendations/Solutions......................................................................................... 9

Conclusion .......................................................................................................................... 12

References ........................................................................................................................... 13

Appendices.......................................................................................................................... 14

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 Inflation in Qatar

Abstract

Oil and gas have made Qatar the highest per-capita income country in the

world ($87,600) and one of the world's fastest growing economies, having achieved

economic growth of between 18 and 20 per cent.

But success comes at a price. Due to sustained expansion, as well as demand

outpacing supply, serious constraints on capacity have created inflationary pressures.

The rise in inflation is again due largely to escalating rents as a result of housing

shortages, as well as high aggregate demand, and rising wages for both nationals and

expatriates.

This paper briefly discusses causes and effects of inflation in Qatar, as well as

certain solutions that could ease this encountered issue.

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 Inflation in Qatar

Introduction

Inflation is a natural product of the liquidity-driven economic boom, and the

"price" that any country has to pay for its growth. It is an overall general upward price

movement of goods and services in an economy, usually as measured by the

Consumer Price Index and the Producer Price Index. Over time, as the cost of goods

and services increase, the value of a currency is going to fall because a person won't

be able to purchase as much with that currency as he/she previously could. Qatar has

been battling increasing levels of inflation for quite a few years already and it is not

over yet.

Rising inflation has become a critical issue for consumers, businesses and

policy makers in Qatar. Recent reports put consumer price (CPI) inflation at around

14 per cent in 2007, and 12 per cent in this year.

If people want to avoid this "growing pain" of inflation, they have to pay a

price in the form of lower growth, in other words, "no pain, no gain". This involves

cutting government spending and liquidity, also known as demand, the underlying

reasons behind the hydrocarbon liquidity-driven boom in the country.

This term paper tends to urge and stimulate a deeper examination and

consideration, or at least, thinking about this "growing pain", since it remains a

challenge for all of us.

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 Inflation in Qatar

Causes of Inflation

What are the factors propelling the inflation? While government authorities

point to economic boom beyond capacity as the root cause, analysts attribute it to

other major factors such as the structural economic rigidities like lower absorptive

capacity amid huge liquidity, domestic currencies pegged to sliding greenback and

prodigal welfare resulting in unwanted fiscal expenditure. But a closer look reveals

that the root causes are deeply entrenched and also influenced by beyond-border

factors.

Inflation in Qatar is caused by a combination of demand pull and supply shock

or cost push factors.

On the demand side, Qatar's economy is flush with burgeoning liquidity as a

result of higher oil prices, thereby pushing aggregate demand. Increasing government

expenditure for economic diversification further fuels the flame. Adding to the

additional demand factor is the ever increasing population, due both to demographic

transition and huge influx of expatriates. It has been impossible for the supply side, in

terms of goods, services, housing and infrastructure, to keep pace. The result is price

spikes all along the value chain due to cost escalation, which then percolates to other

sectors of the economy.

On the supply side, the most controversial cause of the inflation is domestic

currencies pegged to the sliding dollar, thereby sapping the purchasing value of local

currencies. Also the movements between the US dollar and the euro/yen have been

devaluing local currencies that are pegged to the dollar and, therefore, also

contributing to the acceleration of inflation by increasing the cost of goods imported

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 Inflation in Qatar

from Europe and Japan. Supply shock or cost push is also due to the shortage of

skilled labor required for maintaining the growth momentum in Qatar's economy.

More importantly, there have been global supply shocks prevalent in most of the fast

moving economies, such as Qatari, due to higher food and commodity prices that

have direct repercussions for open economy in Qatar. Thus, the economy of Qatar

seems to be located at the higher spectrum of the inflation cycle. Also, inflation in

Qatar has been rising because of surging demand for housing and office space as the

economy has expanded, spurred by a near five-fold increase in oil prices since 2002.

Several Qatari businessmen have expressed concern over the steep rise in the

country's population over the past few years, which, they felt, has led to inflation and

the huge demand for infrastructure facilities and services. Some of them cautioned

against the fast pace of development and called for a gradual and phased growth.

According to Saeed Al Hajari, ADCB chairman, the population growth, economic

boom and inflation are interrelated. He said the country's population has increased by

20 per cent over the past few years. Only few countries have witnessed such a fast

growth. "We should not allow the inflation level to further go up. The development

should not come all of a sudden but instead it should be gradual and well-planned.

The companies which are now being set up in two years can take four years to

establish," he said. Rising inflation is causing a lot of social and economic problems

and, as is known, increasing rents and prices of essentials are the two major

contributory factors. Goods and services are becoming costlier due to a constantly

weakening dollar and the consequent decline in the value of the local currency.

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 Inflation in Qatar

Effects

Inflation is highly interrelated with housing rents that are forcing many young

and employed Qatari nationals to live the single life since they do not have houses of

their own and cannot afford to take one on rent due to skyrocketing rentals.

Community sources say that rising rents have not only affected expatriates but Qatari

nationals as well, since young and employed people need separate homes if they want

to get married. Now, a small plot of land in a remote area, measuring about 1,200sqm,

is not available for less than QR1million. In addition to that, the cost to build a house

is approximately QR700.000 to QR800.000. Higher rentals are creating a lot of social

problems in this midst. There are conflicts among relatives since many members are

forced to share a single accommodation, for instance. Companies are adding to the

problem by taking entire residential buildings on package deals to house their

employees. This way, they are helping the landlords to increase rent due to rising

demand.

Apparently, higher living costs are a direct result of inflation, which has gone

up to 8.2% in the 1st half of 2006 from around 2% in 2000. Soaring rent has been the

main driver of inflation in Qatar in the last few years, until about 2000, the annual rate

of inflation hovered around 2%. In 2005, the rate of inflation was 12.62% and in 2004

it stood at 8.48%. Essentially what inflation means is that the value of money goes

down and it takes more to buy commodities and to pay for services. Therefore 8.2%

inflation means that the price level for a given year has risen 8.2% from a certain

measuring year. Clearly a consumer's purchasing power loses with inflation. Rising

inflation is making Qatar less attractive to thousands of foreigners who have relocated

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 Inflation in Qatar

to the region in search of better income and tax breaks, according to a survey by an

Internet recruitment portal.

In 2006, inflation reached an all-time high of 11.86 per cent, the daily said

quoting data provided by the Qatar Planning Council. The index for household

consumption stood at 145.42 points in the first quarter of this year against 126.66

points in the corresponding period of 2006. Over the same period the general price

level jumped by 3.81 per cent from 140.09 points in the last quarter of 2006,

according to Planning Council data. The index of rent, fuel and energy, constituting

more than 20 per cent of households' consumption expenditure, rose by about 35 per

cent year-on-year in the first quarter of 2007. Compared with the last quarter of 2006,

the index of the group showed a 9.24 per cent jump. Among its sub-indices, monthly

rent of dwelling and electricity charges rose by 35.45 per cent, fuel alone (50 per cent)

and coal and other kinds of fuel (4.26 per cent). Food, beverages and tobacco prices

rose by 6.31 per cent. Medical care and Medical services' index rose by 0.23 per cent

year-on-year in the first quarter of this year. The index of transport and

communications' was up 2.55 per cent year-on-year, while it showed 0.05 per cent

jump compared with last quarter of 2006. The index of entertainment, recreation and

culture was up 5.11 per cent year-on-year, while it rose 0.25 per cent compared with

the last quarter of 2006.

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 Inflation in Qatar

Recommendations/Solutions

Qatar has come up with a package of measures designed to either counter the

negative impact of rising inflation on incomes or to contain price increases. Besides

the pricing control measures, authorities lowered duties on imports especially on

construction materials to ease the pressure. All these taken together are reactionary in

the sense that they would add to inflation in the medium term.

Qatar plans to tackle the rise of inflation by freezing the price of steel and

cement for three years and extending a diesel subsidy. The Gulf state will spend about

1.4 billion riyals ($384.6 million) to extend a subsidy on diesel for another year

"because it is very significant in many industries". Qatar will focus on reducing the

burden of inflation on its population through price controls and subsidies, Sheikh

Hamad bin Jassim bin Jabr al-Thani, Qatari Prime Minister and Foreign Minister, told

the meeting, according to the Gulf Times. `"Any future price rise of such materials in

the global market will be borne by the state during the three-year freeze," he said,

without giving details.

Qatar government has tried to offset inflation while defending their pegs by

raising bank reserve requirements, raising state employee wages, cutting import

duties, boosting subsidies and introducing rental controls.

Qatar is also looking at policy options to fight inflation, including possibly

dropping its peg to the dollar, said Ibrahim Al-Ibrahim, an economic adviser.

Qatar's Finance Minister Youssef Hussein Kamal said that the government is planing

to sell bonds to soak up some liquidity, build cheaper homes and control building

material prices to tackle rising prices. Qatar's central bank, meanwhile, has increased

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 Inflation in Qatar

banks' reserve requirement by 100 basis points to 3.75% in two moves since

December, forcing banks to keep more money in their vaults to slow down money

supply growth, an indicator of future inflation.

A Qatari real estate expert and valuer has unveiled an initiative to ease the

rents crisis saying that he has offers from some foreign real estate companies to build

residential units and rent them out at reasonable prices.

Khalifa al-Moslimani said in an interview with the Arabic daily Arrayah that

foreign companies were ready to embark on such a project only if the state provides

them with lands. "I have also received offers from some banks which are prepared to

finance the project", he said, adding that the lands provided by the state should have

the required infrastructures. He said the companies also ask for permissions from the

government to build eight-storey residential units.

Al-Moslimani said that such apartments would be rented at 40% less than the

value of a similar apartment in the current real estate market. That is the optimal

solution to relieve the inflationary pressures sparked by the spiraling rents.

Many analysts believe the only way to rein the inflation is to contain rent

spiral for which a multi-prolonged approach becomes inevitable. Key to this will be

the provision of adequate commercial space and residential units, which are still in

short supply in Qatar. The prices of most essential items have gone up in Qatar in the

last few months primarily because of the impact of rent spike on commercial and

trading establishments. For same reason the cost of services has also shot up.

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 Inflation in Qatar

Prominent businessmen have called on members of the trade and industry to

raise salaries of foreign workers so that they could fight rising inflation and find their

employment gainful enough. Abdul Hadi Al Shahwani, a key member of the Qatar

Chamber of Commerce and Industry (QCCI), stressed the need for the private sector

to revise job contracts with workers and give a salary raise. He said that the higher

rate of inflation was not only putting expatriates to untold financial hardships but

limited income Qataris were equally affected. But, since the government was there to

take care of the local population, the onus of providing relief to foreign workers was

primarily on the private sector employers.

Qatar government can cut spending on a targeted basis to mitigate some of the

pain. Instead of cutting day-to-day expenditure, for example, through wages and

consumption, that have a direct impact on people’s welfare, they can stretch out or

delay some investment projects farther into the future.

The “temporary” inflation, which is driving up food, commodity, property and

rental prices, usually goes away by itself, given enough time, as scarcity is relieved by

additional supply, the time it takes to build housing units, increase production, and

import additional supplies and so on. The Government can take some short-term

actions to help mitigate this temporary inflation, for instance by acting as "supplier of

last resort", rationing demand, or imposing temporary price controls; temporarily

lowering the price of fuel will be a big help.

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 Inflation in Qatar

Conclusion

After reading this paper, a curious reader should have some insight into

circumstances of inflation and its effects in Qatar. It is apparent that inflation in Qatar

has witnessed an increase in recent years, especially nowadays. This increase in

inflation over the past few years can be primarily attributed to the sustained increase

in housing costs and the weakness of the US dollar, to which the Qatari Riyal is

pegged. Although supply-side pressures could subside in 2008, inflation is still

expected to reach 11.5%. In 2009, we expect the supply of housing to achieve a

degree of equilibrium and more new infrastructure to come on stream. As a result,

inflation is expected to fall into the high single digits.

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 Inflation in Qatar

References

Group of Authors. (21/11/2005, 15/10/2006, 21/04/2007, 14/05/2007). The Peninsula

On-Line, Qatar's Leading English Daily Doha, Qatar: SiDSnetMinds

Gulf Times, Qatar's Top-Selling English Daily Newspaper (08/10/2006). Doha, Qatar:

Gulf Publishing & Printing Co.

Ranjan Pradhan, S. (2008). Inflation in the Gulf states: Are subsidies the antidote. The

Peninsula On-Line. Doha, Qatar: SiDSnetMinds

Unknown Author. (May, 2007). Inflation and Price Hikes in Qatar.

http://www.malaysianqatar.com

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 Inflation in Qatar

Appendices

Qatar Inflation rate (consumer prices): 13.7% (2007)

Year Inflation rate (consumer prices) Rank Percent Change Date of Information
2003 1.90 % 165 2002
2004 2.30 % 144 21.05 % 2003
2005 3.00 % 94 30.43 % 2004 est.
2006 8.80 % 180 193.33 % 2005 est.
2007 7.20 % 164 -18.18 % 2006 est.
2008 13.70 % 207 90.28 % 2007

Definition: This entry furnishes the annual percent change in consumer prices
compared with the previous year's consumer prices.

Source: CIA World Factbook - Information in this page is accurate as of May 16,
2008

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