Changes in Qatari Balance of Payments from the 1980s to the Current Period - Example

Changes in Qatari Balance Of Payments from the 1980s to the Current Period Introduction A country’s balance of payment is the result of its efforts in exports, investment, and control of its imports. This essay is an explanation of Qatar’s balance of payments. The balance of payments is a statement of the nation’s current account and the financial account. The current account consists of the exports and imports, and transactions of international payments of income. The financial account consists of transactions of sales of assets to foreigners in the country and purchases of assets in foreign countries. These two accounts show the balance of payments. Imports are recorded with a negative sign because assets are received in exchange for money while exports are recorded with a positive sign because products and services are given in exchange for money. Qatar’s balance of payment has experienced changes because of the nation’s investments abroad as well as in the country. In 1971, the country discovered the North Field, but its exploration delayed. This led to its current account running on deficit for some time due to low exports and more imports. In the 1980s, there were no major exports. The oil fields had run dry and LNG exploitation had not started. In the 1990s after production had begun in the North Fields, Qatar’s balance of payment started experiencing changes. In 1995, a major shipment was done, and this boosted the country’s exports, causing a big surplus in its current account. The country, however, also has consumers who buy products from abroad, and invest abroad. The country also imported goods and services to improve development. For example, revenues received from exports, were mostly spent on infrastructure for development of other industries that would improve the nation’s growth. These imports were high and sometimes created a deficit in the balance of payments. There are other sources of deficits and surpluses in Qatar’s balance of payments, but the main ones as established by this analysis are the changes in imports and exports. This paper explains the changes in the composition of the balance of payments from 1981 to 2013. Balance of Payments (BoP) The BoP is a report containing the international transaction records of a Nation. Schmitt-Groh´e and Uribe indicate that, "it is a statement of a nations international transactions for a specific period" (Schmitt-Groh´e & Uribe, 2014, p. 7). Transactions are the economic flows that reflect the change, creation, transfer, exchange, or extinction of economic value. In any country, transactions that involve imports and exports, and buying of assets in foreign lands among others contribute to the growth or downfall of the economy of the nation (International Monetary Fund, 2005). This is the main focus of this essay. It is meant to explain the changes in the composition of the balance of payments since 1980s in Qatar. The main compositions of the balance of payments are the exports and the imports. Other inclusions are income from investments in foreign lands, minus incomes to other foreign lands from their investments in Qatar. The trend in the balance of payment will help explain Qatar economic status. A Nation’s balance of payment has two main components; the financial account and the current account. The financial account is a statement with records of purchases of assets in foreign lands, and sales of assets to foreigners. A country’s investment position can be determined using the financial account since it shows the difference in investments between a nation and its partners. The financial account shows the net foreign asset position of a nation. Sales of assets to foreigners are recorded using a plus sign while purchases of assets abroad are recorded with a minus sign (Schmitt-Groh´e & Uribe, 2014). The current account records international payments or receipts of income, and exports and imports of goods and services. Income payments and imports are recorded with a minus while exports are recorded with a positive sign. Changes in Qatar Balance of Payments Qatar balance of payments has changed over time. Between the 1980s and 2012, the balance of payments has fluctuated with surpluses in the balance of trade and deficits in some of the years. All these will be described, and explanations to the fluctuations given. In 1998, there was a surplus of the balance of trade, but this was a reduced surplus compared to the previous year. It declined from $867 million in 1997 to $358 in 1998. The decline was attributed to increased imports and decreased exports. The country’s oil exports were high, but there were price fluctuations that reduced the value of exports. The volume of exports was higher than the previous years, and continued to rise, but low oil prices affected imports to the extent described above. Private transfers and net services also continued to record deficits. In 1998, there was a deficit of $2,431 and a deficit of $2,535 million in 1997. All these led to an increased deficit in the current accounts; from $ 1,668 million in 1997 to $2,073 million in 1998. The balance of services and trade, and private transfers, form the foundation of balance of payment computations. Another important component in these computations, are the official and private investments in foreign markets, and the capital and private transfers in the state borrowings from foreign sources. These components recorded a surplus of $1,336 million in 1998, compared to a surplus of $1,582 million in 1997. This was equivalent to 13% increase (Country Commercial Guide, 2000). Before this major change in the balance of payments, there had been a gradual change in the trade balance between 1994 and 1996. From 1993, the trade balance was 5,154 million Riyals. This decreased to 4729 million Riyals in 1994, then further down to 1940 million Riyals in 1995. In 1996, the trade balance increased to 4546 million Riyals but reduced again to 3164 million Riyals. A drastic decrease was observed in 1998 where the trade balance was at 1307 million Riyals. Exports also decreased in 1994, but then gradually increased through to 1997, then dropped drastically to 13,416 million Riyals from 14,057 million Riyals. Imports were low in 1993, at 6,126 million Riyals. This reduced slightly to 6,122 million Riyals in 1994, and then started increasing. In 1995, it went up to 11,008, decreased again to 9,406, then to 10,893, and to 12,109 million Riyals in 1998. Net service and private transfers had a similar change as the imports. There was a decrease from QR 7553 to QR 6556 in 1994, then increase to QR 9801. This then decreased to QR 9083, then to QR 9254 and 8873 million Riyals (Country Commercial Guide, 2000). These changes affected Qatar’s balance of payments. The deficit increased to QR 2,688 million in 1998 from QR 1,775 million in 1997. It was indicated that the reason for such a deficit was due to high levels of indebtedness from foreign sources that were channelled to liquefied natural gas industry development and other sovereign obligations. Long term debts also contributed to the deficit in the balance of payments and were expected still to affect it for the coming years until such debts were settled (Country Commercial Guide, 2000). Qatar balance of payment has changed over time. In 2012, the balance of payment showed a surplus on the current account of $62.3 billion (QR 226.9 billion). This is an increase from QR 189,200 billion. This was a surplus of 32.4% of the GDP up from 30.3% of the GDP. The Qatar balance of payment as reported by Reuters is as follows: 2011 2012 Current account 189,200 226,898 Trade balance 318,037 374,665 Exports (FOB) 416,047 486,730 Imports (FOB) -98,010 -112,065 Capital & Financial Account -227,805 -162,002 Direct investment abroad -21,940 -6,698 In Qatar -316 1,190 CA/GDP (%) 30.3 32.4 Data obtained from (Reuters, 2013(b)) It was expected that the above current account surplus would fall to about 28% of the GDP, and true to the analysts’ predictions, the current account surplus reduced to 27% in the last quarter of 2012. In 2013, Qatar’s balance of payment had a surplus of 71.3 billion Riyals in its current account in the 1st 2013 quarter. This was 38 percent of the GDP compared to the last quarter’s results that were 27 percent of the GDP. In 2012, Qatar had a surplus of 49.6 billion riyals in the last quarter of 2012. The Balance of payment report is as follows: First Quarter 2012 Fourth quarter 2012 First Quarter 2013 Current account 54,173 49,637 71,266 Trade balance 92,706 92,582 102,999 Exports (FOB) 121,141 120,430 129,815 Imports (FOB) -28,435 -27,848 -26,816 Capital & Financial Account -35,286 -64,077 -50,731 Direct investment abroad 7,078 -8,818 -821 In Qatar -190 -1,744 1,082 CA/GDP (%) n/a 27.4 38.5 Data obtained from (Reuters, 2013). From the 1990s to 2000s, Qatar experienced a constant trade surplus but maintained a balance of payments deficit. This is explained by the large imports of person transfers, and services, and partly due to out-flowing capital transfers. In 1998, the surplus in the balance of trade reduced to $358 million from $897 million in 1997. The exchange rate was 3.64 per $1 at the time. This decline in export was attributed to increased rate of imports, and reduced rate of exports. Oil exports grew in volume, but their prices were low, and so the total revenue reduced. This is evidence of a decline in surplus of the balance of trade as a result of reduced exports. Increased exports, as evidenced by data from the balance of payment reports; increase the balance of trade surplus. In 2013 1st quarter, there was a balance of trades surplus of 102,999 billion Riyals compared 92,582 billion Riyals of the previous year. The respective exports of the times are 129,815 and 120,430. Another contributing factor to this surplus is reduced imports. In 2013 1st quarter, the imports were -26,816 billion Riyals, down from 27,848 billion Riyals. The Country Commercial Guide (2000) explains that, in 2001, there was a trade surplus of $7.5 billion because of purchasing power parity that led to imports totalling to $3.5 billion and exports totalling to $11 billion. Exports and imports are the major components of the current account of the balance of payments. Any changes in these components lead to surpluses or deficits. There are times when imports were high, and this led to deficits in the current accounts although other factors contributed to such deficits. Below is some evidence explaining the deficits and surpluses observed in Qatar’s balance of payments current account. Year Imports %Growth Exports %Growth 1985 4145 -2% 11277 -31.3% 1990 6169 27.8% 14159 44.8% 1995 12368.7 76% 13289.6 13.6% 2000 11838 30% 42202 60% 2005 36621 67.5% 93773.9 37.8% 2010 84593 -6.7% 262277 49% Data obtained from (Al-Khulaifi, 2013) Information from this table helps in explaining the deficits and surpluses that occurred in specific years. In 1985, the export growth rate was very low. This is because of lack of export products at the time. The North Field which is responsible for the Liquefied Natural Gas that constitutes a big percentage of the country’s exports had not been exploited. It had just been discovered, and even the oil fields had low productivity (Ibrahim & Harrigan, 2012). From 1985 to 1990, there were the country was faced with a variety of problems; LNG projects were just beginning, oil fields were getting dry, Japan stagnated, the oil prices were low, and there was Iran-Iraq war. In the period between 1990 and 1995, North Field production had started and contributed to LNG for domestic use and exports. There was, however, high imports of up to 76% which can only be explained by the high investments on industrial infrastructure, meant for the country’s production of export goods and services. From 1995, Qatar’s exports were boosted by increased oil production from changes in the exploitation of oil fields. This explains the 60% increase observed in 2000. In 1997, Qatar had it first LNG shipment which also contributed to the 60% increase in exports (Ibrahim & Harrigan, 2012). Explanation Qatar is a small economy that depends on the world for its capital and consumer goods and in turn provides oil, hydrocarbons, and natural gas to the outside world as exports. The exports and imports have formed a major part of its balance of payments. The exports are the major source of its GDP. From the 1980s, Qatar’s exports have been fluctuating. If there are any unsustainable trade deficits, it means that the country has violated international budget constraints. Qatar receives most of its revenues from oil and gas exports. Exports formed 50-72% of the country’s GDP from 1980 to 2011. Imports ratio to GDP, however, ranged from 185 to 43% from 1980 to 2011. Total exports are composed of Liquefied Natural Gas and Oil. Qatar imports are composed of a variety of products needed to promote its exports, capital goods and consumer goods. This explains the high level of imports observed over the years. The country also developed an export oriented industrial strategy where industries are developed for the production of goods and services to be exported. Qatar has international links that has contributed to its vast market and increased exports. The country’s GDP growth is due to its investments and exports. From 1981 to 2011, the average GDP growth rate is 11.8%. Qatar has the largest Liquefied Natural Gas project in the world, has invested heavily on hydrocarbon industries, and has developed fertilizer, petrochemical, and aluminium industries that depend on gas and oil to produce products and services for export. From 1981-2011, the average growth rate of the country’s exports was 12% per year, and imports rose by an average of 12.4 percent. Even on average, imports grew at a higher rate than the exports, yet exports formed a higher percentage of the GDP. It shows that the major cause of deficit was the large amount of imports (Al-Khulaifi, 2013). In the BoP, a country experiences a deficit of a surplus. A deficit is a state in which the country loses more money than the amount coming in. It is a situation where imports, transfer payments and incomes abroad exceed exports, transfer payments and income coming into the country. A deficit can occur because of changes in income (IMF, 2005). In the years when Qatar experienced deficits, it could have been because of increased incomes of the citizens, increasing their purchasing power. This could drive them to import goods and services from abroad because they can afford. Based on the facts presented about Qatar’s GDP growth and increased revenue from exports, increased income is a likely cause of increased imports by individual citizens. A deficit can also be due to changes in exchange rates that promote buying of products from a foreign land, than the foreigners buying from Qatar. If Qatar’s currency appreciates over a foreign currency, it becomes easy for the Qatari citizens to purchase goods and services from a foreign country because the goods become cheaper. It, however, becomes harder for the foreign nationals to purchase Qatari products because the goods become expensive due to depreciating currency values. Records of Qatar’s GDP improvements explain the likelihood of the currency appreciating and the increased rates of imports experienced over the years. Structural problems can also cause a deficit. Structural problems lead to poor quality goods and services hence reduced demand. This is not the case with Qatar. The country has continued investing in production of its major exports. Current account deficit can also be caused by a large transfer of income abroad. Foreigners may invest in Qatar, but when they receive profits and benefits, they take them back to their home countries. This creates a deficit in the current account A surplus occurs when there is more money coming into the country. In Qatar, surplus can be explained by increased exports. Surpluses are only achieved when transfers inward, and exports, exceed transfers abroad and imports. Inward transfers can be explained by increased income from investments abroad that Qatar has made over the years. Increased prices of imports can also lead to surplus since this reduces the level of imports. Reduced imports compared to exports of a country may lead to a surplus in the country’s current account. Reduced import prices can be due to falling exchange rates. High quality goods and services that attract customers can increase consumer demand, hence current account surplus. A recession can also lead to a surplus in a country’s current account. Negative growth within the country can cause difficulty in selling products domestically forcing businessmen to look for market in foreign markets (IMF, 2005). This increases the exports and in turn, surplus. This is, however, not the case with Qatar. As observed, Qatar has experienced gradual growth of GDP since the 1980s to 2013. Conclusion Qatar’s Balance of Payments since the 1980s has been affected by imports and exports mostly. High imports lead to deficits while high exports lead to surplus in the current account. Specific years accompanied by deficits had specific reasons behind such deficits. Increased imports caused such deficits and also increased income and purchasing power of the citizens. Deficits were also caused by decreased exports, as in the case where oil prices were low, and during the times when exports were low. When there were no oil exports due to low explorations, and there were no LNG exportation yet. There were consecutive surpluses, but there would be differences, for example, in 1997 and 1998. The trade balance surplus reduced and this was due to increased imports and reduced export prices. Qatar’s successful development is because of its visionary leaders who thought wise to invest in its natural resources. Qatar has the largest amount of hydrocarbon resources. The nation also has a large network consisting of international partners that form its market for its exports. North Field is the world’s largest reservoirs, but it took 20 years for its potential to be realized. During the first years of production of natural gas, Qatar found it difficult to reach major markets due to its distance and location from major markets. It also had problems with assessment of technical feasibility and value. It could not make profits from its productions at first, but this soon changed after necessary investments were made, and the country could export more of its gas. This has been used to show the deficits that existed in the nation’s balance of payments then. It also explains the 1990s low exports and gradual increase until Qatar had surplus in its current account. References Al-Khulaifi, A. S. (2013). Exports and Imports In Qatar: Evidence From Co-integration And Error Correction Model. Asian Economic and Financial Review, 3(9):1122-1133. Country Commercial Guide. (2000). U.S. Department of State FY 2000 Country Commercial Guide: Qatar. Retrieved on 15th May 2014 from: http://1997-2001.state.gov/www/about_state/business/com_guides/2000/nea/qatar_CCG2000.pdf Ibrahim, I & Harrigan, F. (2012). Qatars Economy: Past, Present, and Future. QScience Connect, 9: 1-24. International Monetary Fund. (2005). Balance of Payments Manual (EPub). USA: International Monetary Fund. Reuters. (21 August 2013(a)). TABLE-Qatar C/A Surplus Widens to $19.6 bln in Q1. Retrieved from: http://www.reuters.com/article/2013/08/21/qatar-currentaccount-idUSL6N0GM0IW20130821 Reuters. (28 April 2013). TABLE-Qatar C/A Surplus Widens to $62 bln in 2012, Beats Forecasts. Retrieved from: http://www.reuters.com/article/2013/04/28/qatar-currentaccount-idUSL6N0DF03120130428 Schmitt-Groh´e, S. and Uribe, M. (2014). International Macroeconomics. Retrieved from: http://www.columbia.edu/~mu2166/UIM/notes.pdf Read More