Macroeconomic Policies of Qatar - Example

Macroeconomic Policies of Qatar Table of Contents Table of Contents 2 Introduction to the Country 3 2.Major Macroeconomic Issues 3 2 Business Cycles 3 2.2 Productivity 4 2.3 Inflation 5 2.4 Unemployment 6 2.5 Government Budget Deficit 7 2.6 Interest Rates 7 2.7 Fiscal Policy 8 3.Conclusion 9 Reference List 10 1. Introduction to the Country Qatar is a country situated in the Middle East that occupies the Qatar peninsular. The major part of the country is a desert and the country shares its borders with Persian Gulf and Saudi Arabia. The chief of state is considered as Amir or Sheikh and the Prime Minister is the head of the Government (Naifar and Al Dohaiman, 2013). The economy within the country is that of the mixed economic system which comprises of a variety of private freedom, government regulation and a centralized economic planning. The country is considered as one of the world’s wealthiest country with its rich oil and petroleum reserves and it exports oil to other nations and thus participates in international trade (Cherif and Gazdar, 2010). Qatar was less popular as a gulf state but the Saudi Arabia’s participation in the OPEC and Abu Dhabi and Dubai were considered as ideal places for finance, business and tourism. Qatar is famous for world’s energy markets. Hence the researcher has the aim to conduct an overall research on the performance of Qatar in the international markets based on the macroeconomic indicators. It also offers a scope to the researcher to understand the Government policies adopted by the country to overcome the problems of inflation and unemployment and also to predict the future growth prospect of the country. 2. Major Macroeconomic Issues 2.1 Business Cycles The business cycles in the history of Qatar comprises of a series of recession as well as expansion within the economy. The business cycles in Qatar involve the production oil in the economy and raising the GDP by exporting oil to other countries. Qatar has a relationship with US that imports oil from Qatar and the higher oil prices has a spill over affect on the domestic demand (Ben Naceur, Ghazouani and Omran, 2007). There arise price shocks within the economy and these economic shocks lead to inflation within the economy and the rise in price of goods and services. This also led to the rise in the oil prices in the economy before the global economic recession of 2008. The oil prices are considered to be the important causes of economic fluctuations (Squalli, 2007). However in the recent business cycle model a Markov variable can be used to indicate the expansion or the recession that took place in the economy. The effectiveness of the oil price fluctuations within the economy has an impact on the economy as a whole. There is a link between the oil price changes and the economic activity as due to rise in the crude oil prices the demand curve shift to the leftward direction showing a fall in demand for crude oil. Thus the economy shifts to a new equilibrium position. 2.2 Productivity The productivity gains within the manufacturing sector of the Qatar leads to macroeconomic impacts that affects the oil exports, terms of trade and also the investment within the economy as compared to the rest of the world. Raising the productivity of the laborers would raise would prove to be a key to the long-term growth in the oil producing sectors of the country (Campante and Chor, 2012). Due to the constant hydrocarbon production after 2012 there would be a limit to the government investment and reduce sustainable growth in the economy. The main challenge that the country faces is to turn the labor force from low skilled to high skilled in order to enhance the productivity within the economy (Forstenlechner and Rutledge, 2010). The first shock in the Qatar manufacturing sector is that of increasing the labor productivity within the economy that would raise the level of production. The positive supply shocks raise the output levels and lower the prices of goods in the economy. The demand for goods rises and the export also rises. This has a positive impact on the Qatar trade balance as there is a high demand for the crude oil produced in Qatar. The main challenge for the country was to raise the investment facility within the country to introduce innovation. According to the researcher rise in efficiency of the labor force will also lead to a rise in productivity in the economy. 2.3 Inflation Inflation within the economy can be defined as a rise in the prices of goods and services or alternatively a fall in the value of money. Inflation implies rapid money growth within the economy. The other activities that may lead to an inflationary pressure is that of the monopolistic pricing behavior of OPEC and fall in the foreign exchange rates that leads to a low value of dollars and the major crop failure results in a fall in real output (Abu‐Qarn and Abu‐Bader, 2008). These are an issue of unemployment within the economy that leads to a lower production level and a rise in the prices of the goods that are produced. Figure 1: Inflation, consumer prices in Qatar (annual %) (World Bank, 2015) There are factors that lead to inflation that is the interest rate differential. Higher interest rates on the loans reduce the purchasing power of individuals and as the spending on the goods reduces it will in turn reduce the employment in the economy (Campante and Chor, 2012). In case there are low inflationary expectations then this fall in employment will in turn lead to a fall in the prices. The study reveals that the inflation rate that was recorded in Qatar is around 0.90% in April 2015. The average inflation rate was 3.66% between 2005 and 2015 that reached to 16.59% in June 2008 during the global financial crisis (Elryah, 2015). In Qatar the main components of the consumer price index are energy, fuel, rent, culture, transport, communication and entertainment. 2.4 Unemployment The research says that inflation within the economy rises as the unemployment falls. The concept is explained by the Phillip’s curve that states that there is a trade between the inflation as well as the unemployment. The correlation between the inflation as well as the unemployment can be explained based on the economic shocks and the adjustment lags. The Phillip’s curve can also be used to explain the relationship between the rate of change wage rate and the unemployment rate in the economy (Kandil and Morsy, 2011). There is another phenomenon that involves the concept of full employment rate of unemployment also known as the “Non-Accelerating inflation rate of Unemployment (NAIRU)”. According to the concept whenever the actual employment rate falls below the full employment rate within the economy the total expenditure falls and the inflation rate also declines. Due to the fall in actual inflation the expected inflation also falls and in turn leads to a decline in the wage demands that lead to a lower unemployment rate in Qatar (Campante and Chor, 2012). However the policy makers in Qatar take initiatives to control the economy before the inflation rate reaches zero. As a result the research suggests that in most cases of recession there are falling but positive inflation rates. However the rate of unemployment is considered to be steady in absence of the supply shocks. The supply within the economy would rise with the rise in employment opportunities as more workers are hired in the firm and more output will be generated. 2.5 Government Budget Deficit During the recent years the study has revealed that the economy of Qatar was characterized by a rising Federal deficits. However the national income accounting states that the budget deficits are expected to create excess of imports over exports. In case there is a budget surplus there would be more of imports than exports and in case there is balanced budget the exports in the economy will be equal to the imports (Dreher, Sturm and De Haan, 2008). However the foreign countries that exports crude oil from Qatar need to pay in currency of Qatar. Thus there arises a fluctuation in the exchange rates especially in case of the US dollars as it exports crude oil from Qatar. In case if the economy is not in the state of full employment the tax cuts will raise the production levels that would in turn lead to a rise in both the national income as well as the private savings within the economy. However the impact of the budget deficits on the trade deficits will be lower due to the unemployed resources in the economy (Campante and Chor, 2012). Finally the budget deficit is also expected to raise the investment levels that would in turn increase the return to capital. The research also states that the deficits in budget in turn lead to a cutback in taxes of the capital income and as a result increase the after tax rate of return in the economy of Qatar. 2.6 Interest Rates Research says that the banks in Qatar are experiencing rising profits as well as political stability in the economy. The domestic banks within Qatar have experienced a huge asset growth and are expected to increase its operations in other countries as well (Afonso, Agnello and Furceri, 2010). As compared to the low borrowing rates within the country the interest rates offered to the customers are extremely high. The loans are mainly borrowed by the oil producing companies in order to hire more laborers who would raise the level of production in the economy. Research says that the rate of interest charged by the Qatari banks is around 4.5%. The banks in Qatar also invite the foreign investors to invest in the country in order to expand their business and facilitate the investments particularly in Qatar (Afonso, Agnello and Furceri, 2010). The emergence of domestic banks within the economy is facilitated by the infrastructure projects within the economy that costs billions of dollars within the country. The growth of the non-hydrocarbon sector in Qatar is also significant with the banks offering loan facilities. The interest rates are comparatively low that encourages the companies to take loans from the banks and the balance sheets reveals the fact that the financial institutions are expected to develop in the next few years. 2.7 Fiscal Policy The fiscal policy refers to the policy set by the government of Qatar in order to control the inflation rates in the economy. Due to the unavailability of crude oil and the high demand by the oil exporting nations there is a rise in the oil prices in the economy and the oil prices have enhanced the fiscal policies of the government. The study says that almost 70% of the country’s revenue comes from crude oil and petroleum production within the economy (Afonso, Agnello and Furceri, 2010). This raises the demand for crude oil in the economy and hence there is a fluctuation in prices within the economy. The study says the government is determined to maintain the domestic expenditures to a minimum level in the economy until the external debt of the country is repaid. A rise in the oil prices with the tax imposed on the oil exports by other countries controls the rising demand for crude oil in the international market. In 2009 the government of Qatar imposed a 10% corporate income tax for the foreign companies that exports oil from Qatar (Afonso, Agnello and Furceri, 2010). Further the Government of Qatar also plans to impose customs duty as indirect tax in order to stop the illegal import of crude oil by other countries. 3. Conclusion The research has been carried out on the macroeconomic policies of Qatar that has affected the performance of the country in the international markets. Qatar is known as the major oil producing nation and it exports crude oil to other parts of the country. However due to the rise in demand for crude oil and lack of availability of crude oil in the country there is a rise in price for crude oil. The paper also discusses the rise in prices leading to the inflation within the economy and the inverse relationship between the inflation and unemployment has been using Phillip’s curve. The oil price shocks within Qatar also reduce the unemployment rate within the economy and thus raise the production within the economy. The rise in production levels of crude oil leads to fall in prices. Further, the Government of Qatar also undertakes fiscal policies in the economy to stop the illegal export of the crude oil by imposing direct and indirect taxes on the imports of crude oil by other countries. However the balance sheets of the banks in Qatar reflects a good financial position of the country and the country is expected to grow in the near future with enhanced oil reserves earning a huge profit. Reference List Abu‐Qarn, A. S. and Abu‐Bader, S., 2008. On the optimality of a GCC monetary union: structural VAR, common trends, and common cycles evidence. The world economy, 31(5), pp. 612-630. Afonso, A., Agnello, L. and Furceri, D., 2010. Fiscal policy responsiveness, persistence, and discretion. Public Choice, 145(3-4), pp. 503-530. Ben Naceur, S., Ghazouani, S. and Omran, M., 2007. The determinants of stock market development in the Middle-Eastern and North African region.Managerial Finance, 33(7), pp. 477-489. Campante, F. R. and Chor, D., 2012. Why was the Arab world poised for revolution? Schooling, economic opportunities, and the Arab Spring. The Journal of Economic Perspectives, pp. 167-187. Cherif, M. and Gazdar, K., 2010. Macroeconomic and institutional determinants of stock market development in MENA region: new results from a panel data analysis. International Journal of Banking and Finance, 7(1), p. 8. Dreher, A., Sturm, J. E. and De Haan, J., 2008. Does high inflation cause central bankers to lose their job? Evidence based on a new data set. European Journal of Political Economy, 24(4), pp. 778-787. Elryah, Y., 2015. Does Our Values Become Worsen?—A Study of the Effects of Fiscal Policies on Households’ Life in Sudan. International Journal of Contemporary Economics and Administrative Sciences, 4(3-4), pp. 40-66. Forstenlechner, I. and Rutledge, E., 2010. Unemployment in the Gulf: Time to update the “social contract”. Middle East Policy, 17(2), pp. 38-51. Kandil, M. and Morsy, H., 2011. Determinants of Inflation in GCC. Middle East Development Journal, 3(02), pp. 141-158. Naifar, N. and Al Dohaiman, M. S., 2013. Nonlinear analysis among crude oil prices, stock markets return and macroeconomic variables. International Review of Economics & Finance, 27, pp. 416-431. Squalli, J., 2007. Electricity consumption and economic growth: bounds and causality analyses of OPEC members. Energy Economics, 29(6), pp. 1192-1205. World Bank, 2015. Inflation, consumer prices (annual %). [online] Available at: [Accessed 2 June 2015]. Read More