Controlling inflation in Qatar is not that easy

Authorities in Qatar are having a difficult time containing inflation. Worse, prospects for bringing inflationary pressures under control look only dim.

US investment bank Merrill Lynch expects inflation rate in Qatar to reach 14.5 per cent in 2008, up from 14 per cent in 2007. Currently, inflation rate in Qatar is a far cry from the past few years. According to the Economist Intelligence Unit (EIU), the rate averaged 2.6 per cent in 2002-2004.

To be sure, Qatari inflation rate is the worst within the Gulf Cooperation Council (GCC). Merrill Lynch expects an inflation rate of 12 per cent in the UAE this year.

The other GCC countries of Saudi Arabia, Kuwait, Oman and Bahrain are suffering from inflationary pressures, but albeit less so compared to the UAE and certainly Qatar.

Several reasons stand behind growing inflationary pressures in Qatar, notably local economic growth. The EIU expects real (adjusted for inflation) gross domestic product to stand at 9.3 per cent in 2008, up from the estimated 7.8 per cent last year. Still, real GDP stands to grow to 12.4 per cent next year on the back of expansion of the country's gas sector.

Furthermore, firmer oil prices and declining interest rates translate into stronger availability of liquidity, in turn causing additional inflationary pressures. The Qatari riyal is pegged to the US dollar, a policy that dictates importing interest rates from the US. Qatar follows the US Federal Reserve in changing interest rates.

In 2006, the government placed a 10 per cent cap on annual rise of rental rates, as part of efforts to check runaway prices. However, thanks to steady demand, attaining the objective seemed not possible from the very onset. Recently, the EIU reported that the policy failed partly because growth in supply could not keep pace with demand. Needless to say, some property owners found different means to counter the restrictions, including charging additional prices for new services such as increasing security measures at residential compounds.

Visiting Qatar in January, I noted that inflation tops the agenda when talking to expatriates. The issue is not the same with regards to locals, as the government keeps raising salaries for public sector employees. The utmost majority of Qatari nationals (more than 90 per cent) work in governmental departments. Last year, the authorities raised salaries by a hefty 40 per cent.

More recently, top Qatari officials advised various measures to counter inflationary pressures. Qatari Finance Minister Yousuf Hussain Kamal indicated that officials are contemplating issuing bonds in order to stem excess liquidity available in the market. The matter is increasingly becoming necessary due to declining interest rates. Recently, Qatar followed a move by the Fed of the US by cutting rates by 75 basis points. Low or lower interest rates plus a plunge in stock markets translate into stronger availability of liquidity.

According to the minister, other measures include strengthening cap on rental rises and placing restrictions on prices. Yet, the policy of imposing price controls on wheat-based products could backfire. The EIU has warned that the suggested policy could backfire as it could turn out to be a disincentive to retailers to stock supplies.

Trouble is that the authorities could control only key variables causing inflationary pressures. For instance, Qatar has no choice but to follow the Federal Reserve with respect to interest rates, so long as the riyal is pegged to the dollar. Certainly, the Qatari government can elect to end the link, as this is a sovereign decision. Or else, Qatar could follow Kuwait by adopting a basket of currencies.

- The writer is a Member of Parliament in Bahrain.