FIFA’s surprising decision to award Qatar the 2022 World Cup drew plenty of mixed emotions from around the world. Now that the excitement has subsided, plenty of work lies ahead as Qatar prepares to host. Over the next decade, Qatar ambitiously plans to build sophisticated air-conditioned stadiums, a mega size airport, a modern public transportation system, residential housing units, hotels, roads, and many more, at an estimated cost of $100 billion. The bulk of this outlay will be spent over the next couple of years when contracts for the above projects will be awarded.
Like some of its Gulf neighbours, Qatar is a “low absorber” economy (IMF 2009). Its limited absorptive capacity does not allow it to spend all of its hydrocarbon revenues, which is why a portion of the oil and gas revenue is invested in foreign assets. During the oil boom of 2002-2008, when Qatar vigorously promoted economy-wide developmental work, inflation skyrocketed because its narrow production base couldn’t absorb a sudden increase in aggregate demand, most of which was due to a substantial increase in expatriate population. History has shown us that, despite the potential, Qatar’s monetary authority could not stop inflation from rising.
In the aftermath of the recent financial crisis, for the first time in its history Qatar rightly adopted counter-cyclical fiscal policy, which helped its non-hydrocarbon sector (including financial sector) to comfortably navigate the financial storm. In fact, the size of the government budgets for 2009 and 2010 were the largest by historical standards. The current stance of expansionary fiscal policy is expected to continue growing independent of the level of spending committed for the 2022 World Cup.
Meanwhile, Qatar’s inflation rate has fallen dramatically over the past two years. From an annual average of 14% during 2006-2008, inflation fell slightly short of -5% (that’s deflation) in 2009 and is expected to be less than zero in 2010. This happened because of increased supply of residential units (which was a primary contributor to inflation during 2002-2008 period) and the drop in international commodity prices, thanks to the financial crisis (see IMF 2009). The current deflationary environment therefore makes it ideal for higher government spending, since it unlikely to push inflation to the two-digit level that was seen in the pre-financial crisis years.
However, Qatar is a non-standard case due to its limited domestic production base, absence of independent monetary policy, and above all, because it is an extremely rich country (on the per capita basis). Before the decision of the 2022 World Cup host was announced, the IMF’s forecast for inflation rates over the period 2011-2015 were in the range of 3%-4%. These figures are very likely to be revised upward once new World Cup spending is injected into its existing expansionary fiscal programmes. Additional money will also come from foreign direct investment, cross-border portfolios flows, and short-term speculative funds. If we keep silent about the international commodity price increase for the upcoming years, these money injections are sufficient to push Qatar’s inflation to higher levels.
What can be done to control future inflation from rising? Direct monetary policies, such as increasing Qatar’s policy interest rate, are difficult unless the Federal Reserve increases the federal fund rate, since Qatar’s exchange rate is rigidly pegged to the dollar.
One viable option is to issue “World Cup bonds” with maturities ranging from 5 to 10 years, and if possible 15 years. However, issuing bonds in foreign currencies is not viable as this will eventually be added to the domestic monetary base. What is viable is issuing Qatari riyal denominated local currency bonds as these will help to mop up surplus liquidity that would otherwise fuel inflation. Qatar has a large cross-section of rich institutional and individual investors who will be happy to buy these bonds. Moreover, many Gulf investors (if not western investors) will be interested in buying these bonds due to Qatar’s relatively robust economic position in the region. Issuing large-scale local currency bonds will also help Qatar develop its nascent bond markets. Another advantage from issuing local currency bonds is, if the authority of buying/selling bonds were given to nation’s central bank, the central bank could effectively use these instruments for liquidity management, partially offsetting the loss of its monetary policy independence (see Basher et al. 2010 for more discussion).
Besides issuing local currency bonds, other central bank related measures can be undertaken to keep future inflation under control. If necessary, (unremunerated) reserve requirements can be increased. Qatar can also launch deposit auctions (local or foreign currency, or both) to neutralise the effect of liquidity build-up in the banking system. More importantly, to curb short-term speculative funds, the central bank can contemplate introducing partial capital controls targeting short-term funds going to stock market and real estate sector. The bottom line is that, even with the loss of sovereign monetary policy, Qatar has a range of tools to deal with surplus liquidity.
Qatar’s current deflationary episode can be seen as the calm before an inflationary storm. In addition to the well-known negative effects, higher domestic inflation will be disadvantageous to Qatar when the planned Gulf monetary union is officially launched. Monetary union implies a common currency. Hence, when national currencies are to be converted to the new Gulf currency, Qatar’s national wealth will be undervalued if its inflation is higher relative to other member states. Needless to say, higher inflation will also make it harder for citizens and residents to buy World Cup tickets!
The hosting of 2022 World Cup by Qatar is expected to yield positive economic impact throughout the region, particularly contributing to youth employment in the broader Middle East region (Sayre 2010). It will also contribute (albeit in a small way) to an adjustment of global imbalance by increasing spending and imports. To wisely ride the new wave of economic transformation, Qatar needs to seriously consider the policy options that it has at its disposal to keep inflation under check.
I thank Elsayed Elsamadisy for stimulating discussions. Views expressed here are strictly author’s own and do not represent the official view of the Qatar Central Bank.
Basher, S, I Dalla, and H Hesse (2010), “Gulf Cooperation Council Local Currency Bond Markets and Lessons from East Asia”, VoxEU.org, 22 May.
IMF (2009). Qatar: 2008 Article IV Consultation, IMF Country Report No. 09/28.
Sayre, E (2010), “Qatar’s Bid for the World Cup: Shifting to a Knowledge Based Economy”, Brookings Institution.