Type of paper: Essay

Topic: Qatar, Middle East, Politics, Government, Finance, Banking, Business, Economics

Pages: 6

Words: 1650

Published: 2020/11/14


Since early 1970s, the huge increases in revenue from petrochemical sales have led to Qatar's total dependence on oil as the main player running the economy. Although, to date, it is still reliable and has succeeded in raising the living standards of the public as well as make certain the State has enough to spare, recent studies revealed that oil reserves are limited. Over-dependence on oil at the current rates of production will soon exhaust the reserves.
At the beginning of the 21st Century, the Qatar government began enacting policies that will divert the countries reliance on oil production for revenue. Although the process has taken slower than initially expected, the government is dedicated to enforcing and facilitate the policies to ensure success in diversification of the economy. Alarmed by the news of exhausting reserves, the government has invested in various areas of the economy to improve and strengthen other sources of revenue.
Today, there are numerous small and medium-sized industries owned by both local and foreign investors. Both investors enjoy a favorable environment with numerous opportunities making it conducive for flourishing the business. The local investors, for instance, enjoy the tax-free importation of equipment and tax-free income. The government also makes funds easily available at the Banks and financial institutions to promote the development of the private sector.
Among the factors promoting the realization of economic diversification in Qatar include industrial efficiency and the current world economic condition. The steady drop in the rate of crude oil's total contribution to the Gross Domestic Product (GDP) is encouraging. Other factors such as inflation limit the course of achieving economic diversification.
Production of petrochemicals has, over the years, dominated Qatar's industrial base making the country almost totally reliant on exporting liquid natural gas. Every other segment of the financial system benefits from the abundance of oil and especially the low prices. Other large-scale exporters include steel and aluminum producers as well as cement factories geared for the local Qatar's market. Beginning in 2009, the aluminum industry has flourished and stabilizing generating substitute revenue in foreign exchange. Over the years, the administration has not been keen on initiating programs to promote diversification. Without a major problem of unemployment like most other countries, the country has been comfortable and, therefore, adamant in exploring other options for creating government revenue and sustain the population.
With a limited and smaller oil reserves compared to other rivals such as Iran, Abu Dhabi, and the United Arab Emirates, the administration has considered the diversification. With the current level of production, experts estimate the oils reserves to serve the country for not more than thirty years. The alarming revelations caused the government to commit its efforts in ensuring the creation of other industries to sustain the future generation of the country. Today, with a contribution from foreign investors, the government has allowed the establishment of numerous small and medium sized industries across the country.
Among the government initiatives to ensure diversification of the country's economy is supporting the development of the private sector by increasing the funds directed to the Qatar Development Bank (QDB). Efforts to promote the country as a tourist destination have yielded the desired positive results by creating huge revenues in foreign income.
Although the efforts to ensure diversification of the economy have dragged and taken long to realize, there is a steady rise in development of reducing the reliance on oil sales by improving the private segment as well as other industries. This paper seeks to assess the plans, progress as well as the limiting factors to the efforts in achieving economic diversification and shield the country from future falling oil prices or exhaustion of reserves.
The need for diversification
Qatar, unlike her oil-producing neighbors, does not share the problem of over-population and unemployment of its citizens. For years, the comfort the nation enjoyed justified the reluctance to explore other large-scale industrial methods of creating income (David Held and Kristian Ulrichsen, 23). The demand for petrochemicals worldwide gave the country the relevance as a constant partner in the oil business. In this incident, there was no need to invest in other sectors of the economy as they benefited directly from the low gas prices locally. However, studies revealed that the oil reserves are limited and would not serve the country indefinitely. Experts estimated only 30 years of constant availability at the current rate of production according to the International Business Publications report (2007).
The realization that total dependence on petrochemical is risky led to the government's decision to explore other options as revenue sources to sustain the economy. This initiative is geared towards protecting the countries economy from yielding to pressure from a drop in oil places. It is extremely important to shield the economy by providing another revenue source.
Towards economic diversification
Government incentives
The Qatar National Vision 2030 speculates details in achieving diversification and attain ultimate development. It focuses on knowledge-based economy for the private investors. In order to enable an economy built on financial knowledge, the document proposes extensive research and consultancy as the main method of obtaining relevant information to ensure success in businesses (Diop, Marotta & Melo, 12). The consultancy and technical advice is free for the locals who intend to establish small and medium-sized companies.
According to Ministry of Economy and Finance of Qatar, the government policy to exempt tax returns for small and average sized classified businesses is intended to encourage and fuel the growth and development of the private sector. Both income and equipment are tax-free and, therefore, cheap. Moreover, local investors benefit from the fee services of both technical and consultancy. The Qatar Chamber of Commerce is responsible for regulating and managing this initiative.
In the effort to stabilize the private sector, the government went ahead to increase funding for the Qatar Development Bank (QDB). In 2008, the government (also the owner of QDB) raised its capital by an extremely great margin: from 200million (in Qatar currency) to a 10 billion. This funding in turn avails funds through loans to the public. The Central Bank of Qatar later successfully reduced its deposit rates in accordance to the Unite States of America policy rates standards. This measure ensured the elimination of short-term arbitrage funds that were unnecessary. According to the International Monetary Fund, (IMF) 2012 report, the Qatar banking sector retains its strength and profitability. It had a capital adequacy ratio of 22% by the end of 2011.
In order to facilitate governments programs and projects in the effort to ensure diversification, the government has established an efficient infrastructure. The effective design of the programs in the country are protected by a transparent legal system that is reliable. As a consequence, the efficient infrastructure has succeeded in attracting massive foreign investment. Although foreign investors concentrate on small and medium-sized companies, the collective contribution earns the state of Qatar the foreign income it desires.
Education City is a government initiative to achieve a literate population by the year 2030. Directing funds to the education sector is the method used to avail and equip schools for the Qatar's young population. Concentrating on the welfare of the young generation is a crucial step in securing the future stabilization of the country. The government altered the budget allocation to increase funds that will support the education sector.
The government's vision2030 did not ignore the health sector. Sidra Medical and Research Center is among the several initiatives to ensure complete control of public health. Extra funding intended for research and availability for health services across the country is crucial to minimizing hospital costs intended for treatment.
The Qatar Investment Authority (QIA) concentrates on international business relations. It has invested in a wide range of businesses across the globe in each continent where it finds appropriate and promising. The Qatar Investment Authority is the main wealth funder accountable for all the major projects intended to diversify Qatar's economy.
In exposing the country as a tourist destination, the government has utilized numerous options to promote the country as widely as possible. Promotion techniques include staging crucial world business conferences to expose and sell the available services. The country also stages high-profile world sporting events that attract fans from around the globe to view and acquit with Qatar.
The Qatar Science and Technology Park (QSTP) was established to provide a place of interaction with world technology-based companies. Local scientists, young aspiring entrepreneurs and technological companies can learn and interact with the world's best to get the exposure and networks necessary to improve their businesses. The Qatar Science and Technology Park (QSTP) focuses on research of latest developments and advancement of technology to create opportunities for both experienced scientists and young amateur entrepreneurs. The opportunities to explore their talents and projects in collaboration with international companies with high-profile reputations not only minimizes unemployment but also provides advancement in technology in the country.
Factors affecting the diversification in Qatar
Consistent with the International Monetary Fund report of 2012, the expected inflationary effect was 1%. The major contributor to a potential inflation was the non-tradable sector as well the over-investment in the real estate business. The excess supply and availability of real estates depressed the rent rates. It is evident that domestic factors contributed to inflation. However, this is a short-term challenge that can easily be solved either directly or by indirectly by other factors.
The monetary also revealed the challenge in the government's efforts to support credit growth without causing the pressure that leads to inflation. The rapid and consistent growth in the private sector especially in real estate increases the demand for credit. Without proper analyzes and policies to regulate the flow of credit, the QDB's efforts in availing credit to the investors might lead to a weak currency and quality.
Regulatory gaps
In order to effectively and efficiently manage and regulate the banking system, the Qatar Central Bank needs to distinguish and define separately the role and functions of the Islamic Banking from the conventional banks. Activities in these two systems cause conflict as different rules and policies govern them.
The government of Qatar is dedicated towards a viable and self-sufficient manufacturing industrial system. In its Vision 2030 plan, concentrating on industries is the main factor in ensuring the achievement of a reliable, stable and consistent growth in the economy. With enough to share (due to the huge revenue from oil sales since the 1970s), the government has opted to invest in developing an adequate industrial infrastructure and empower the private sector to self-sustainability. The process is, however, slow especially owing to the fact that the population is comfortable and does not realize the need for finding other sources of income when the traditional oil manufacturing industry is still successful and reliable.
The government Monetary policy is challenging. After years of successful credit availability, the private sector has rapidly grown to an extent that requires regulation and limiting. Most investors have concentrated on the real estate businesses causing harm to rent rates. The banks need to change their strategy in order to maintain the course and plan of the Qatar vision2030.
David Held, Kristian Ulrichsen. (2010)The Transformation of the Gulf: Politics, Economics, and the Global Order
Diop, N., Marotta, D., & De Melo, J. (2012). Natural resource abundance, growth and diversification in MENA: the effects of natural resources and the role of policies. Washington, DC, World Bank.
International Business Publications, USA. (2012). Qatar Investment and Business Guide Strategic and Practical Information. Intl Business Pubns USA.
International Financial Statistics Yearbook. (2012) Washing D.C., International Monetary Fund.
Ministry of Economy and Finance of Qatar, Industrial Survey, 2010. (Doha)
Oxford Business Group. (2007). The Report: Emerging Qatar 2007. London, Oxford Business Group.
Qatar Monetary Agency, Annual Report (Doha, 2013), p.20
Qatar–2011 Article IV Consultation Concluding Statement of the IMF Mission,. December 1, 2011
(2008)Report: Qatar 2008. [S.l.], Oxford Business Group.
(2012). Qatar Mineral & Mining Sector Investment and Business Guide. [s.l.], International Business Publications.

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