Expenditure growth to surge under Qatar's FY 2008-09 fiscal plan

Global Insight Perspective

Significance
Qatar unveiled its budgetary projections for the upcoming fiscal year, which runs April through March.

The FY 2008-09 budget is projected to generate another huge surplus of QR7.4bn ($2.0bn), up from last year's budget of QR6.7bn.

Implications
Expenditures are expected to climb to QR95.9bn under the plan for the current fiscal year, up from the QR65.7bn budgeted in FY 2007-08.

Nearly two thirds of overall spending will be channelled into infrastructure, education, and health and social services projects.

The budget surplus will remain supported by strong revenue growth, which is projected to jump a whopping QR103.3bn.

Outlook
With its FY 2008-09 budget, the Qatari government looks to push ahead with its ambitious development plans, despite widespread signs of overheating.

Projects are now faced with sharply higher input costs, as well as labour and equipment shortages, which have resulted in cost overruns and delays. The overheating situation is therefore likely to become more severe in the near term.

On 31 March, the Qatari emir, Sheikh Hamad bin Khalifa al-Thani, formally endorsed the fiscal year (FY) 2008-09 budget.

The package will cover the fiscal year running April 2008-March 2009, and is the largest budget plan to date.

Qatar is projected to generate another huge surplus of QR7.4bn ($2.0bn) in FY 2008-09, up from last year's budget of QR6.7bn.

To be sure, the fiscal balance remains supported by the country's huge revenue windfalls derived from the rising energy exports and the high global oil prices.

Although the government again factored in a conservative oil price forecast of $55 per barrel in the budget, this was up from the $40/barrel forecast used in the FY 2007-08 plan.

Government revenues are projected to increase 43%, to a whopping QR103.3bn during the current fiscal year.

Meanwhile, expenditures are expected to climb to QR95.9bn in FY 2008-09, up from the QR65.7bn budgeted a year earlier.

This represents a 46% surge in government spending. Nearly two thirds of overall spending will be channelled into infrastructure, education, and health and social services projects.

Infrastructure spending is projected to rise by a similar 46%, amounting to QR30.6bn.

Spending on education and health will also reach QR19.7bn and QR9.2bn respectively, under the plan.

Outlook and Implications

The Qatari government seems determined to go ahead with its ambitious development projects despite widespread signs of overheating.

Such projects are now faced with sharply higher input costs, as well as labour and equipment shortages, which will likely result in cost overruns and delays.

The surge in fiscal spending will further exacerbate the situation, leading to more severe overheating in the near term.

Populist policy measures such as salary increases, subsidies, and rent controls aimed at easing the households' inflation-spurred hardships are also likely to aggravate the problem further by stimulating demand.

While these measures might be politically expedient in the short term, they fail to address the root causes of the overheating and surging inflation, namely domestic demand outrunning supply.

In Global Insight's view, Qatar will sooner or later have to moderate its fiscal spending and constrain liquidity growth to curb inflationary pressures and avoid economic instability.