Inflation will continue to plague the country in years to come. But in a bad news-good news equation, it will not necessarily double or treble over the coming few years, according to Dr William T Wilson, International Bank of Qatar (IBQ) Head of Economic Research.
Inflation has been spurred by a five-fold increase in energy prices starting from 2002-2003. The rise in energy prices is a factor which has caused inflation which won't go away soon. The fiscal stimulus will remain for years to come as well. "It is worth noting how quickly inflation has ramped up from early 2003, in a relatively short period of time," said Wilson.
The omens are not good as a country with a 15 percent inflation rate or thereabouts — such as Qatar — will see its currency fall in value by 50 percent in five years' time. Central banks in the region should take "draconian" steps to counter inflationary pressures. Snapping ties with the US dollar will not be the only solution but, Wilson said: "You don't want to link monetary policy to a country which is growing at one-third the rate you are. It is not the dollar peg itself, but being forced to replicate the US' monetary policy that creates a problem."
Perhaps adding to the confusion of Gulf states is the dollar which has been the dominant reserve currency for a long time and will continue to be so for a number of years. "The GCC has $2tn in dollar-denominated assets and a slide in value of 10 percent means a loss of $200m," said Wilson.
Investments made by Sovereign Wealth Funds (SWFs) are for the long-term and money is ploughed into projects and entities overseas, not for quick gains but for the benefit of future generations, he said. "These are not quarter-to-quarter investments but for generations that have not even been born yet. You want a decent portfolio of assets and equities outperform fixed-income securities."
That Qatar is a country with spiraling economic growth is not to be denied which has meant the setting up of entities like the Qatar Financial Centre (QFC) and the substantial investment made by NYSE Euronext for a 25 percent holding in the Doha Securities Market (DSM) indicates the country is going places. "NYSE wants a big footprint in the Middle East. And this year, the GCC economy as a whole exceeds $1tn. The region is getting scale," said Wilson.
While Qatar is jockeying for position to emerge as the financial centre of choice competing against the likes of Dubai and Bahrain, Wilson said there is enough space for all three. "It is like the San Francisco Forty-Niner Gold Rush. Everyone wants to be here. And financial services will probably be the largest source of growth," said the expert.
But with relatively low salaries in several sectors and the soaring cost of real estate and accommodation, people have been wary of coming to the region. Salaries in countries of the Indian subcontinent, for instance, are rising rapidly and many corporates have been offering across-the-board pay hikes every year.
However, Wilson predicted the influx of manpower will continue. "You may be surprised to see how high salaries for an ordinary worker will be in three years' time," he said.
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