|focus|

shape before, when oil prices were high, but that has not always been sustained. But this time things are different because energy prices are high. And we think it will continue to remain high. But more than that is the diversification issue. There is a strong need for the economy to diversify. And we believe they are on the right track. Demographics. It has a young population (though Qataris are still a small percentage of the population) and that is again linked to the first D. To create employment opportunities is a big issue. The energy sector is by its very nature capital intensive and Qatar needs to create a financial infrastructure that allows savings to be translated into not only increased consumption, but also into investment opportunities, outside the energy sector, in the service sector. This in turn will provide employment opportunities. And then there is the Dollar. It is a key point, as the link to the dollar means that the interest rates are too low for the good of the domestic economy. Which unfortunately is leading to inflation, as seen in stock market, asset prices... The link to the dollar is a prelude to the need and likelihood of Qatar deepening and broadening its financial infrastructure. There is a need for greater monetary instruments, a need at some stage for a yield curve. This is very important for allowing companies to raise funds and banks and other lenders to price their risk. It is crucial for allowing young entrepreneurs, young Qataris, to go out and raise funds, from the wider capital market, and allow them to link into the other two Ds Diversification and Demographics (generating jobs). We are positive about Qatar, and it is not only because of the economic growth, but also the social and cul-

Time for Taxation?

By Vani SaraSwathi

rom the proposed GCC monetary union and Qatars hydrocarbon budget deficit to diversification and an open finance sector, Standard Chartered Bank Chief Economist and Group Head of Global Research, Dr Gerard Lyons gives his take on the outlook for Qatar and the Gulf. In an interview to Qatar Today, Dr Lyons stressed that while the overall outlook was indeed positive, there were areas that need to be developed quickly. An expert on the world economy, international financial systems, mac48 Qatar Today MARCH 2006

ro-economic policies and global markets, he is a highly regarded international economist with an excellent forecasting record. Dr Lyons was invited to Doha to speak on the global economic outlook and share his views on the Middle East markets, and Qatar in particular. What is your outlook for Qatar, both immediate and future? We are very positive about Qatar. The best way to look at Qatar is as the three Ds Diversification, Demographics and the Dollar. Diversification. The economy is in great shape. It has been in great

|focus|
tural aspects. It is no good just having a strong economy, it is about having a strong economy with the right social mix, allowing Qatar to have its own cultural identity. What are the concerns? The gas sector is obviously very attractive, when you look at Russia, Iran and Qatar, the three big gas producers. But there is a strong case to have the infrastructure in place now, to allow the service sector to develop. You need to generate the jobs. You want an entrepreneurial county. The challenge is also if the infrastructure, including the financial sector, is developing quickly enough. The non-hydrocarbon budget deficit is high, this has to be addressed. There is a case for considering a taxation regime for the country in the future. We live in a very competitive global environment, and there is a strong case to keep taxes down. But you want to have something that is cyclical when the economy is booming too much, you want to do something that takes the heat out of it. I think capital gains tax should be considered, where some of the money can be used to develop public infrastructure. And at some stage Value Added Tax (VAT) would be a positive development. But keeping Income Tax and tax on the Corporate sector low is essential. Do you think Qatar has opened up its financial sector quickly enough? The QCB is doing things to regulate the banking sector and providing the right infrastructure. But timing is the issue. People in financial markets expect everything to happen yesterday. But reality is that when you are looking at things from the Central Bank perspective, and not just in Qatar, it is different. Other economies have moved on, but even the most developed countries have only deregulated their financial sectors in recent decades. And the lesson in deregulating the sector is to do at a speed that best suits your domestic economy. And therefore it is important to sequence it and do it in steps. There is no doubt that there is a need to diversify, a need to create instruments in which Qataris and others can invest, and there is a need to have greater investment opportunities for people to put money elsewhere than the stock and property markets. And this goes hand-in-hand with the need to have a more entrepreneurial and service sector economy. Has enough been done to meet project finance needs? It is a regional need, not just in Qatar. Dubai in some respects is ahead of the game in diversification. But project finance is a need in the entire region. The GCC is moving towards a single monetary unit. What effect will it have on the stronger economies here, and the ones that are not so strong? I am not convinced by the timing of the single currency. You have to remember that I am from the UK and we tend to think that single currency is strange! It comes back to the dollar environment. When you have a single currency, you are still pegged to the dollar... It would make sense to tie the single currency not to the dollar but to a basket. That will give more flexibility in rates. In Europe, it is one size fits all (or one size doesnt fit all) or forced to at least. Economies are not the same as one another, and when you have a single monetary policy, it becomes difficult to manage the economies. What you therefore need to have is other flexibilities, other shock absorbers. Fiscal policy needs to be the shock absorber; flexible labour market as well, as a shock absorber. Take the US they have one currency, one political system (which some say is a pre-requisite) and the richer states subsidise the poorer states. That comes back to your question... How the underperformers will handle the single currency; they will need some internal fiscal mechanism. So should the individual currencies shift to a basket before unification? My own view is that it would make more sense to have floating currency. Then interest rates could be set to meet domestic needs. But we are not starting from that proposition. That should have been done a few years ago, and the currency could have appreciated and interest rates could have gone up. Then you would have had the benefit without the inflationary side effects. That did not happen, and we are starting from where we are now. So probably not the right time to change the link to the dollar. Given that the interest rates are too low for the economys needs, other measures need to be taken controls in lending to certain sectors. Which I believe the QCB is trying to do lending to the property sector and things like that. You need to use other measures to try and control things. What about Geo-Politics and Investor confidence in the region? It is interesting, if you are sitting here and worrying about Geo-Politics. But if you look at it globally, markets are not pricing for risk anyway US, Asia, Europe... It is a global phenomena that there isnt sufficient pricing for risk. I dont think people are deterred from investing here due to Geo-Politics. It is just the general trend n
MARCH 2006 Qatar Today 49