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The Qatar guide to surviving an economic boycott

March 23, 2018 at 4:03 pm

Qatar has weathered the worst of the Gulf’s economic boycott, the International Monetary Fund (IMF) announced earlier this month, the latest in a series of reports that has seemingly shattered the dreams of its neighbours. Nine months after Saudi Arabia, Bahrain, Egypt and the UAE cut all diplomatic and financial ties with the tiny Gulf state, the global financial institution praised Qatar’s efforts at repelling economic turmoil.

“The direct economic and financial impact of the diplomatic rift between Qatar and some countries in the region is fading. While economic activity was affected, this has been mostly transitory and new trade routes were quickly established,” IMF staff concluded in a mission statement.

Qatar’s economy is expected to have grown 2.1 per cent in 2017, only slightly down from the previous year, with a renewed rate of 2.6 per cent predicted for 2018. Doha’s endurance, a product of favourable circumstances and decisive action, has rightly been praised. Yet the relentless positive coverage of the situation has obscured the further measures which are needed to truly consolidate its economic infrastructure in the long term, and weather a blockade that shows no sign of ending.

Keeping up with trade

Usually the most severe impact any regional boycott can have is on trade. From the closure of trading routes to losing the closest importers and exporters, uncertainty can send the prices of basic goods spiralling and see investments withdrawn.

Qatar’s experience was no different, with the fallout of the boycott immediately apparent as trade plummeted by 40 per cent within the first month. Food prices were quickly affected, rising by 4.5 per cent in July, having only just declined two months previously. Forced to turn to agricultural imports from further away, the quality of food produce has seen a marked decrease, equally reducing consumer confidence.

Read: Qatar launches self-sufficiency plan amid Gulf rift

The tourism and real estate market were also hit hard by the blockade, as closed borders impeded travel from the nation’s closest neighbours; the number of visitors from the GCC fell by 70 per cent last summer. Qatar Airways was forced to reroute flights, with the chief executive admitting the company will likely post a loss for this year. Between June and the end of 2017 tourism receipts are estimated to have fallen by some $600 million. Meanwhile, the real estate price index fell by 11 per cent in 2017 following a cumulative increase of 53 per cent in the three previous years, reflecting low demand in uncertain times.

Qatar was largely fortunate as a result of its position as the world’s top exporter of liquefied natural gas; the blockade could not cut the country’s primary source of income. The government also moved quickly to recuperate its losses, looking to nearby Oman, who remained neutral in the conflict, and relocating its regional trans-shipment hub from Dubai to Oman’s Sohar port. Omani investors also intensified their activity in the Qatari market in search of new business opportunities; trade with Qatar is estimated to have risen by over 1,000 per cent in the January to September period last year, owing to a particular surge over the summer months.

Qatar also made moves to strengthen its regional allies beyond its Gulf counterparts. Turkey was quick to react to the blockade, sending some 200 cargo planes, 16 trucks and one ship of supplies within the first month to allow Qatar to meet its daily needs. Since then, the two countries have signed 15 new trade agreements, and have also extended the invitation to Iran, with the three nations signing a trade and transport deal in November that could reduce the cost of transiting of goods by some 80 per cent via Iranian land and sea routes. Incidentally, trade with Iran increased by 117 per cent in the seven months leading up to November, a number that is likely to grow.

Read: Qatar to supply Ukraine with liquefied natural gas

Qatar has also moved to show its openness to the rest of the world. Usage of its Hamad Port, just south of Doha, has also reduced shipping costs by a third, enabling greater trade with India and Pakistan, as well as the facilitation of a 15-year liquid gas contract with Bangladesh. With several deals signed with the US, UK, France and other European states, the country has actively shown itself as independent and open for business.

Strengthening fiscal policy

Qatar’s deficit improved significantly in 2017, estimated to having narrowed to about six per cent of gross domestic product, down from 9.2 per cent in 2016, as the government has attempted to strengthen its domestic finances to face the blockade. The decline has largely been attributed to substantial gains in hydrocarbon revenues, with the country expecting prices to rise in the coming year.

However, Qatar initially had to deal with sizeable capital outflows, amounting to an estimated $30 billion, as its Gulf neighbours chose not to roll over deposits. Doha was forced to inject about $38.5 billion of its foreign reserves in attempt to cushion the blow, but the IMF praised the resiliency of the banking sector, which has outlasted the initial deterioration and now reportedly needs no further central bank support.

Various spending reforms are also on the table for the coming year, including fees for the use of government services and new tax measures, particularly plans to introduce VAT.

In an attempt to promote private investment, the government also expects to award nearly $8 billion worth of contracts to the private sector, with the need to diversify the economy away from oil-based products becoming more obvious since the blockade. Despite the increased costs of planned manufacturing and construction needed for the 2022 World Cup, the country has significant potential, with the BMI Research group finding that the non-hydrocarbon sector will be a key driver of growth this year.

Read: Qatar asks US to investigate UAE bank for ‘financial warfare’

Active diplomacy

Doha has also been active on the diplomatic front to limit the impact of its regional isolation, with Finance Minister Ali Shareef Al-Emadi crediting the siege with forcing Qatar to reinforce its political ties abroad.

Despite US President Donald Trump initially expressing support for the blockade, the US has remained close with the Gulf state, with Ryan Gliha, the Chargé d’Affaires of the US Embassy in Qatar, proclaiming last month that relations have “never been stronger”.

A UK delegation to Doha also saw the Parliamentary Under-Secretary of State at the Department for International Trade, Mark Garnier, identify Qatar as an indispensable strategic partner in the future, promising British support in making the 2022 World Cup a success. The EU has echoed similar rhetoric, with European and Qatari representatives emphasising the strong historical and strategic ties, at a meeting last month.

Following the blockade, Qatar also re-established full diplomatic relations with Iran, returning its ambassador in August of last year. Ties had previously been cut following the storming of the Saudi embassy in Tehran last year, but Iran was quick to condemn the Arab quartet’s actions, provide Qatar with crucial food supplies and the two have since launched a joint chamber of commerce to facilitate greater interaction.

Read: Qatar and Kuwait sign cooperation agreement on tourism

Qatar’s Emir Sheikh Tamim Bin Hamad Al Thani is slated to meet Russian President Vladimir Putin this week, at a time when Doha is reportedly engaging in “advanced negotiations” with Moscow over the purchase of air missile defence systems. Government representatives have also met with delegations from India and Japan, looking to boost engagement in the private sector and emphasising Qatar as an emerging global business hub.

Is the worst yet to come?

It seems so far Qatar has managed to overcome the most potent difficulties posed by the boycott. In an ironic turn of events, evidence also suggests that the Saudis and Emiratis are suffering to a certain degree due to the boycott, having severed numerous profitable Qatari contracts. Dubai estate agents are fearful of the long term result on the city’s property markets; Qataris bought about $500 million worth of property in the Emirate in 2016 alone. The boycott has also caused the GCC union to suffer, impeding the free movement of goods and people. Pushing Qatar towards the region’s greatest rival Iran is also counterproductive to the Gulf’s objective. GCC states regularly point to the threat posed by Tehran and its desire to influence the region.

Yet the near constant positive coverage of Qatar’s response warrants some degree of scepticism. Whilst the country has made the best of a difficult situation, obstacles remain, with the IMF report noting that the ongoing rift continues to affect public and investor confidence. It’s clear that Qatar has tried to avoid such a situation, the continual coverage of the positive statements made by government ministers – but a failure to acknowledge the problems posed – can do more harm than good.

Qatar has survived the boycott thus far, but now needs to assess how it can prosper. The longer the crisis persists, the more damaging it will be for Qatar’s relationships with its neighbours economically, socially and politically. The country has made a good start, but with new challenges emerging, it must consider how best to navigate the continuing possibilities for disaster the blockade may pose.

Read: Qatar and UAE sign first agreement since blockade

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.