DOHA: Qatar is going into deflation after witnessing steep rise in the cost of living in 2007 and 2008 especially, which put immense financial strains on people with limited income.

A major worry in a deflation-hit economy is that over the long-term salaries are usually reduced as things become cheaper.

A Bank of America Merrill Lynch analysis of GCC states said yesterday: “Qatar is the fastest growing country in the region, but a detail that everybody ignores is that it is also the only nation to have gone into deep deflation.”

Qatar’s consumer price index (CPI) has fallen seven percent with prices taking a beating in all sub-components of the CPI basket, said the analysis.

Deflation over the long term is as harmful to an economy as higher inflation, warned a financial expert The Peninsula talked to for comment.

On the likely impact of deflation on the Qatari economy, the expert, a reputed name, said not wanting to be identified that it could lead to reduction in salaries as companies fail to make enough money. State revenues are hit as tax collection goes down, and this automatically leads to a drastic drop in public spending on development projects, which is the main driver of growth in a country.

Deflation also leads to a decline in the prices of consumer goods with things continuing to become cheaper

“In an economy confronting deflation, the other major problem is that people’s purchasing power goes down,” said the expert.

However, a major worry in a deflation-hit economy is that over the long-term it could trigger unemployment.

The Bank of America Merrill Lynch report, meanwhile, added: “Our rational is simple. The healthy stream of hydrocarbon revenues does not filter into the non-oil economy, making Qatar an attractive bond rather than equity investment, in our view.”

“As we fail to see non-oil growth in this rich but small country, once the capital-intensive infrastructure projects mature, Qatar’s large savings are likely to look for opportunities abroad,” said the analysis.

Asked about the new taxation regulations Qatar has put in place for foreign companies, the financial expert quoted above said it bodes well for non-Qatari business entities here, both joint venture partners and 100 percent stakeholders in non-oil sectors, since the tax rate has been reduced to 10 percent.

But under the new tax regime, foreign companies in the oil and gas sector, which is the mainstay of Qatar’s economy, will continue to pay taxes at the rate of 35 percent, said the expert.

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