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Qatar is using its fiscal space, generated from an increase in hydrocarbon production and high prices, to implement a large public spending program to maintain strong growth in the non-hydrocarbon sector in the medium term and improving living standards. Headline inflation remains subdued, but inflation risks have risen somewhat due to a permanent increase in public sector wages, which underscores the need for fiscal policy to monitor aggregate demand and the central bank to manage liquidity. The banking sector remains profitable and strong with a capital adequacy ratio of 22.3 percent, average return on assets of 2.7 percent, and non-performing loans ratio of 2.3 percent at end-June 2011. The non-financial corporations are also in an expansionary phase–profits are at pre-crisis levels, cash is abundant, default rates are low, and financing conditions remain easy. The central bank should monitor its growth and stand ready to use macro prudential instruments to prevent the building up of excessive risks. Closing regulatory gaps in the financial system and continuing with efforts to develop the domestic bond market are needed to further strengthen financial stability while developing the financial system. Further improvements in statistics will be essential, which will also require greater coordination between sectors. A cap on remunerated deposits of QCB and successive reduction in policy deposit rates proved successful in driving out short-term arbitrage funds that were intermediated through the banking system. Issuance of government bonds and sukuk coinciding with the imposition of the cap on central bank deposits, and issuance of treasury bills in lieu of central bank certificates of deposit facilitated the mopping up of structural liquidity from the banking system over a longer period, while shifting the cost from the central bank’s balance sheet to the government.