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Oman and the IMF
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On June 10, 1998, the Executive Board concluded the Article IV consultation with Oman1.
During the past two decades since the first oil price shock Oman has achieved remarkable economic prosperity, supported by steady increases in petroleum output and exports and a growing participation of the private sector in the economy. Oman also enjoyed a high degree of price stability and strong non-oil growth averaging 6.7 percent during 1991–95, supported by an expansionary fiscal policy.
The Omani authorities embarked in 1996 on a comprehensive economic reform program in the context of the Fifth Five-Year Plan (FFYP) in order to reverse the trend of rising fiscal deficits that had entailed substantial drawdowns of foreign investments of the State General Reserve Fund (SGRF)—established to build up savings for the future generation—and a rising level of external borrowing. Hallmarks of the FFYP are to achieve high non-oil GDP growth through higher domestic savings and investment, and increased reliance on investment from domestic and foreign private sectors, while eliminating the official budget deficit (excluding SGRF operations) by the year 2000 through a substantial front-loaded reduction in current outlays.
During 1996–97, Oman achieved significant progress in reducing macroeconomic imbalances, particularly in the fiscal area. The fiscal deficit (excluding SGRF operations) was halved in 1996 to 4.4 percent of GDP and further reduced to an estimated 0.1 percent of GDP in 1997. Including SGRF operations, the fiscal position recorded a surplus of 3.6 percent of GDP and increased further to 5.3 percent of GDP in 1997. This outcome was to some extent due to higher oil export prices, particularly in 1996, but reflected mostly a significant compression of expenditures by a cumulative 6 percentage points to 37.8 percent of GDP in 1997. The reduction of expenditures was concentrated in current outlays, as more than 11,000 civil servants were retrenched, no general salary increase was granted, and defense expenditures were cut by 2 percent of GDP. In addition, following the completion of a number of projects in 1995, capital expenditures were reduced by more than 2 percent of GDP by delaying the execution of ongoing and new projects.
The withdrawal of the fiscal stimulus initially had a contractionary impact on non-oil real GDP growth which slowed to 3.1 percent in 1996. But, non-oil growth rebounded to 5.3 percent in 1997 reflecting a broad-based private sector-led expansion in construction, electricity and water, financial and business services, transport and communications, restaurants and hotels, and the agriculture and mining sectors, supported by the favorable impact of the LNG project.
The external current account balance improved to a modest surplus position in 1996, reflecting a terms of trade gain through higher oil prices and a tighter stance of fiscal policy. In 1997, the balance of payments was significantly affected by the start of the LNG project, resulting in an external current account deficit of 7 percent of GDP. However, excluding LNG project-related imports, the current account deficit was limited to 0.8 percent of GDP, supported by a strong rebound in non-hydrocarbon exports (17 percent). The overall balance of payments improved to a surplus of 4.4 percent of GDP, reflecting direct investments and loans associated with the LNG project, official drawings on external loans, and sizable private inflows.
Oman has a long tradition of prudent monetary management which established an enviable record of price stability (the consumer price index remained virtually unchanged during 1992–97). In 1997, however, the broad money supply grew by 24.5 percent—reflecting a strong growth of credit to the private sector on account of personal loans, which contributed to an unprecedented surge in the Muscat Stock Market Index (131 percent). The expansion of credit to the private sector and of broad money has started to decelerate in recent months.
Following the collapse of international oil prices, the Omani authorities moved swiftly in February/March 1998 to formulate a comprehensive package of fiscal measures (yielding 4.7–5.6 percent of GDP) that, if implemented fully, would contain the fiscal deficit to about 6 percent of GDP. The package includes both increases in the corporate income tax and higher excises on a number of goods, as well as across-the-board expenditure cuts of 5 percent compared with the budget authorizations.
Executive Board Assessment
Executive Directors commended the authorities for achieving strong economic growth and price stability supported by an expanding and dynamic private sector. Directors noted with satisfaction the virtual elimination during 1996-97 of the official budget deficit, the significant buildup of assets in the SGRF, and a sharp increase in private investment. Nevertheless, particularly in view of the sharp declines in the oil export price, Directors underscored the needfor strengthening the fiscal position to enhance Oman’s economic outlook over the medium term.
Directors noted that the authorities’ response to the oil price decline in the form of supplementary fiscal measures was timely and appropriate, and they stressed the importance of implementing firmly the 1998 supplemental fiscal package. Looking further ahead, Directors urged the authorities to consider a fiscal path aimed at achieving a balanced budget position by 2000-2001 and building-up the SGRF reserves. This would call for both expenditure containment and a mobilization of non-oil revenues to reduce over time the excessive dependence on oil revenue.
Directors noted that Oman’s prudent stance of monetary policy in recent years, together with the efficient financial regulation and supervision, have laid the foundation for a strong financial system and contributed to exchange rate and price stability. To protect those gains, Directors called on the authorities to contain the more recent rapid credit expansion to the private sector, which had contributed to an unsustainable surge in the Muscat Security Market index, and to refrain from administrative interventions in the security market in order to prevent a market correction. Directors also endorsed the authorities’ planned financial sector reforms aimed at broadening and deepening the market for treasury and government securities, and at implementing indirect monetary control mechanisms.
Directors commended the authorities for the positive initiatives undertaken in the real sector, which already have elicited a favorable private sector response and an increase in jobs. Further diversifying the economy would require removing the remaining bias against foreign investment and accelerating the privatization program. Directors considered that the effective implementation of the diversification strategy through real sector reforms and successful implementation of the gas-based projects would also help support the current exchange rate peg. In this regard, Directors welcomed the measures implemented to enhance labor market efficiency, and they encouraged the authorities to put more emphasis on improving Omani labor market productivity through spending on education and vocational training.
|Oman: Selected Economic Indicators|
|Change in real GDP||4.8||3.5||3.6|
|Change in real non-oil GDP 2/||4.8||3.1||5.3|
|Change in consumer prices (end of period) 3/||-1.1||0.3||-0.2|
|In millions of U.S. dollars 4/|
|Current account balance||-545||38||-1,098|
|Capital account balance||-88||-5||1,510|
|Central bank gross foreign assets||1,899||2,031||2,139|
|Current account balance (in percent of GDP)||-3.9||0.3||-7.0|
|Current account balance (excluding LNG-related imports; in percent of GDP)||...||0.3||-0.8|
|Change in real effective exchange rate (in percent)5/||-9.1||4.5||1.0|
|In percent of GDP 4/|
|Central government balance (excluding SGRF)||-8.8||-4.4||-0.1|
|Central government balance (including SGRF)||-4.0||3.6||5.3|
|Change in broad money (In percent of beginning broad money stock)||7.7||8.1||24.5|
|Interest rate (in percent) 6/||6.0||6.5||6.5|
1/ IMF staff estimates.
2/ Includes oil refining.
3/ Index for Muscat area.
4/ Unless otherwise noted.
5/ (+) = appreciation.
6/ Weighted average for Rial Omani time deposits.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT