Public Information Notices
Oman and the IMF
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On October 2, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Oman.1
Despite lower global crude oil prices, Oman's macroeconomic performance remained positive in 2001, leading to an additional accumulation of resources into the State General Reserve Fund (SGRF). An increase in liquefied natural gas (LNG) exports by US$700 million to about US$1.2 billion partially offset lower crude oil revenue and higher imports of both consumer and capital goods, with the external current account surplus narrowing by 5.5 percentage points of GDP to about 12 percent. Though rising LNG and investment income revenue also partially offset lower oil government revenue, government spending (including net lending) grew by 2.8 percentage points of GDP in 2001, mainly reflecting higher defense and capital outlays. As a result, the central government's overall fiscal surplus narrowed to 4 percent of GDP, while the non-oil/LNG fiscal deficit (defined as non-oil/LNG revenue minus total spending and net lending) widened by 2 percentage points of GDP to close to 29 percent. Meanwhile, following the repayment of LNG and government debt, the external debt dropped below 30 percent of GDP at the end of 2001.
Economic activity continued its recovery during 2001 amid negative inflation. Real GDP growth is estimated to have increased to more than 7 percent underpinned by rising LNG export volumes. Non-hydrocarbon growth also accelerated to 7.5 percent from about 3 percent in 2000, mainly spurred by investment in new power plants and infrastructure and higher private consumption. In contrast, crude oil output remained flat, as the country-an independent oil producer-has supported an Organization for Petroleum Exporting Countries-led effort to stabilize oil prices since 2000. With Oman operating within a framework of an open trade regime and a pegged exchange rate fixed to the U. S. dollar, inflation remained negative in 2001, as a result of a further drop in import prices in U.S. dollars.
Last year, monetary developments showed a rapid rise in net domestic assets. After remaining flat in 2000, credit to the private sector grew by almost 7 percent by end-2001, mainly owing to higher lending to the manufacturing sector and for personal loans. Moreover, despite an overall fiscal surplus, for portfolio management purposes, the government borrowed domestically by issuing Treasury bills to take advantage of low domestic interest rates. The increase in both credit to the private sector and government contributed to an acceleration in broad money growth to about 9 percent, even though net foreign assets of the banking system declined by more than 5 percent. While central bank international reserves remained stable at about US$2.4 billion last year, equivalent to five months of imports of goods and services, commercial banks net foreign assets declined, as some banks liquidated foreign asset holdings to reduce their exposure in regional markets. Reflecting the decline in U.S. interest rates and excess domestic liquidity conditions, nominal interest rates on local currency deposits and loans fell further during 2001.
In 2001, banks remained well capitalized and provisioned, even though their net profit (after taxes and provisions) declined for the third consecutive year. The average capital adequacy ratio was about 16 percent, exceeding the 12 percent minimum required by the Central Bank of Oman (CBO). However, nonperforming loans rose to almost 11 percent of total loans, reflecting mainly the exposure of a large number of banks to one local business group that experienced difficulties, and in a few cases to other markets in the region. Also, the adoption of International Accounting Standard 39 (fair value accounting) led to stricter provisioning requirements, squeezing most banks' net profits further last year.
Structural reforms have continued to support Oman's development strategy that seeks to promote a balanced and sustainable growth across the country, and develop human resources and an efficient, competitive private sector. The power sector remains at the forefront of privatization efforts, with three plants currently under construction by foreign investors under a build-own-operate basis. The authorities have recently privatized the management of airport services. They have also taken important steps toward making the Omani economy more attractive to investors. These include lifting impediments in most sectors to foreign direct investment, streamlining business regulations, and adopting a one-stop investment center. Following Oman's accession to the World Trade Organization at end-2000, the liberalization of services is underway, and legislation has been revised to bring it in line with the provisions of the WTO agreement. A free trade zone around the Salalah container port has been launched to develop a regional distribution center. Moreover, improvements in corporate governance have continued to receive top priority to boost investors' confidence. Meanwhile, progress has been made to broaden the use of indirect monetary instruments, with the central bank of Oman reactivating the issuance of certificate of deposits (CDs), but direct controls on personal loans remain in effect.
The authorities have continued to rely on a mix of market-based measures, mandatory mechanisms, quotas, and supply side policies (such as education and training) to enhance the employability of Omani nationals. Emphasis is also been put on encouraging self-employment through domestic entrepreneurship, including through the provision of soft loans to young Omanis who want to start small businesses and training in partnership with the private sector.
Executive Board Assessment
Executive Directors commended the authorities for implementing sound economic policies and a balanced, export-oriented development strategy, which has started to show favorable trends in exports and government revenue, leading to an additional accumulation of resources into the SGRF. Oman's medium-term economic growth outlook remains positive, underpinned by rising liquefied natural gas exports and investment in new power plants and public infrastructure, as well as by ongoing efforts at encouraging foreign direct investment, streamlining business regulations, and improving corporate governance. The privatization of the power sector and liberalization of services in line with the country's commitment to the WTO should further contribute to enhancing growth prospects.
Directors were encouraged by the favorable fiscal performance in the face of lower oil revenues. They considered that maintaining a strong fiscal position will be important to support the development strategy. Directors saw scope for further revenue-enhancing measures and a re-orientation toward productive expenditures. Measures that would broaden the revenue base in the short run include an increase in subsidized water and electricity tariffs, the elimination of customs duty exemptions and tax holidays, and the introduction of a sales tax on luxury items. In the long run the authorities should aim at adopting a modern tax system based on a range of taxes on income and consumption, as part of a coordinated tax effort within the Cooperation Council of the Arab States of the Gulf. Directors welcomed the authorities' request for Fund technical assistance to help them prepare reforms in this area.
Directors encouraged the authorities to carry through their plan to improve the budget structure by reducing non-productive spending, such as defense, and re-directing expenditure toward social outlays, training, and education. They welcomed the efforts underway to consolidate the large number of government pension funds to improve efficiency. Directors considered that casting fiscal policy in a medium-term framework would help assess periodically the sustainability of the fiscal stance by focusing, in particular, on developments in the non-oil/LNG fiscal balance. Such a framework would also support the authorities' objective of accumulating resources into the SGRF to save for the future generations.
Directors noted that Oman's financial sector is sound and that banks are well capitalized and provisioned. In this connection, they commended the authorities for taking forceful actions to improve banks' asset quality. In the period ahead, commercial banks should reinforce their risk-credit assessment, and the central bank broadens the monitoring of private sector borrowing to include external sources. Directors welcomed the central bank of Oman's decision to issue its own certificates of deposit to enhance its capacity to implement a market-based monetary policy. They commended the authorities' actions to strengthen Oman's anti-money laundering regime and combat the financing of terrorism. Directors welcomed the authorities' decision to participate in the FSAP, which will help identify remaining weaknesses in the financial system.
Directors agreed that the peg of the rial Omani exchange rate to the U.S. dollar has contributed to keeping inflation low, maintaining competitiveness, and strengthening confidence. They stressed that a continued strong fiscal position and a sound banking system are essential to support this arrangement, while continued structural reforms and human capital development should further enhance the economy's competitiveness and flexibility.
On financial sector reforms, Directors saw scope for further steps to deepen financial intermediation. Some Directors recommended that the authorities consider steps to gradually lift the remaining limits on personal loans and related interest ceilings, but some others were convinced that these limits were useful for prudential reasons. To deepen the market for government securities, Directors encouraged the authorities to consider eliminating the current limit on bank holding of government bonds, securitizing the current government debt to banks, and relying on the issuance of government securities as the main source of budget financing, including for short-term cash flow requirements.
On labor market reforms, Directors noted the mix of market-based measures, mandatory mechanisms, and supply-side policies to increase job opportunities for Omani nationals in the private sector. They encouraged the authorities to continue to use mandatory mechanisms flexibly, and to rely mainly on improving education and training to match available jobs with skill requirements. Directors cautioned the authorities to target financial assistance to develop local entrepreneurship carefully to avoid waste.
Directors noted that Oman's statistics are satisfactory for surveillance purposes, and they welcomed its participation in the Fund's General Data Dissemination System, which will help further improve the quality of the country's statistics and enhance data availability. They encouraged the authorities to start compiling, if possible, and with technical assistance, if necessary, information on the international investment position of the non-bank private sector, as well as to publish available data on Oman's external debt. To enhance fiscal transparency, several Directors recommended publishing a consolidated position of the general government accounts and adopting internationally accepted classification of government spending.
1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 2, 2002 Executive Board discussion based on the staff report.
IMF EXTERNAL RELATIONS DEPARTMENT