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Public Information Notice (PIN) No. 03/126
October 22, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Oman

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On October 6, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Oman.1

Background

Oman's macroeconomic performance remained strong in 2002—a trend that is expected to continue in the current year. Real nonhydrocarbon GDP growth accelerated to 6 percent, underpinned by rising public consumption and investment, though aggregate real GDP grew by only 2 percent, as oil output (including condensates) fell by 6.2 percent, mostly owing to aging oil fields. In line with declining import prices, the consumer price index fell by about 1 percent in 2002—the third consecutive year of a small negative change.

The overall fiscal and external current accounts recorded surpluses last year, as has been the case since 1999-2000. Liquefied natural gas (LNG) export receipts reached close to $1.2 billion in 2002 (equivalent to 15 percent of crude oil exports), with output of about 6.5 million tons—up from 2.2 million tons in 2000, the first year of exports. As a result, total exports have remained stable at some $11.3 billion since then, despite the fluctuation in oil prices and, more recently, the fall in oil production. After a sharp deterioration in nominal terms caused by higher government spending, particularly in 2000, the nonhydrocarbon fiscal deficit (excluding hydrocarbon revenue and oil-related capital spending) remained stable at about RO 2 billion in 2002, with the wage bill and defense accounting for a large part of the increase in spending in the past years.

The government has devoted budgetary surpluses since 1999 to accumulating foreign assets and to lowering debt, which declined from 32.3 percent of GDP in 1998 to 16.0 percent by 2002. The repayment of domestic debt contributed to a fall in the banking system's net domestic assets by 15 percent at end-2002 from a year earlier. As a result, broad money growth decelerated, even though net foreign assets of both the Central Bank of Oman and commercial banks increased sharply.

Commercial banks' performance improved significantly in 2002. After four consecutive years of a decline, profits recovered last year—with this trend continuing into early 2003. This improvement was brought in part by the sharp slowdown in the increase of the ratio of nonperforming loans to total credit of commercial banks, owing to tightened central bank regulations to reduce banks' exposure to a single borrower, and a more cautious approach to private sector credit taken by commercial banks. At the same time, higher banks' profits have contributed to a strengthening in market sentiment since last year, with the Muscat Securities Market index—in which financial sector shares weigh heavily—rising by almost 50 percent from end-2001 to end-June 2003, after several years of negative or low growth. Meanwhile, progress has been also made since the late 1990s in accelerating the adoption of structural reforms to support the government's diversification strategy. In the past year, these reforms have mainly focused on broadening the privatization program, encouraging foreign direct investment, and accelerating the Omanization of the labor force by modernizing the educational and training system and establishing quantitative medium-term targets through a participatory approach with the private sector.

Executive Board Assessment

Executive Directors noted that Oman's macroeconomic performance has been strong over the past few years, as a result of sound policies, relatively high crude oil prices, rising government consumption and investment, the LNG development, and an improved business climate. While crude oil output declined, growth in the nonhydrocarbon sector has remained robust, and the fiscal and external current account balances have recorded surpluses. In addition, the government has reduced its debt significantly and accumulated foreign assets.

Directors considered that Oman's medium-term growth prospects remain favorable, underpinned by higher public and private investment in gas-based industries, infrastructure, and tourism, as well as further expansion in LNG production and exports. However, the fiscal position could deteriorate as a result of lower crude oil prices, a slow recovery in crude oil output, and increased oil-related government investment. Directors therefore agreed that the key priorities for the medium term are to maintain a strong fiscal position and to continue to pursue efforts aimed at increasing employment opportunities for a rapidly growing local labor force, improving the business environment, and diversifying the economy.

Regarding fiscal policy, Directors recommended that the authorities consider adopting, in the short run, excise taxes on luxury goods and services, and a simple property tax to replace the current scheme of taxation of rental agreements. Over the medium term, and in coordination with other GCC countries, the adoption of a broad-based value-added tax on imports and locally produced goods and services should be considered together with the introduction of personal income taxes. Directors also recommended restraining the growth of the wage bill and outlays on goods and services, keeping subsidies constant in nominal terms, and cutting defense spending in line with objectives set out in the authorities' current five-year development plan.

Directors welcomed the authorities' decision to cast fiscal policy in a medium-term framework based on prudent oil price projections. This approach should help assess periodically the sustainability of the fiscal stance, focusing on developments in the nonhydrocarbon fiscal balance. It should also ensure intergenerational economic equity, and facilitate Oman's fiscal convergence vis-à-vis other GCC countries on the road toward the creation of the monetary union. Some Directors suggested that the medium-term framework could be complemented with fiscal rules, such as limits on the nonhydrocarbon fiscal deficit. Directors welcomed efforts underway to restore the financial health of the civil service employee pension fund, including through its possible recapitalization, and encouraged the authorities to consolidate the several government pension funds as soon as possible.

Directors endorsed the long-standing exchange rate peg of the rial Omani to the U.S. dollar, which has helped preserve price stability and external competitiveness. They observed that continued adherence to the peg would require maintaining a strong fiscal position, supported by a sound financial system and structural reforms aimed at enhancing the economy's productivity and competitiveness.

Directors noted that Oman's financial sector appears strong, and commended the Central Bank of Oman's compliance with international standards. They indicated that the financial sector could be further strengthened in line with the recommendations of the recent FSAP exercise, and welcomed the authorities' prompt action in moving to implement these recommendations. Directors encouraged continued efforts to improve credit assessment, risk-based supervision and the regulatory framework for the securities, insurance, and pension sectors. In addition, Directors urged the authorities to regularly re-assess the economic efficiency of government programs to support small- and medium-sized enterprises and to work closely with commercial banks to gradually transfer to them the responsibility of assessing and financing projects of these enterprises. Directors commended the authorities' efforts in continuing to strengthen Oman's anti-money laundering regime and its stance against the financing of terrorism, including through the legal framework.

Directors noted that ongoing structural reforms in the context of the development strategy—including the broadening of the privatization program—are steps in the right direction to address Oman's key medium term challenges. The authorities were encouraged to complete their review of the tax framework governing domestic and foreign businesses to further encourage foreign investment.

Directors also considered that long-term job creation should rely mainly on robust growth, human capital development, and wage flexibility. In this context, they commended the authorities for their strong emphasis on modernizing the education system and improving training in line with private sector requirements. Directors noted the use of medium-term employment quotas for Omani nationals in several sectors, and encouraged the authorities to continue to implement this policy with flexibility and pragmatism, taking into account labor market conditions, and to regularly assess the impact of these quotas on long-term job creation.

Directors commended the authorities for their efforts at improving data quality, transparency, and dissemination. In this context, they welcomed the decision to begin conducting surveys regularly to improve statistics on labor market and foreign investment. To improve fiscal transparency, the authorities were encouraged to publish a consolidated position of the general government accounts, including data on financial transactions of the State General Reserve Fund, the Oil Fund, and public sector pension funds. The publication of available information on Oman's external debt and international investment position would also be important.


Oman: Selected Economic Indicators, 1998-2002 1/


         

Prel.

 

1998

1999

2000

2001

2002


 

(Percent change; unless otherwise indicated)

Production and prices

         

Nominal GDP (RO millions)

5,416

6,041

7,639

7,668

7,804

Real GDP (percent change)

2.7

-0.2

5.5

9.3

2.3

Hydrocarbon GDP 2/

-0.1

-0.4

9.4

9.3

-2.5

Nonhydrocarbon GDP

4.4

-0.1

3.3

9.3

5.1

Crude oil production (000 barrels per day)

899

905

958

956

897

Liquefied natural gas (LNG) production

         

(million tons)

0.0

0.0

2.2

5.8

6.5

Consumer prices (Muscat)

-0.5

0.5

-1.2

-1.0

-0.7

           
 

(In percent of GDP; unless otherwise indicated)

Financial variables

         

Total revenue and grants

35.9

38.3

44.1

40.7

40.8

Of which: Oil revenue

23.4

28.3

36.6

31.9

29.9

Total expenditure

40.8

37.6

34.4

36.9

37.1

Of which: Current expenditure

33.0

30.4

27.8

28.8

29.6

Overall fiscal balance

-5.0

0.8

9.7

3.8

3.7

Excluding hydrocarbon revenue

         

and PDO investment (in RO millions)

-1,357

-1,491

-1,860

-2,018

-1,954

In percent of GDP

-25.1

-24.7

-24.4

-26.3

-25.0

Government debt

32.3

26.7

20.0

20.3

16.0

           
 

(In percent)

           

Change in broad money

4.8

6.4

6.0

9.2

5.2

Change in net foreign assets

-34.1

26.8

-6.7

-5.4

58.0

Change in net domestic assets

41.8

-2.6

13.4

16.2

-15.2

Change in claims on private sector

18.1

8.6

0.9

6.8

0.4

           
 

(In millions of U.S. dollars)

External sector

         

Exports

5,521

7,240

11,334

11,113

11,256

Of which

         

Crude oil

3,588

5,404

8,742

7,578

7,497

LNG

0

0

480

1,203

1,154

Imports, f.o.b.

-5,215

-4,299

-4,593

-5,311

-5,633

Current account balance

-3,055

-228

3,523

2,211

2,026

In percent of GDP

-21.7

-1.5

17.7

11.1

10.0

           

Central bank reserves

2,007

2,836

2,448

2,446

3,173

In months of imports 3/

4.1

5.5

4.2

4.0

4.8

Total external debt 4/

5,662

5,919

5,939

5,395

4,515

(In percent of GDP)

40.2

37.7

29.9

27.1

22.2

Average real effective exchange

         

rate (percent change)

-0.1

-1.8

2.0

2.6

-4.0


Sources: Omani authorities; and IMF staff estimates.

1/ Official data available as of May 2003.

2/ Includes crude oil, refining, natural gas, and LNG production.

3/ Goods and services imports in following year.

4/ Includes foreign liabilities of commercial banks.


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.




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