Public Information Notice No. 07/35

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Oman

March 20, 2007

On January 31, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Oman.¹

Background

Oman's economic performance in 2005 was strong, with real GDP growing at 5.7 percent and inflation kept low at 2 percent. Macroeconomic performance remained favorable in 2006, spurred by high oil prices and rapid growth in the non-hydrocarbon sector. Ongoing infrastructure projects, buoyant consumption, and an increase in gas production are expected to have led to overall real GDP growth of about 6 percent, with inflation running at 3.5 percent. The external current account surplus is estimated at 14 percent of GDP in 2006, on account of high oil revenues, higher liquefied natural gas (LNG) exports, and a surge in non-oil exports. As a result, the foreign exchange reserves of the Central Bank of Oman (CBO) are projected to have reached $5.8 billion by year's end (4.3 months of prospective imports of goods and services).

The fiscal position remains comfortable. Strong oil prices are estimated to have resulted in an increase in fiscal revenues of about 20 percent in 2006, while expenditures, including social and infrastructure spending to support the authorities' diversification strategy, are expected to have grown by about 12 percent. As a result, the central government fiscal surplus is estimated to have increased to 15 percent of GDP in 2006, from 12 percent in 2005. Preliminary information indicates that this surplus has been used to reduce the public debt, which was already low, and to contribute to the State General Reserve Fund and other government funds and accounts.

Monetary conditions in Oman are characterized by ample liquidity, with broad money growing by 18 percent during the first nine months of 2006, notwithstanding a significant increase in the stock of certificates of deposit (CDs) placed by the CBO to mop up liquidity. Both the banking sector's balance sheet and banks' profits have increased substantially, with prudential indicators remaining strong. As in other Gulf Cooperation Council (GCC) markets, the Muscat Securities Market (MSM) index experienced a significant correction in the first half of 2006, partially reversing the 44 percent increase recorded in 2005, but by year's end, the index had risen 14.5 percent above the end-2005 value. Foreign participation in the market increased substantially in 2006 to about one-third of total investors.

Ongoing infrastructure projects and buoyant consumption should help maintain real GDP growth at about 6 percent in 2007. Inflation is likely to reach 4 percent. Although the fiscal position is projected to remain in surplus, expenditure would increase by about 20 percent. At the same time, broad money is projected to grow by 10 percent, with credit to finance private and public investments rising strongly. The external current account surplus is expected to decline in 2007, but with foreign direct investment rising, the foreign exchange reserves of the CBO are projected to increase to over 4½ months of prospective imports of goods and services by year's end.

Executive Board Assessment

Executive Directors commended the Omani authorities' outward-oriented development strategy and sound economic management, which have led to large fiscal surpluses, a stable financial system, a sizable accumulation of foreign reserves, and very little public debt. Progress is being made in diversifying the economy, and economic growth has been resilient despite declining oil production.

Directors supported the authorities' push toward economic diversification, in the current context of high oil and gas prices, as the appropriate response to the downward trend of oil production and the key to output and employment growth in the future. They welcomed efforts to spur productive investment in infrastructure and to reduce shortages of skilled labor. However, noting the large public investment program, Directors called for a prudent approach in view of uncertainty about future oil and gas prices and concerns about the economy's ability to absorb such large scale investment in a non-inflationary manner. Maintenance of macroeconomic stability will require prudent policies and selection of investment projects that are economically justified.

Against this background, Directors welcomed the authorities' commitment to keep public spending at levels consistent with the economy's absorptive capacity. They stressed the importance of achieving a sustainable non-hydrocarbon budget position through an expansion of the tax base and restraint on current spending. Directors also emphasized that the fiscal implications of the planned public private partnerships should be carefully assessed, and the financial risks properly defined and shared between public and private entities, to avoid unforeseen fiscal costs and to contain the fiscal impact. Directors supported the planned reform of the Civil Service Employees Pension Fund to ensure that it meets its ongoing obligations, and encouraged the authorities to gradually eliminate fuel subsidies.

To improve liquidity management, Directors advised the authorities to align the interest rate on central bank certificates of deposit more closely with the U.S. Federal Funds rate. They also called for closer coordination between the Ministry of Finance and the central bank on the government's projected cash requirements, and to step up efforts to develop an inter bank money market and a corporate bond market. In this regard, Directors supported the authorities' request for technical assistance regarding liquidity management and money market development, and their intention to continue strengthening the legal and regulatory framework for the capital market. They welcomed the ongoing implementation of the recommendations of the Financial Sector Assessment Program (FSAP), and the authorities' intention to request an FSAP update in 2008.

Directors considered that the pegged exchange rate arrangement provides a credible anchor for price stability and market confidence. They emphasized that Oman's external competitiveness will be enhanced through continued fiscal discipline, flexible labor markets, and accelerated structural reforms to improve productivity. Directors noted Oman's decision to withdraw from the GCC monetary union, based on considerations such as differences in economic structure, resource endowment, and non-hydrocarbon growth potential, and the authorities' desire to search for alternative convergence criteria that could accommodate these differences.

Directors were of the view that availability of appropriate skills is a key pre-requisite for successful economic diversification. They therefore endorsed the authorities' emphasis on education and training, and welcomed the flexible implementation of the Omanization policy.

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.