IMF Executive Board Concludes 2010 Article IV Consultation with Oman

Public Information Notice (PIN) No. 11/44
April 1, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 23, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Oman.1


Oman was well prepared to confront the global financial crisis. This was the consequence of prudent macroeconomic management of oil wealth, appropriate regulatory and supervisory policies, and implementation of structural reforms to enhance non-hydrocarbon growth. Over the last decade the government strengthened its balance sheet by reducing public debt and accumulating savings while the central bank increased its gross foreign assets. Rigorous oversight of the financial sector has promoted prudent risk management, reinforced capital buffers, and enhanced banks’ resilience to macroeconomic shocks. The 2010 UN Human Development Report ranked Oman first in improving human development over the last four decades.

In 2009, strong hydrocarbon growth was offset by a decline in the non-hydrocarbon sectors, particularly wholesale and retail trade, resulting in headline growth of 1.1 percent. Growth rebounded in 2010, with a pickup in non-hydrocarbon growth supported by accommodative liquidity conditions; hydrocarbon and non-hydrocarbon GDP growth are estimated at 6.2 percent and 3.0 percent, respectively. Inflation is estimated at about 3½ percent in 2009 and 2010, driven largely by higher prices for imported food. The fiscal balance is estimated to have improved significantly—from a deficit of 1.2 percent of GDP in 2009 to a surplus of 6.2 percent in 2010. This turnaround is largely attributable to increased oil prices and oil output while nominal expenditures were broadly constant. Similarly, the external current account shifted from a deficit of 0.6 percent of GDP in 2009 to a surplus of 11.4 percent in 2010.

The banking system has proved resilient and maintained profitability in the first nine months of 2010. Bank capitalization at 15 percent exceeds the new regulatory minimum of 12 percent that became effective at end-2010. NPLs remain low at 3.3 percent at end-June 2010. During the first nine months of 2010, banking system returns on assets and returns on equity were about 1.5 percent and 11.4 percent, respectively. Good performance is also attributable to the limited impact of the global crisis on the profitability of listed nonfinancial corporates.

Since the Board discussion took place, uncertainty in the region has increased, with possible implications for the medium-term outlook. Notwithstanding, the medium-term outlook is broadly positive, reflecting improvements in the external environment and strong public investment. Continued public investment should help non-hydrocarbon GDP growth move toward a medium-term rate of 6½ percent while inflation is projected to remain low.

Executive Board Assessment

Executive Directors noted that, owing to a track record of prudent macroeconomic management and a resilient financial sector, the economy has weathered the global crisis well, with growth starting to rebound. Directors observed that the main medium-term challenge is to achieve economic diversification through sustained reform efforts.

Directors encouraged the authorities to increase budget savings over the medium-term in light of the projected depletion of hydrocarbon reserves. They noted that such savings could come from increasing non-hydrocarbon revenues and targeting subsidies to the most vulnerable. Directors agreed that the productivity of public spending could be enhanced through regular reviews. In this context, they emphasized the importance of adopting a multi-year budgeting framework, underpinned by an appropriate fiscal rule, to help ensure sustainability.

Directors urged the central bank to stand ready to absorb the excess liquidity in the banking system, should bank risk aversion ease, as it could lead to overheating of the economy. They also stressed the importance of further developing macroprudential tools in a monetary policy environment constrained by the currency peg.

Directors encouraged the authorities to mitigate concentration risk in the banking system through the application of capital charges using Pillar II under the Basel II framework, and called for strict enforcement of single-borrower exposure limits. They also noted the importance of strengthening the central bank’s crisis resolution framework.

Directors recommended that the authorities intensify their efforts to develop the financial system. They considered that a calibrated removal of interest rate and quantitative ceilings on personal loans is an important factor for the development of financial markets. Directors also observed that a robust domestic debt market could provide the basis for long-term financing, with an active government bond market providing a benchmark from which to price rial-denominated corporate bonds.

Directors noted that strong and sustainable growth in the non-hydrocarbon sector would be necessary to provide employment for the rapidly growing population. They observed that diversification of the economy would depend on the effectiveness of reforms in education, stepped-up training, and measures to enhance productivity. Directors supported the authorities’ efforts to raise the quality of human capital and improve the business environment.

Directors considered the authorities’ decision to maintain the peg to the U.S. dollar as appropriate while encouraging the central bank to develop the technical and operational capacity to conduct a more independent monetary policy in the event that a switch to an alternative exchange rate regime becomes desirable. Directors commended the authorities for their progress in improving their AML/CFT framework, thus aligning it more closely with the Financial Action Task Force recommendations.

Oman: Selected Economic Indicators, 2006–10
          Est. 1/
  2006 2007 2008 2009 2010
  (Annual percentage change, unless otherwise indicated)

Production and Prices


Nominal GDP (in billions of U.S. dollars)

36.8 41.9 60.6 46.9 55.9

Real GDP

5.5 6.7 12.9 1.1 4.1

   Real hydrocarbon GDP 2/

-2.5 -3.6 6.8 4.9 6.2

   Real nonhydrocarbon GDP

11.3 13.1 16.1 -0.8 3.0

Consumer prices (average)

3.4 5.9 12.6 3.5 3.3
  (In percent of GDP, unless otherwise indicated)

Fiscal and Financial variables


Central Government revenue, of which:

48.9 47.5 46.4 40.2 41.5

   Hydrocarbon revenue

42.2 37.3 40.5 31.2 35.1

Central Government expenditure

35.1 36.5 32.6 41.4 35.3

Fiscal balance (deficit -)

13.8 11.1 13.8 -1.2 6.2

Change in broad money (in percent)

24.9 37.2 23.1 4.7 9.1

Interest rates (in percent) 3/

3.6 2.5 1.0 0.1 0.1
  (In billions of U.S. dollars, unless otherwise indicated)

External Sector


Exports of goods, of which:

21.6 24.7 37.7 27.7 36.0

   Oil and gas

17.5 18.7 28.7 18.1 23.8

Imports of goods, f.o.b.

9.9 14.3 20.7 16.1 18.4

Current account balance

5.7 2.5 5.0 -0.3 6.4

Current account (in percent of GDP)

15.4 5.9 8.3 -0.6 11.4

Central Bank gross reserves

5.0 9.5 11.4 12.2 13.7

Central Bank Gross Reserves (in months of next years imports of goods and services)

3.1 4.3 6.4 6.0 5.6

Real effective exchange rate (period average percent change) 4/

21.8 -2.1 3.3 5.1 -1.1

Sources: Omani authorities; and IMF staff estimates and projections.

1/ IMF staff estimate.

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

3/ Rial Omani overnight domestic inter-bank lending rate. Period Average. 2010 data through October.

4/ 2010 data through November.

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. An explanation of any qualifiers used in summings up can be found here:


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