## 1omnea2021001 - 2020. Overall and non-hydrocarbon GDP are estimated to have contracted by 2.8 percent,

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### Overview and 2020 outcome
- Overall real GDP contracted by -2.8 percent in 2020.
- Real nonhydrocarbon GDP contracted by -3.9 percent in 2020.
- Real hydrocarbon GDP contracted by -1.7 percent in 2020.
- Labor market adjustment was facilitated by temporary wage cuts and a reduction in expatriate employment (expatriate population reduced by 13 percent by end-March, y-o-y).
- Inflation (consumer prices, average) was -0.9 in 2020.
- Hardest-hit sectors: Construction; Hospitality; Wholesale and retail trade.
- Unemployment: overall stable and low, but high for female and young (15-24) workers.

### Outlook and macro projections (2021–26)
- Non-hydrocarbon GDP growth is projected at 1.5 percent in 2021 as vaccine rollout gradually restores domestic activity and external demand recovers.
- Oil production is projected to increase after the current OPEC+ agreement expires in April 2022.
- Real GDP growth projections:
  - 2021: 2.5
  - 2022: 2.9
  - 2023: 4.2
  - 2024: 2.9
  - 2025: 3.3
  - 2026: 2.6
- Real hydrocarbon GDP projections:
  - 2021: 3.5
  - 2022: 3.6
  - 2023: 6.0
  - 2024: 2.8
  - 2025: 3.3
  - 2026: 1.2
- Real nonhydrocarbon GDP projections:
  - 2021: 1.5
  - 2022: 2.3
  - 2023: 2.4
  - 2024: 3.0
  - 2025: 3.4
  - 2026: 4.0
- Consumer prices (average) projected:
  - 2021: 3.0
  - 2022: 2.7
  - 2023: 2.5
  - 2024: 2.5
  - 2025: 2.4
  - 2026: 2.4

### Fiscal developments, MTFP, and public debt
- Fiscal deficit widened to 19.3 percent of GDP in 2020, partly reflecting non-policy factors (notably the contraction in nominal GDP).
- Overall balance projections:
  - 2021: -2.4 percent of GDP
  - 2022: 0.9 percent of GDP
  - 2023: 1.4 percent of GDP
  - 2024: 1.8 percent of GDP
  - 2025: 1.8 percent of GDP
  - 2026: 2.3 percent of GDP
- Central government debt rose to 81.2 percent of GDP in 2020 and is expected to decline over the medium term:
  - 2021: 70.7 percent of GDP
  - 2022: 64.5 percent of GDP
  - 2023: 60.5 percent of GDP
  - 2024: 56.3 percent of GDP
  - 2025: 51.9 percent of GDP
  - 2026: 46.9 percent of GDP
- Total government external debt:
  - 2020: 60.2 percent of GDP; projected 51.0 in 2021, 43.0 in 2022, 37.7 in 2023, 32.4 in 2024, 27.9 in 2025, 26.4 in 2026.
- Non-hydrocarbon primary balance (percent of non-hydrocarbon GDP):
  - 2020: -47.8
  - 2021: -39.1
  - 2022: -36.1
  - 2023: -33.3
  - 2024: -30.8
  - 2025: -28.7
  - 2026: -26.7
- MTFP aims and measures:
  - Steadfast implementation of the Medium-Term Fiscal Balance Program (MTFP) to contain expenditure, reduce revenue dependency on hydrocarbon prices, and place debt on a firm downward path.
  - 2021 fiscal adjustment: 4.3 percent of GDP structural adjustment in the non-hydrocarbon primary balance, primarily from lower wage bill (mandatory retirement), reduction in water and electricity subsidies, introduction of VAT, and modest cuts in capital spending.
  - Targeted subsidy reforms: electricity and water tariff changes implemented January 2021; subsidies on non-vulnerable groups to be phased out by 2025.
  - Hydrocarbon capital expenditure (~7.2 percent of GDP) shifted from the budget to EDO; non-hydrocarbon capital expenditure to be prioritized and rationalized.
- Fiscal transparency and institutions:
  - Recommendation to expand fiscal coverage beyond the budgetary central government to capture the broader public sector (EDO and OIA oversight of SOEs).
  - Develop a sovereign asset and liability management (SALM) framework and strengthen the capacity of the debt management office.
  - Net financial assets ratio (central government debt less deposits at depository corporations and OIA’s liquid assets) declined to -33 percent of GDP in 2020 (-13 percent at end-2019). Projected net financial assets ratio following MTFP: -14.4 percent of GDP.

### External sector, reserves, and external debt
- Current account balance (in billions of U.S. dollars):
  - 2020: -8.7
  - 2021: -4.8
  - 2022: -1.4
  - 2023: -0.9
  - 2024: -0.7
  - 2025: -0.7
  - 2026: -0.6
- Current account balance (percent of GDP):
  - 2020: -13.7 percent of GDP
  - 2021: -6.2 percent of GDP
  - 2026: -0.6 percent of GDP (projection)
- Central Bank gross reserves (US$ billions):
  - 2020: 15.0
  - 2021: 15.8
  - 2022: 16.0
  - 2023: 16.4
  - 2024: 17.2
  - 2025: 18.1
  - 2026: 19.1
- Central Bank gross reserves in months of next year's imports of goods and services:
  - 2020: 6.3 months
  - 2021: 5.9 months
  - 2022–2026: 5.7, 5.6, 5.6, 5.6, 5.6 months respectively
- Total external debt (US$ billions and percent of GDP):
  - 2020: 72.7 (114.7 percent of GDP)
  - 2021: 78.6 (101.1 percent of GDP)
  - 2026: 79.9 (85.0 percent of GDP)
- Foreign assets and NIIP:
  - By end-2020, external assets stood at US$87.5 billion; external liabilities reached US$114.9 billion.
  - NIIP declined from -22.7 to -43.3 percent of GDP in 2020.

### Financial sector and credit conditions
- Private sector credit growth: slowed to 1 percent (y/y) in March 2021.
- Private sector deposit growth: 7.3 percent (y/y).
- Claims on government increased by 52.8 percent; claims on SOEs increased by 11.5 percent.
- Government deposits decreased by 7.2 percent; SOE deposits decreased by 11.8 percent.
- CBO policy rate and interbank rate fell sharply with no pass-through to deposit and lending rates.
- Banking sector buffers (end-March 2021):
  - Average capital adequacy ratio: 18.5 percent.
  - Liquidity Coverage Ratio: 199 percent.
- Non-performing loan (NPL) ratio: 4.2 percent (3.5 percent in 2019).
  - Loan loss provision coverage: 65 percent.
  - Provisions to NPLs: 100 percent.
- Deferred payments (loan moratoria) amounted to 6.2 percent of bank credit outstanding at end-March 2021.
- Banks’ profitability: ROA fell to 0.9 percent in 2020 (1.4 percent in 2019).
- Authorities’ stress tests indicate sufficient capital buffers to withstand severe scenarios (based on March 2021 data).

### Key risks, scenarios, and stress-test results
- Downside risks dominate:
  - COVID-19 variants prolonging the pandemic impact.
  - Tighter global financial conditions worsening fiscal and external positions.
  - Substantial decline in oil prices increasing gross financing needs and producing negative spillovers to the non-hydrocarbon sector.
  - Public debt vulnerability to shocks to oil markets, GDP growth, the exchange rate, primary balance, and interest rates.
- Oil price scenario assumptions (Annex note):
  - Downside oil price scenario assumes an oil price of US$33.1 in 2026 (one standard deviation below WEO oil price from 2022 to 2026).
  - Baseline oil price in 2026: US$55.7.
  - Upside oil price scenario assumes an oil price of US$78.2 in 2026 (one standard deviation above WEO oil price from 2022 to 2026).
- Stress test outcomes (selected):
  - Growth shock (1 standard deviation): increases central government debt to 63 percent of GDP by 2026.
  - Primary balance shock (deterioration by 5.7 percentage points of GDP): increases public debt to about 63 percent of GDP by 2026; GFNs increase substantially.
  - Interest rate shock: increases public debt to 68.4 percent of GDP by 2026; trajectory becomes explosive.
  - Combined macro-fiscal shock: central government debt and GFNs reach about 116 percent and 25.5 percent of GDP in 2026, respectively.
  - Contingent liability shock (10 percent of banks’ assets): gross debt of 91.6 percent of GDP and GFNs of 11.6 percent of GDP by 2026.

### Executive Board assessment and policy recommendations
- Directors commended swift and well-coordinated policy actions addressing health and economic effects of COVID-19.
- Macroeconomic policy stance:
  - Recommended that macroeconomic policies remain supportive until recovery is fully entrenched.
  - Prioritize mitigating the impact of COVID-19 until recovery is firmly underway.
  - Provide additional temporary and targeted support for affected sectors and households if needed, while preserving medium-term fiscal consolidation objectives.
  - Be vigilant about potential deterioration in asset quality and increasingly target support to distressed but viable borrowers.
- Fiscal policy recommendations:
  - Steadfast implementation of the MTFP to contain expenditure, reduce revenue dependency on hydrocarbon prices, and place debt on a firm downward path.
  - Sustain outreach to bolster public support for reforms and establish a clear fiscal anchor.
  - Strengthen public sector transparency and governance; expand fiscal coverage beyond budgetary central government; provide more detailed budget and debt data.
  - Develop a sovereign asset and liability management framework and strengthen the capacity of the debt management office.
- Monetary and financial policy recommendations:
  - Maintain the exchange rate peg as an appropriate policy anchor for Oman.
  - Continue vigilance to contain financial stability risks; manage the sovereign-bank nexus carefully to support banking system resilience.
  - Welcome AML/CFT mutual evaluation in 2021 and ongoing strengthening of the framework.
- Structural policy recommendations:
  - Improve labor market flexibility, promote private sector employment, increase female labor participation.
  - Strengthen the social safety net.
  - Accelerate SOE reforms to enhance competition and more efficiently manage public resources.

### COVID-19 policy response and vaccination status
- Fiscal measures amounted to 0.1 percent of GDP in 2020 and 0.5 percent of GDP in 2021, including interest-free emergency loans, waiving or reducing selected taxes and fees, tax installments, and the Job Security Fund.
- The Central Bank of Oman relaxed macroprudential requirements with potential utilization of 39.9 percent of GDP in 2020 and 28.5 percent of GDP in 2021.
- Economic Stimulus Plan (ESP) adopted in March 2021 to mitigate the new wave of COVID-19 cases and promote diversification through temporary tax cuts for selected sectors, support for SMEs, and measures to promote employment of nationals in the private sector.
- Vaccination status as of July 5: about 23.5 percent of the targeted population partially vaccinated and 6.6 percent fully vaccinated. Oman plans to immunize 70 percent of the population by end-2021.
- Updated vaccination progress as of August 8, 2021: About 58 percent of the targeted population have been fully or partially inoculated; a sultanate-wide campaign targets 320,000 students aged 12 and older.

### Sovereign asset and liability management (SALM) and institutional reforms
- Rationale:
  - Define sovereign balance sheet to include financial assets and liabilities and contingent liabilities; exclude present value of nonfinancial assets.
  - Align OIA inflow/outflow rules with the fiscal framework and non-hydrocarbon structural primary balance.
- Sovereign assets (selected figures):
  - OIA total assets (as of March 2021): US$42 billion, around 66 percent of GDP.
  - SGRF assets: about US$20 billion (about 31 percent of GDP).
  - PRF assets as of May 2021: 2.8 percent of GDP (approximately US$2.4 billion).
  - Government deposits with banks: 22 percent of GDP; government deposits with CBO average around 4 percent of GDP.
- Sovereign liabilities (selected figures):
  - External debt accounts for 75 percent of total debt; Eurobonds represent 55 percent of total external debt.
  - SOE debt (excluding Petroleum Development Oman) increased to 39 percent of GDP in March 2021.
  - Explicit government guarantees to SOEs amounted to 11 percent of GDP.
- Recommendations:
  - Establish a high-level SALM committee (MoF, CBO, OIA, EDO) and expand the Debt Management Committee’s mandate to cover sovereign assets and liabilities.
  - Publish regular reporting on sovereign assets and liabilities, and finalize medium-term debt strategy by end-2021.
  - Accelerate SOE reforms, publish audited financial statements, and adopt a Code of Governance for SOEs.

### Labor market, social safety nets, and structural reforms
- Labor market measures:
  - Simplified minimum wage to a single minimum wage of OMR 325/month.
  - Time-bound wage subsidy of OMR 200/month for first-time Omani jobseekers, initially expected to cover about 15,000 persons.
  - Hiring of 15,000 jobseekers in the public sector.
  - Transfer of expatriate employees allowed without employer “no-objection-certificate” effective January 2021.
  - Job Security Fund established November 2020; coverage period temporarily extended from six months to one year (Job Security Fund provides unemployment benefit for 12 consecutive or intermittent months).
- Labor market outcomes and priorities:
  - Current FLFP is 38 percent; Upside scenario assumes FLFP rises to about 50 percent over five years.
  - Scenario analysis: Under two upside scenarios, potential output will remain 4-7 percent higher than the baseline projection over the medium term.
  - Recommendations: promote private-sector employment for Omanis, encourage female labor participation (extend maternity benefits, provide childcare), improve vocational training and education efficiency, and adopt flexible expatriate labor policies with caution on fee increases.
- Social safety nets:
  - Authorities preparing comprehensive social safety net reforms with ILO and UNICEF support.

### COVID-19 policy support measures (selected from Annex I)
- Key household measures (budgetary impact 2021, OMR, millions):
  - Fuel subsidy card adjustment: Budgetary impact 2021: 30
  - Job Security Fund: Budgetary impact 2021: 20
  - Training job seekers: Budgetary impact 2021: 20
  - Exemption from repaying housing loans for eligible citizens: Budgetary impact 2021: 10
  - Exemption for Sanad and Mawareed Alriezq beneficiaries: Budgetary impact 2021: 3.9
  - Exemption of VAT on electricity & water for Omanis with <=2 accounts: Budgetary impact 2021: 13
  - Increase exempted food products from 93 to 488: Budgetary impact 2021: 27
- Key firm measures (budgetary impact 2021, OMR, millions):
  - SME income tax reduction impact: 2
  - Exemption of hotel establishments from income tax: 0.5
  - Deduction incentive: 1.5
  - Exemption from Tourism and Municipality Tax for tourism establishments: 7
  - Discounted land lease value: Size 4; Budgetary impact 2020: 4; Budgetary impact 2021: 4
  - Interest-free emergency loans: Size 19.26; Budgetary impact 2020: 19.26; Budgetary impact 2021: 0.215
- Central Bank measures (Size 2020 / Size 2021, OMR, millions where reported):
  - Reduced the repo rate and extended repo tenor: 1619 / 983 (as of March 2021)
  - Reduced FX swap rates and extended limits: 1013 / 130 (as of January 2021)
  - Regulatory relief to banks (e.g., reduced capital conservation buffer): 4200

### Staff appraisal: priorities and risks
- Priorities:
  - Support recovery until firmly entrenched while balancing fiscal vulnerabilities.
  - Steadfast implementation of the MTFP to put debt on a downward path and rebuild buffers.
  - Strengthen social safety nets, outreach, and stakeholder consultation to sustain public support for MTFP and reforms.
  - Establish a clear fiscal anchor robust to oil price and cyclical volatility and embed a floor on government net financial assets.
  - Expand fiscal risk analysis and contingency planning.
- Risks noted:
  - Prolonged pandemic, oil price volatility, and potential social pressures could derail MTFP implementation.
  - Loan deferral programs may mask financial sector vulnerabilities; balance support with financial stability is necessary.

*Source: OMAN STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (IMF staff report).*

### 2020. Overall and non-hydrocarbon GDP are estimated to have contracted by 2.8 percent,

### 1omnea2021001 - 2020. Overall and non-hydrocarbon GDP are estimated to have contracted by 2.8 percent,

### Overview and 2020 outcome
- Overall real GDP contracted by -2.8 percent in 2020.
- Real nonhydrocarbon GDP contracted by -3.9 percent in 2020.
- Real hydrocarbon GDP contracted by -1.7 percent in 2020.
- Labor market adjustment was facilitated by temporary wage cuts and a reduction in expatriate employment.
- Inflation (consumer prices, average) was -0.9 in 2020.

### Outlook and projections (2021–26)
- Non-hydrocarbon GDP growth is projected at 1.5 percent in 2021 as vaccine rollout gradually restores domestic activity and external demand recovers.
- Oil production is projected to increase after the current OPEC+ agreement expires in April 2022.
- Real GDP growth projections:
  - 2021: 2.5
  - 2022: 2.9
  - 2023: 4.2
  - 2024: 2.9
  - 2025: 3.3
  - 2026: 2.6
- Real hydrocarbon GDP projections:
  - 2021: 3.5
  - 2022: 3.6
  - 2023: 6.0
  - 2024: 2.8
  - 2025: 3.3
  - 2026: 1.2
- Real nonhydrocarbon GDP projections:
  - 2021: 1.5
  - 2022: 2.3
  - 2023: 2.4
  - 2024: 3.0
  - 2025: 3.4
  - 2026: 4.0
- Consumer prices (average) projected:
  - 2021: 3.0
  - 2022: 2.7
  - 2023: 2.5
  - 2024: 2.5
  - 2025: 2.4
  - 2026: 2.4

### Fiscal developments and projections
- Fiscal deficit widened to 19.3 percent of GDP in 2020, partly reflecting non-policy factors (notably the contraction in nominal GDP).
- Overall balance projections:
  - 2021: -2.4 percent of GDP
  - 2022: 0.9 percent of GDP
  - 2023: 1.4 percent of GDP
  - 2024: 1.8 percent of GDP
  - 2025: 1.8 percent of GDP
  - 2026: 2.3 percent of GDP
- Central government debt rose to 81.2 percent of GDP in 2020 and is expected to decline over the medium term:
  - 2021: 70.7 percent of GDP
  - 2022: 64.5 percent of GDP
  - 2023: 60.5 percent of GDP
  - 2024: 56.3 percent of GDP
  - 2025: 51.9 percent of GDP
  - 2026: 46.9 percent of GDP
- Total government debt breakdown:
  - External debt: 60.2 percent of GDP in 2020; projected 51.0 in 2021, 43.0 in 2022, 37.7 in 2023, 32.4 in 2024, 27.9 in 2025, 26.4 in 2026.
- Non-hydrocarbon primary balance (percent of non-hydrocarbon GDP):
  - 2020: -47.8
  - 2021: -39.1
  - 2022: -36.1
  - 2023: -33.3
  - 2024: -30.8
  - 2025: -28.7
  - 2026: -26.7

### External sector and reserves
- Current account balance (in billions of U.S. dollars):
  - 2020: -8.7
  - 2021: -4.8
  - 2022: -1.4
  - 2023: -0.9
  - 2024: -0.7
  - 2025: -0.7
  - 2026: -0.6
- Current account balance (percent of GDP):
  - 2020: -13.7 percent of GDP
  - 2021: -6.2 percent of GDP
  - 2026: -0.6 percent of GDP (projection)
- Central Bank gross reserves:
  - 2020: 15.0 (US$ billions)
  - 2021: 15.8
  - 2022: 16.0
  - 2023: 16.4
  - 2024: 17.2
  - 2025: 18.1
  - 2026: 19.1
- Central Bank gross reserves in months of next year's imports of goods and services:
  - 2020: 6.3 months
  - 2021: 5.9 months
  - 2022–2026: 5.7, 5.6, 5.6, 5.6, 5.6 months respectively
- Total external debt in US$ billions and percent of GDP:
  - 2020: 72.7 (114.7 percent of GDP)
  - 2021: 78.6 (101.1 percent of GDP)
  - 2026: 79.9 (85.0 percent of GDP)

### Key risks and uncertainties
- Downside risks dominate; main downside scenarios include:
  - COVID-19 variants prolonging the pandemic impact.
  - Tighter global financial conditions worsening fiscal and external positions.
  - Substantial decline in oil prices increasing gross financing needs and producing negative spillovers to the non-hydrocarbon sector.
  - Public debt vulnerability to shocks to oil markets, GDP growth, the exchange rate, primary balance, and interest rates.
- Upside factors:
  - Strong roll-out of vaccination.
  - Higher oil prices.
  - Continued implementation of structural reforms.

### Executive Board assessment and policy recommendations
- Directors commended swift and well-coordinated policy actions addressing health and economic effects of COVID-19.
- Recommended that macroeconomic policies remain supportive until recovery is fully entrenched.
- Near-term policy recommendations:
  - Prioritize mitigating the impact of COVID-19 until recovery is firmly underway.
  - Provide additional temporary and targeted support for affected sectors and households if needed, while preserving medium-term fiscal consolidation objectives.
  - Be vigilant about potential deterioration in asset quality and increasingly target support to distressed but viable borrowers.
- Fiscal policy recommendations:
  - Steadfast implementation of the Medium-Term Fiscal Balance Program (MTFP) to contain expenditure, reduce revenue dependency on hydrocarbon prices, and place debt on a firm downward path.
  - Sustain outreach to bolster public support for reforms and establish a clear fiscal anchor.
  - Strengthen public sector transparency and governance; expand fiscal coverage beyond budgetary central government; provide more detailed budget and debt data.
  - Develop a sovereign asset and liability management framework and strengthen the capacity of the debt management office.
- Monetary and financial policy recommendations:
  - Maintain the exchange rate peg as an appropriate policy anchor for Oman.
  - Continue vigilance to contain financial stability risks; manage the sovereign-bank nexus carefully to support banking system resilience.
  - Welcome AML/CFT mutual evaluation in 2021 and ongoing strengthening of the framework.
- Structural policy recommendations:
  - Improve labor market flexibility, promote private sector employment, increase female labor participation.
  - Strengthen the social safety net.
  - Accelerate SOE reforms to enhance competition and more efficiently manage public resources.

### COVID-19 policy response and vaccination
- Fiscal measures amounted to 0.1 percent of GDP in 2020 and 0.5 percent of GDP in 2021, including interest-free emergency loans, waiving or reducing selected taxes and fees, tax installments, and the Job Security Fund.
- The Central Bank of Oman relaxed macroprudential requirements with potential utilization of 39.9 percent of GDP in 2020 and 28.5 percent of GDP in 2021.
- Economic Stimulus Plan (ESP) adopted in March 2021 to mitigate the new wave of COVID-19 cases and promote diversification through temporary tax cuts for selected sectors, support for SMEs, and measures to promote employment of nationals in the private sector.
- Vaccination status as of July 5: about 23.5 percent of the targeted population partially vaccinated and 6.6 percent fully vaccinated. Oman plans to immunize 70 percent of the population by end-2021.

*Source: OMAN STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (IMF staff report).*

### 5.      The economic toll of the pandemic and oil sector shocks has been significant. Besides

### 1omnea2021001 - 5.      The economic toll of the pandemic and oil sector shocks has been significant. Besides

### Economic impact and sectoral performance
- GDP contraction in 2020: 2.8 percent.
- Real non-hydrocarbon growth in 2020: -3.9 percent.
- Hydrocarbon GDP decline: shallower due to strong oil condensate production not covered by the OPEC+ agreement (no aggregate percent provided).
- Hardest-hit sectors: Construction; Hospitality; Wholesale and retail trade.
- Inflation: -0.9 percent in 2020 (y-o-y); increased to 1.9 percent (y-o-y) in April (mostly due to the launch of VAT).
- Labor market adjustments:
  - Temporary wage cuts implemented.
  - Expatriate population reduced by 13 percent by end-March (y-o-y).
  - Unemployment: overall stable and low, but high for female and young (15-24) workers.

### External position and reserves
- Current account deficit in 2020: -13.7 percent of GDP (compared with -5.5 percent in 2019), mostly owing to lower hydrocarbon exports.
- Official reserves: US$15 billion (84.4 percent of ARA metric).
- Including liquid assets of the Oman Investment Authority (OIA) would raise reserves to 157.6 percent of the ARA metric.
- Staff assessment: Oman’s external position was substantially weaker in 2020 than the level implied by fundamentals and desirable policies.

### Fiscal outcomes and public debt
- Hydrocarbon revenue fell by 4.9 percent of GDP in 2020.
- Non-hydrocarbon revenue fell by 0.9 percent of GDP in 2020.
- Overall fiscal deficit widened to 19.3 percent of GDP in 2020 (partly reflecting contraction in nominal GDP).
- Gross financing need in 2020: 23.2 percent of GDP.
- Financing sources: domestic and external borrowing and non-debt creating financing (drawdown of deposits and sovereign funds, and privatization proceeds).
- Central government debt rose to 81.2 percent of GDP (60.5 percent at end-2019).
- Net financial assets ratio (central government debt less deposits at depository corporations and OIA’s liquid assets) declined to -33 percent of GDP (-13 percent at end-2019).

### Financial sector and credit conditions
- Private sector credit growth: slowed to 1 percent (y/y) in March 2021.
- Private sector deposit growth: 7.3 percent (y/y).
- Claims on government increased by 52.8 percent; claims on SOEs increased by 11.5 percent.
- Government deposits decreased by 7.2 percent; SOE deposits decreased by 11.8 percent.
- CBO policy rate and interbank rate fell sharply with no pass-through to deposit and lending rates.
- Banking sector buffers (end-March 2021):
  - Average capital adequacy ratio: 18.5 percent.
  - Liquidity Coverage Ratio: 199 percent.
- Non-performing loan (NPL) ratio: 4.2 percent (3.5 percent in 2019).
  - Loan loss provision coverage: 65 percent.
  - Provisions to NPLs: 100 percent.
- Deferred payments (loan moratoria) amounted to 6.2 percent of bank credit outstanding at end-March 2021.
- Banks’ profitability: ROA fell to 0.9 percent in 2020 (1.4 percent in 2019).
- Authorities’ stress tests indicate sufficient capital buffers to withstand severe scenarios (based on March 2021 data).

### Outlook and macro projections (selected)
- Non-hydrocarbon GDP growth: projected 1.5 percent in 2021; increases gradually to 4 percent in 2026.
- Overall GDP growth: projected around 2.5 percent in 2021.
- Oil production: projected to increase after OPEC+ agreement expires in April 2022.
- Nominal non-hydrocarbon GDP: projected to return to 2019 levels in 2022.
- Inflation: expected to increase to 3 percent in 2021, then decline to around 2.5 percent over the medium term.
- Current account and fiscal projections (Text Table 2, 2019-26 selected rows):
  - Real GDP Growth (percent): 2019 Prel. -0.8; 2020 -2.8; 2021 2.5; 2022 2.9; 2023 4.2; 2024 2.9; 2025 3.3; 2026 2.6.
  - Non-hydrocarbon GDP Growth (percent): 2019 -2.8; 2020 -3.9; 2021 1.5; 2022 2.3; 2023 2.4; 2024 3.0; 2025 3.4; 2026 4.0.
  - Inflation (percent): 2019 0.1; 2020 -0.9; 2021 3.0; 2022 2.7; 2023 2.5; 2024 2.5; 2025 2.4; 2026 2.4.
  - Current Account Balance (% of GDP): 2019 -5.5; 2020 -13.7; 2021 -6.2; 2022 -1.7; 2023 -1.1; 2024 -0.8; 2025 -0.8; 2026 -0.6.
  - Fiscal balance (adj., % of GDP): 2019 0.0; 2020 -12.1; 2021 -2.4; 2022 0.9; 2023 1.4; 2024 1.8; 2025 1.8; 2026 2.3.
  - Non-hydrocarbon primary balance (% of non-hydrocarbon GDP): 2019 -46.7; 2020 -47.8; 2021 -39.1; 2022 -36.1; 2023 -33.3; 2024 -30.8; 2025 -28.7; 2026 -26.7.
  - Government debt (% of GDP): 2019 60.5; 2020 81.2; 2021 70.7; 2022 64.5; 2023 60.5; 2024 56.3; 2025 51.9; 2026 46.9.
  - External government debt (% of GDP): 2019 45.4; 2020 60.2; 2021 51.0; 2022 43.0; 2023 37.7; 2024 32.4; 2025 27.9; 2026 26.4.

### Risks and scenarios
- Downside risks dominate:
  - Emergence of COVID-19 variants could prolong global impact and deepen scarring.
  - Tighter global financial conditions could worsen fiscal and external positions.
  - Public debt vulnerable to oil market developments and shocks to GDP growth, exchange rate, primary balance, and interest rates.
  - Substantial decline in oil prices would increase gross financing needs, impact banking system liquidity, and have negative spillovers on the non-hydrocarbon sector.
- Upside risks:
  - Strong vaccine rollout, ending of international travel restrictions, and stronger-than-expected global rebound.
  - Higher oil prices and continued structural reforms would considerably improve the outlook.
- Oil price scenario assumptions (Annex note):
  - Downside oil price scenario assumes an oil price of US$33.1 in 2026 (one standard deviation below WEO oil price from 2022 to 2026).
  - Baseline oil price in 2026: US$55.7.
  - Upside oil price scenario assumes an oil price of US$78.2 in 2026 (one standard deviation above WEO oil price from 2022 to 2026).
- Scenario impacts (selected points cited):
  - A one standard deviation adverse oil price shock would reduce net financial assets to -52.8 percent of GDP by 2026 (baseline comparisons shown in staff calculations charts).

### Policy discussions and recommendations
- Near-term priorities:
  - Continue health crisis response (including vaccine rollout), support recovery, mitigate financial stability risks, and minimize economic scarring.
  - Carefully coordinate and calibrate withdrawal of policy support measures; publish a detailed assessment of policy support measures to strengthen transparency.
  - Allow room for temporary, targeted support if oil prices remain above budgeted levels (US$50/bbl), without jeopardizing medium-term consolidation.
  - Staff suggested temporary social protection to support jobseekers not covered by the Job Security Scheme, given elevated female and youth unemployment.
- Financial sector policy:
  - Continue forward-looking assessment of banks’ asset quality.
  - Maintain constraints on dividend distribution and ensure buffers are adequate.
  - Extend loan moratoria beyond September 2021 only if data-dependent and increasingly targeted to distressed but viable borrowers.
  - Enhance systemic risk monitoring and expand thematic stress tests to pandemic-affected sectors.
- Fiscal policy and MTFP implementation:
  - Steadfast implementation of the Medium-Term Fiscal Plan (MTFP) to build buffers and strengthen public sector management.
  - MTFP aims to eliminate the fiscal deficit over the medium term by boosting non-hydrocarbon revenue and restraining fiscal expenditure through efficiency and targeting.
  - Institutional changes: OIA to assume ownership of government companies and investments; Energy Development Oman (EDO) to manage government investments in oil, gas, and renewables with revenue-sharing via royalty taxation and dividends.
  - 2021 fiscal adjustment: 4.3 percent of GDP structural adjustment in the non-hydrocarbon primary balance, primarily from lower wage bill (mandatory retirement), reduction in water and electricity subsidies, introduction of VAT, and modest cuts in capital spending.
  - Adjustment mitigation: policy support measures include social spending, loans, and temporary reductions/waivers of taxes and fees.
  - Staff recommended avoiding tax exemptions and welcomed establishment of Oman Tax Authority.
  - Personal income tax on high-income earners planned for late 2022 (preparations progressing).
  - Wage bill: wages and benefits account for 25 percent of spending; 2021 measures reduce wage bill by 2.4 percent of GDP in structural terms.
  - Targeted subsidy reforms: electricity and water tariff changes implemented January 2021; subsidies on non-vulnerable groups to be phased out by 2025.
  - Hydrocarbon capital expenditure (~7.2 percent of GDP) shifted from the budget to EDO; non-hydrocarbon capital expenditure to be prioritized and rationalized.
- Structural and insolvency measures:
  - Coordinate COVID-19 policy support measures and structural reforms announced as part of the ESP to minimize long-term scarring.
  - Explore strengthening insolvency and debt restructuring tools following the updated Bankruptcy Law to facilitate resource reallocation.
- Authorities’ stance:
  - Authorities broadly agreed with staff’s outlook and risk assessment.
  - Emphasized acceleration of vaccination in second half of the year, cautious phasing out of policy measures guided by the ESP, and continued vigilance by CBO.
  - A governmental committee established to assess corporate impacts and limit long-term scarring.

*Source: Country Authorities; and IMF staff calculations; IMF staff assessment and projections as presented in the document.*

### 23.      Establishing a clear fiscal anchor would help in achieving the fiscal consolidation.

### Establishing a clear fiscal anchor would help in achieving the fiscal consolidation.

### Fiscal anchor and medium-term fiscal plan (MTFP)
- Rationale and recommendation:
  - Given the sensitivity of the headline fiscal balance to oil prices, adopt a target for the non-hydrocarbon structural primary balance as a fiscal anchor—robust to oil price and cyclical volatility and supportive of the MTFP’s consolidation goals.
  - Supplement the anchor with a floor on government net financial assets.
  - Incorporate the MTFP into a fiscal strategy that contains fiscal risk analysis, including sensitivity of fiscal plans to varying economic scenarios.
- Projected fiscal impacts of implementing the MTFP:
  - Non-hydrocarbon primary deficit projected to decline from 48 percent of non-hydrocarbon GDP in 2020 to about 27 percent by 2026.
  - Net financial assets ratio projected to be -14.4 percent of GDP (following MTFP implementation).
- Institutional support:
  - Authorities welcomed recent IMF TA to strengthen the macro-fiscal function in the MoF.

### Countercyclical policy and stabilization funds
- Authorities’ intent:
  - Establish a counter-cyclical account for economic and social stability to strengthen fiscal support under adverse scenarios and support diversification.
- Design considerations from staff:
  - Tradeoffs between accumulating highly liquid assets, servicing high levels of debt, and supporting the economy.
  - Need to align the OIA to the fiscal framework through inflow and outflow rules consistent with the fiscal anchor.
- Recommendation:
  - Embed the Counter-Cyclical Account within a broader SALM framework and fully integrate it with the government budget process, with a clear role relative to other funds.

### Public financial management and fiscal governance
- Reforms underway:
  - Strategic Procurement Unit established to procure mainly operational expenditure to improve procurement process and spending efficiency.
  - Development of a treasury single account to improve cash management.
- Coverage and disclosure:
  - Recommendation to expand fiscal coverage beyond the budgetary central government to capture the broader public sector (EDO and OIA oversight of SOEs).
  - More disclosure on revenue, expenditure, and financing (including a periodic debt bulletin) would be helpful.
- Fiscal transparency:
  - Authorities publish monthly fiscal performance but further disclosure is advised.

### Sovereign asset and liability management (SALM)
- Institutional developments:
  - Establishment of a Debt Management Committee comprising MoF, CBO, Capital Market Authority (CMA), and OIA to coordinate sovereign debt issuance and manage financial exposures.
  - Recommendation to expand the Committee’s mandate to cover sovereign assets and liabilities, identify and mitigate sovereign risk exposures, decide on borrowing versus asset drawdown given the cost of carry, and assess sustainability of the sovereign balance sheet (Annex VI).
- Integration and reporting:
  - Counter-Cyclical Account should be embedded within SALM and integrated with the budget; regular reporting on sovereign assets and liabilities should be enhanced.
- Capacity and strategy timeline:
  - Debt management office (DMO) has strengthened human and analytical capacity, including through IMF TA.
  - Authorities expected to finalize their medium-term debt strategy by end-2021 to guide borrowing and provide predictability.

### Monetary and financial sector considerations
- Exchange rate and monetary policy:
  - Exchange rate peg remains appropriate as policy anchor; a more flexible regime could support non-hydrocarbon tradables over time but would have limited near-term benefits.
  - CBO launched the Monetary Policy Enhancement Project (MPEP) in January 2020 to smooth policy transmission, improve money and FX market efficiency, develop liquidity assessment and forecasting (including for Islamic banking), enhance emergency liquidity frameworks, and advance macroeconomic forecasting.
- Sovereign-bank nexus and financial exposures:
  - Deposits from government and SOEs constituted around 30 percent of total deposits.
  - Banks’ claims on government and SOEs increased from 10 percent to 19 percent of total assets during 2014-2020.
  - Sovereign ownership in the banking system accounted for 35 percent of banks’ equity in 2020.
  - Reserve requirement is 5 percent, with banks allowed to include investments in government securities up to 2 percent of reserve requirement.
  - Staff recommended managing rising interlinkages, strengthening the public sector balance sheet, and pursuing SOE privatization to avoid crowding out private sector lending.
- Regulatory and market reforms:
  - CBO tightened limit on banks’ foreign assets from 75 to 50 percent of banks’ net worth; staff recommended replacing the limit with non-discriminatory prudential measures (e.g., country credit risk weighting).
  - Bank Resolution Framework (2019) needs grounding in the Banking Law; Banking Law is under revision by the Ministry of Justice and Legal Affairs.
  - CMA advancing equity and debt market reforms; authorities intend to publish an annual borrowing plan and auction calendar to foster government debt market development.
  - Fintech promotion highlighted for financial inclusion, with attention to risks outside traditional financial sector (SME loans below a 5-percent target in banks’ loan portfolio).
  - AML/CFT: National AML/CFT Strategy for 2020-2022 approved; Oman expected to undergo its AML/CFT mutual evaluation in 2021.

### Structural policies: labor market, social safety nets, SOEs, and business environment
- Labor market reforms and measures:
  - Simplified minimum wage to a single minimum wage of OMR 325/month.
  - Time-bound wage subsidy of OMR 200/month for first-time Omani jobseekers, initially expected to cover about 15,000 persons.
  - Hiring of 15,000 jobseekers in the public sector.
  - Update to Oman labor law ongoing to improve labor market flexibility.
- Policy guidance on labor reforms:
  - Promote private-sector employment for Omanis and set clear expectations about limited future public-sector employment.
  - Adopt more flexible expatriate labor policies; removal of employer-consent requirement for expatriate job switching is welcomed.
  - Encourage female labor force participation through extended maternity benefits, childcare provision, and support for female entrepreneurs.
  - Increase efficiency of public spending on education and vocational training; continue public–private partnership training and employment programs.
- Social safety nets:
  - Job Security Fund established in November 2020 to provide unemployment benefit and facilitate reallocation.
  - Coverage period temporarily extended from six months to one year.
  - Authorities simplifying the pension system and preparing comprehensive social safety net reforms with ILO and UNICEF support.
- SOE reforms and governance:
  - OIA plan to enhance efficiency, governance, and privatize some SOEs; priorities include publishing audited financial statements, assessing business strategies and public policy roles, and mitigating intra-public sector exposures.
  - OIA and CMA developing a Code of Governance for SOEs based on OECD guidelines to ease IPOs and improve transparency.
- Business environment and climate policy:
  - Legal reforms: Privatization and Public Private Partnership Laws, Bankruptcy Law, and Foreign Capital Investment Law modernized to encourage investment and restructurings.
  - Special Economic Zones have attracted substantial foreign investment, with scope to increase local spillovers.
  - Climate mitigation/adaptation actions: promote solar and wind, adopt low carbon technologies, promote carbon emission management in new industrial projects, and improve industrial energy efficiency via waste heat recovery systems.

### Key statistics and dates preserved from the source
- Non-hydrocarbon primary deficit: 48 percent of non-hydrocarbon GDP in 2020 → about 27 percent by 2026.
- Net financial assets ratio: -14.4 percent of GDP (projected).
- Deposits from government and SOEs: around 30 percent of total deposits.
- Banks’ claims on government and SOEs: increased from 10 percent to 19 percent of total assets during 2014-2020.
- Sovereign’s ownership in banking system: 35 percent of banks’ equity in 2020.
- Reserve requirement: 5 percent; government securities inclusion up to 2 percent of reserve requirement.
- Minimum wage: OMR 325/month.
- Wage subsidy: OMR 200/month for first-time Omani jobseekers; expected coverage about 15,000 persons.
- Public sector hires: 15,000 jobseekers.
- Mortgages: 15 percent of total loans.
- SME loans target: below a 5-percent target in banks’ loan portfolio.
- Job Security Fund established: November 2020; coverage extended from six months to one year.
- DMO to finalize medium-term debt strategy: by end-2021.

### Staff appraisal: priorities and risks
- Priorities:
  - Support recovery until firmly entrenched while balancing fiscal vulnerabilities.
  - Steadfast implementation of the MTFP to put debt on a downward path and rebuild buffers.
  - Strengthen social safety nets, outreach, and stakeholder consultation to sustain public support for MTFP and reforms.
  - Establish a clear fiscal anchor robust to oil price and cyclical volatility.
  - Expand fiscal risk analysis and contingency planning.
- Risks noted:
  - Prolonged pandemic, oil price volatility, and potential social pressures could derail MTFP implementation.
  - Loan deferral programs may mask financial sector vulnerabilities; striking a balance between support and financial stability is necessary.

*International Monetary Fund staff report excerpt.*

### 42.      Enhancing public financial management and fiscal governance would improve

### Enhancing public financial management and fiscal governance would improve

### Public financial management and fiscal governance
- Fiscal coverage should be expanded beyond the budgetary central government to give a more comprehensive picture on the sustainability of the broader public sector.
- Greater disclosure in monthly fiscal reports is needed, including on revenue, expenditure, and financing.
- A sovereign asset liability management framework should be developed given eroding financial buffers and growing role of SOEs to mitigate potential sovereign risk exposures and ensure sustainability of the sovereign balance sheet.

### Exchange rate and monetary policy
- The exchange rate peg remains an appropriate policy anchor, delivering low and stable inflation.
- A more flexible exchange rate could support development of the non-hydrocarbon tradable sectors over time, but:
  - A move away from the peg would have limited benefits for competitiveness in the near term and remove an effective nominal anchor.
- The IMF team assesses that the external position in 2020 was substantially weaker than the level implied by fundamentals and desirable policies.
- The MTFP and structural reforms are critical to support the peg.
- The launch of the MPEP would enhance the effectiveness of monetary policy.

### Financial sector regulation and supervision
- The financial sector continues to be well regulated and supervised, and the regulatory frameworks could be strengthened further.
- The sovereign-bank nexus should be carefully managed to avoid crowding out lending to the private sector.
- A limit on banks’ credit exposures to non-residents can be replaced with non-discriminatory prudential measures.
- The resolution framework should have legal certainty, grounded in the Banking Law, in supporting effective resolution implementation.
- Capital market reforms are welcome.
- Promoting Fintech would enhance financial inclusion, especially for women, youth, and SMEs.

### Structural reforms and economic diversification
- Structural reforms are needed to boost non-oil private sector growth and support fiscal and external sustainability.
- Labor market reforms are important to facilitate resource reallocation, raise competitiveness, and foster creation of private sector jobs.
- Planned reforms to the social safety net would supplement labor market reform.
- These efforts, together with reforms that strengthen public resource management and improve the business environment, would help attract private investment and support non-oil private sector growth.
- Actions taken to develop a greener Omani economy are welcome and would support long-term economic sustainability.

### Key fiscal and external figures and projections (selected)
- Revenue and grants (percent of GDP): 28.7 (2016), 33.2 (2017), 36.2 (2018), 38.6 (2019), 31.3 (2020), 32.9 (2021), 35.3 (2022), 34.8 (2023), 34.6 (2024), 33.7 (2025), 33.1 (2026).
- Expenditure (percent of GDP): 51.2 (2016), 45.2 (2017), 44.0 (2018), 44.2 (2019), 52.1 (2020), 35.4 (2021), 34.4 (2022), 33.5 (2023), 32.9 (2024), 32.0 (2025), 30.8 (2026).
- Net lending (+)/borrowing (–) (overall balance, percent of GDP): -24.1 (2016), -12.6 (2017), -8.4 (2018), -6.0 (2019), -19.3 (2020), -2.4 (2021), 0.9 (2022), 1.4 (2023), 1.8 (2024), 1.8 (2025), 2.3 (2026).
- Total government debt (percent of GDP): 33.7 (2016), 45.9 (2017), 51.3 (2018), 60.5 (2019), 81.2 (2020), 70.7 (2021), 64.5 (2022), 60.5 (2023), 56.3 (2024), 51.9 (2025), 46.9 (2026).
- Break-even oil price (fiscal, U.S. dollars): 103.8 (2016), 86.4 (2017), 80.3 (2018), 67.9 (2019), 90.8 (2020), 69.3 (2021), 59.9 (2022), 55.4 (2023), 51.7 (2024), 50.0 (2025), 47.2 (2026).
- Current account balance (in percent of GDP): -19.1 (2016), -15.6 (2017), -5.4 (2018), -5.5 (2019), -13.7 (2020), -6.2 (2021), -1.7 (2022), -1.1 (2023), -0.8 (2024), -0.8 (2025), -0.6 (2026).
- Central Bank gross reserves (million of USD): 20,262 (2016), 16,089 (2017), 17,389 (2018), 16,662 (2019), 15,008 (2020), 15,075 (2021), 15,266 (2022), 15,628 (2023), 16,410 (2024), 17,334 (2025), 18,315 (2026).

### Institutional recommendation
- Staff proposes that the next Article IV consultation with Oman follow the standard 12-month cycle.

*International Monetary Fund. Content unit: 1omnea2021001 - 42.*

### Annex I. COVID-19 Policy Support Measures

### Annex I. COVID-19 Policy Support Measures

### Key actions supporting households
- Increase amount of subsidized fuel for fuel subsidy card holders from 200 liters to 400 liters per month. VAT on these amounts are also exempted so that the price will remain 180 bz/ltr. — Size (OMR, millions): 0; Budgetary impact 2020 (OMR, millions): 0; Budgetary impact 2021 (OMR, millions): 30
- Established the Job Security Fund to support citizens who lost their jobs (announced August 2020). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 20
- Allocation in the 2021 Budget for training job seekers and qualifying them to join the labor market (announced March 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 20
- Reduction of fees for expatriate recruitment: 50% for firm achieving the required Omanization target; and 25% for those not achieving the target (announced March 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
- Exempted citizens whose salary is below RO 350 from repaying housing loans provided by the Ministry of Housing and Urban Planning. (RO 10m in 2021, RO 5m in 2022). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 10
- Exempt citizens enrolled as beneficiaries of Sanad and Mawareed Alriezq programs from repaying the outstanding amounts. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 3.9
- Maximize the subsidy allocated for the schemes provided by the Ministry of Social Development for vulnerable cases. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
- Avail financial facilities with no interests or fees through Oman development Bank for self-employed persons. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 6
- Exemption of VAT on electricity & water for Omanis with <=2 accounts. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 13
- Increase exempted products from VAT from 93 to 488 essential food products. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 27

### Key actions supporting firms — taxes, fees, other measures
- Taxes:
  - Reducing the rate of income tax for SMEs from 15 percent to 12 through the two tax years of 2020 and 2021 (announced March 2021). (impact is RO 2m in 2021 and RO 4m in 2022). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 2
  - Waived fines and penalties for late tax disclosures, allowed deduction of donations made to combat the coronavirus (announced 2020). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Exemption from the income tax to firms operating within the Economic Diversification Sectors for five years, for activities initiated during January 2021 to end-2022. — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Exemption of hotel establishments from the Income Tax due for the two tax years of 2020 and 2021 (announced 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0.5
  - Waived the additional income tax (for 2021) ensuing from paying by installments (announced 2021). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Deduction of 1% of the value of the due tax, to a maximum of RO 10,000 (announced 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 1.5
  - Suspension of withholding tax related to the distribution of dividends on shares and interests for five years starting from 2020 (announced 2020, and then extended in 2021). — Size: 0.5; Budgetary impact 2020: 0.5; Budgetary impact 2021: 0.5
  - Deferring of the loss incurred by firms, as of the year 2020, to the next year and deducting the same from taxable income in the year 2021 and the subsequent years until such a time that the loss is zeroed (announced 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
  - Exemption from the Tourism Tax (4%) and the Municipality Tax (5%) payable by tourism establishments until the end of 2021 (announced 2020, and then extended for 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 7
- Fees:
  - Suspended municipal taxes and some government fees (March to August 2020). No impact, as changes only within the year. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
  - Suspended rent payments for factories in industrial zones for three months (announced 2020). No impact, as changes only within the year. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
  - Exempted companies from fees for renewing active commercial registration (announced 2020). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Reduced port and air freight charges (March to June 2020). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Postponed electricity and water fees (March to June 2020). No impact, as changes only within the year. — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0
  - Exemption from fees and fines resulting from permits to conduct work for non-Omani manpower, if they permanently left Oman (announced 2020). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Reduced environmental permit fees that are rewarded in 2021 by 50 percent, and exemption from fines if renewed within three months (announced 2021). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 1
  - Discounted land lease value by 25 percent for 2020-2021. — Size: 4; Budgetary impact 2020: 4; Budgetary impact 2021: 4
  - Exemption from licensing fees for SMEs for the first three years of incorporation for licenses issued only during 2021. — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
- Others:
  - Interest-free emergency loans to assist some segments of entrepreneurs whose businesses took the brunt of the pandemic, as well as beneficiaries of loans of Oman Development Bank and Al Raffd Fund (announced June 2020). — Size: 19.26; Budgetary impact 2020: 19.26; Budgetary impact 2021: 0.215
  - Postponed loan servicing for borrowers (SMEs) of Oman Development Bank and Al Raffd Fund (March to December 2020, and then extended to December 2021). — Size: n.a.; Budgetary impact 2020: n.a.; Budgetary impact 2021: n.a.
  - Provided free government warehouses for the private sector to temporarily store goods and food for six months (announced 2020). — Size: 0; Budgetary impact 2020: 0; Budgetary impact 2021: 0

### Key actions by the Central Bank of Oman — monetary and regulatory measures
- Monetary measures (Size 2020 (OMR, millions) / Size 2021):
  - Reduced the repo rate from 125 bps to 50 bps, and extended the tenor of repo operations to three months (announced March 2020), and then extended the tenor of the repo operations to six months (announced March 2021). — 1619 / 983 (as of March 2021)
  - Reduced the interest rate on rediscounting T-bills from 2 percent to 1 percent (March 2020), and then to 0.75 percent (announced March 2021). — Not utilized.
  - Reduced the interest rate on FX swaps by 50 bps and extended swap operations to one year (announced March 2020) and increased the limit of the facility to 100 percent of a bank’s net worth (announced September 2020). The rate was further reduced by 50 bps in March 2021. — 1013 / 130 (as of January 2021)
  - Reduced interest rates on rediscounting of commercial papers by 100-125 (March 2020) and reduced the rates further by 50 bps (March 2021). New rates are between 2.5% and 3%. — Not utilized.
- Regulatory measures:
  - To banks:
    - Reduced capital conservation buffer by 50 percent from 2.5 percent to 1.25 percent (announced March 2020). — 4200
    - Increasing the lending ratio from 87.5 percent to 92.5 (announced March 2020). — 1500
    - Allowed tolerance up to 25 percentage points in the Liquidity Coverage Ratio (LCR) in case of genuine liquidity stress (September 2020 until March 2021). Banks have ample liquidity. Banking sector average as of March 31, 2021 at 199 percent and lowest LCR reported at same period at 140 percent.
    - Allowed banks to defer the risk classification of loans related to government project (March to September 2020, then extended to September 2021). — 1264 (total amount of all outstanding loans availing deferment related to government projects, March 2021).
  - To borrowers:
    - Suspending loan payment for laid-off citizens till further notice, and citizens whose salaries are slashed by their employers/companies till the end of September 2021. — 947 (total amount of all outstanding loans availing deferment to affected retail customers, March 2021).
    - Deferred loan installments (March to September 2020, extended to March 2021, and now to September 2021), and asked lenders not to change risk classification of borrowers only because the loan deferment scheme. The extension for principal and interest, with no additional interest or profit (announced March 2021). — 1726 (total amount of all outstanding loans availing deferment, March 31, 2021).
    - Reduced the margin of loan-to-value ratios from 20 percent to 10 percent on housing loans for first-time home buyers (announced September 2020). — n.a.
    - The CBO will work closely with banks as they re-schedule loans to alleviate pressures on borrowers without imposing additional fees. — n.a.
    - Advised banks to restore the revolving short-terms loans to finance and leasing companies (FLCs) falling due until September 2021 (announced March 2021). — n.a.
    - Advised banks to reduce fees related to various banking services and not to introduce any new fee new/fee charge until December 31, 2021. — n.a.

### Annex II. Status of Recommendations of 2019 Article IV Consultation

- Fiscal:
  - Anchor the fiscal consolidation on a medium-term fiscal framework to strengthen the fiscal and external positions — Implemented. Adopted the Medium-Term Fiscal Balance Plan to reinforce fiscal sustainability and alleviate financing pressures.
  - Reduce current spending rigidities—particularly on the wage bill and subsidies, streamline public investment and raise non-hydrocarbon revenue — Ongoing. Key revenue and expenditure measures are grounded in the Medium-Term Fiscal Balance Plan to mitigate structural weaknesses in public finances, notably heavy reliance on hydrocarbon revenue and rigidities in expenditure. VAT has been introduced. Fuel subsidies have been targeted to only unemployed, retired, students, and low-income group. Mandatory retirement for long serving employees would lower wage bill. Electricity and water subsidies are being phased out over the span of 5- years and targeted to vulnerable households. Reduced annual allowance for a segment of civil servants. Excise taxes are being imposed on selected consumer products. Personal income tax is being considered.
- Financial Sector:
  - Bolster financial sector resilience to strengthen crisis management and preparedness. — Ongoing. After adopting the Bank Resolution Framework, integrating the Framework in the Banking Law is being considered.
  - Avoid discriminatory measures that may limit capital flows. — Not implemented. The limit on banks’ exposures to non-residents was tightened.
- Structural Reforms:
  - Accelerate reforms aimed at improving the business environment, human capital, and the functioning of the labor market, and fast-tracking the government’s diversification program. — Implemented. The new Foreign Capital Investment Law, which has relaxed the rules and restrictions and streamlined the procedures, became effective from January 1, 2020. An updated Bankruptcy Law framework went to effective in July 2020 to establish a comprehensive framework for the regulation of bankruptcies and liquidations.
  - Update to the Labor Law is ongoing. — Ongoing.

### Annex III. External Sector Assessment — findings, projections, and policy responses

- Overall assessment:
  - The external position of Oman in 2020 was substantially weaker than the level implied by fundamentals and desirable policies.
  - The estimated current account deficit widened in 2020, mainly due to the oil price decline and economic activity interrupted by the pandemic.
  - The exchange rate peg remains an appropriate policy anchor.
- Near-term policy response:
  - Fiscal consolidation should proceed with continued targeted support to defeat the pandemic and support the nascent recovery.
  - The introduction of VAT and the reduction in capital spending in 2021 are expected to narrow the current account deficit.
- Medium- to long-term policy response:
  - Fiscal adjustment in the context of Oman medium-term fiscal balance plan and oil price recovery are expected to strengthen the external position.
  - Structural reforms to diversify the economy and boost the non-hydrocarbon tradeable sector would support a stronger external position.
- Foreign assets and liabilities — position and trajectory:
  - By end-2020, Oman’s external assets stood at US$87.5 billion, of which about 17.2 percent are reserve assets and 24.5 percent are government foreign assets.
  - External liabilities reached US$114.9 billion, of which 33.3 percent were central government debt liabilities.
  - The NIIP declined by US$10 billion in 2020.
  - As a share of GDP, the NIIP declined from -22.7 to -43.3 percent in 2020.
  - 2020 (% GDP): NIIP: -43.3; Gross Assets: 138.1; Res. Assets: 23.7; Gross Liab.: 181.3; Debt Liab.: 114.7
  - Assessment: Oman’s NIIP is projected to improve reflecting fiscal adjustments, recovery in hydrocarbon exports, and stronger sovereign asset management.
- Current account:
  - The current account deficit is estimated to have increased from 5.5 percent of GDP in 2019 to 13.7 percent in 2020.
  - It is projected to narrow in 2021 due to recovery of oil price and fiscal consolidation.
  - Assessment: EBA-lite current account gap estimated at about -8.8 percent of GDP. Current account norm estimated to be -2.0 percent of GDP. Policy gap explains -0.3 percentage points of the estimated gap.
  - Consumption Allocation Rules model suggests a CA gap of -7.6 percent of GDP under the constant annuity approach and -1.1 percent under the constant real per capita annuity approach.
  - Staff assesses a CA gap of -8.8 percent of GDP with a range from -3.1 to -9.6 percent of GDP in 2020.
- Real exchange rate:
  - The Omani Rial is pegged to the U.S. dollar at a rate of US$2.6 per Rial.
  - The real effective exchange rate (REER) depreciated 4.4 percent in 2020. Average REER was 1 percent above its 10-year average.
  - The nominal effective exchange rate (NEER) depreciated by 2.5 percent in 2020.
  - Assessment: Staff assesses the 2020 REER gap to be around 22 percent with a range of 6.9 to 24.6 percent.
- Capital and financial accounts:
  - In 2020, FDI inflows are estimated at US$3.2 billion, and the government issued Eurobonds of US$2.5 billion.
  - Capital and financial accounts net inflows, including government external borrowing, FDI and increase in banks’ foreign liabilities resulted in estimated net inflows of about US$7.5 billion in 2020.
  - As part of COVID-19 measures, the CBO tightened the limit on banks’ foreign assets (a CFM/MPM measure) from 75 to 50 percent of banks’ local net worth. Staff recommended replacing it with non-discriminatory micro- and/or macroprudential measures as recovery becomes entrenched.
- FX intervention and reserves level:
  - CBO’s gross reserves decreased by US$1.7 billion in 2020 and stood at US$15 billion (6.2 months of imports, 30 percent of broad money) at end-2020.
  - These reserves correspond to 84 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric, down from 90 percent in 2019 and below the suggested adequate range of 100-150 percent.
  - Assessment: Foreign reserves expected to remain broadly stable in nominal terms and decline in terms of metrics such as import coverage ratio and the IMF’s ARA metric. Reserves are broadly adequate for covering prospective imports but inadequate in terms of IMF’s ARA metric.
- Oman: Foreign Reserve Adequacy Assessment (selected projections):
  - CBO foreign reserves (US$, bil.): Est.2019: 16.7; 2020: 15.0; 2021: 15.1; 2022: 15.3; 2023: 15.6; 2024: 16.4; 2025: 17.3; 2026: 18.3
  - In percent of ARA metric: Est.2019: 90.1; 2020: 84.4; 2021: 77.2; 2022: 71.5; 2023: 71.3; 2024: 71.0; 2025: 71.8; 2026: 74.3
  - In months of prospective imports of G & S: Est.2019: 7.3; 2020: 6.3; 2021: 5.6; 2022: 5.5; 2023: 5.3; 2024: 5.3; 2025: 5.4; 2026: 5.4
  - Memo: OIA liquid external assets (SWF, US$, bil.): 2019: 13.1; 2020: 13.0; 2021: 13.0; 2022: 12.3; 2023: 11.8; 2024: 11.6; 2025: 11.5; 2026: 11.4
  - CBO reserves and SWF in percent of ARA metric: 2019: 160.8; 2020: 157.6; 2021: 144; 2022: 129; 2023: 125; 2024: 121; 2025: 119; 2026: 121

*Source: 1omnea2021001 - Annex I. COVID-19 Policy Support Measures*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### A. Public Debt Sustainability Analysis — Developments and Baseline Scenario
- Debt profile and levels:
  - Public debt rose from 4.6 percent of GDP in 2014 to 60.5 percent in 2019, and to 81.2 percent in 2020.
  - Domestically-held debt increased from 15.2 to 21 percent of GDP between 2019-2020.
  - Externally-held debt increased from 45.4 to 60.2 percent of GDP between 2019-2020.
  - Bonds and sukuk account for 69 percent and 65 percent of domestic and external debt at end-2020, respectively.
  - Net debt (central government debt less deposits at banks, OIA’s liquid assets, and Oil Fund) moved from minus 27.8 percent of GDP at end-2016 to 33 percent of GDP at end-2020.
  - At end-2020, the stock of T-bills stood at 2 percent of GDP and is assumed to be rolled over the projection period.

- Macroeconomic and fiscal baseline assumptions:
  - Non-hydrocarbon growth is projected to reach about 4 percent by 2026.
  - Overall growth is expected at 2.6 percent in 2026.
  - Implementation of the Medium-Term Fiscal Plan (MTFP) will improve the overall fiscal balance from a deficit of 19.3 percent of GDP in 2020 to a surplus in 2022.
  - Non-hydrocarbon structural primary balance increases from -25.6 percent of GDP to -16.2 percent of GDP over the same period.
  - Gross financing needs (GFNs) were about 22.8 percent of GDP in 2020; projected to decline to 8.9 percent of GDP in 2021 and to around 7.8 percent of GDP by 2026.
  - GFNs are assumed to be financed mainly through issuance of long-term external debt and modest drawdowns of fiscal buffers.
  - Projected gross (net) public debt is about 47 (14.5) percent of GDP by 2026.

- Key baseline projection figures (selected from Figure 1 table):
  - Nominal gross public debt: 2019 = 60.5; 2020 = 81.2; 2021 = 70.7; 2022 = 64.5; 2023 = 60.5; 2024 = 56.3; 2025 = 51.9; 2026 = 46.9 (in percent of GDP).
  - Public gross financing needs: 2019 = 8.4; 2020 = 11.3; 2021 = 29.5; 2022 = 8.8; 2023 = 7.4; 2024 = 4.6; 2025 = 2.7; 2026 = 3.6; 6.6 (projection at end).
  - Net public debt: 2019 = -28.2; 2020 = 12.9; 2021 = 33.0; 2022 = 31.5; 2023 = 27.5; 2024 = 24.4; 2025 = 21.4; 2026 = 18.3; 14.4 (projection at end).
  - Real GDP growth: 2019 = 3.4; 2020 = -0.8; 2021 = -2.8; 2022 = 2.5; 2023 = 2.9; 2024 = 4.2; 2025 = 2.9; 2026 = 3.3; 2.6 (projection at end).
  - Inflation (GDP deflator): 2019 = 2.9; 2020 = -3.5; 2021 = -14.6; 2022 = 19.7; 2023 = 2.9; 2024 = -1.7; 2025 = 0.2; 2026 = 0.2; 1.6 (projection at end).
  - Effective interest rate: 2019 = 3.5; 2020 = 4.3; 2021 = 4.6; 2022 = 5.0; 2023 = 5.0; 2024 = 5.1; 2025 = 5.3; 2026 = 5.5; 5.4 (projection at end).

- Drivers and interpretation:
  - The 2014-2015 oil price shock and weak economic activity largely drove the rise in debt; debt rose sharply again in 2019 and amplified in 2020 due to the COVID-19 pandemic and collapse in oil prices.
  - Steadfast implementation of the MTFP, higher oil prices, and ongoing structural reforms are projected to considerably narrow debt over the medium term.
  - Financing needs over the medium term are assumed to be predominantly financed through debt issuance.

### A. Public Debt Sustainability Analysis — Sensitivity and Stress Tests
- Heatmap and overall vulnerability:
  - Heat map indicators are above high-risk DSA benchmarks; debt profile aspect is breached for most indicators under the baseline scenario.
  - Among standard stress tests, the negative GDP growth shock has the largest impact.

- Stress test outcomes (selected scenarios and impacts):
  - Growth shock: A 1 standard deviation shock to real GDP growth (equivalent to about 3.4 percentage points in each year 2022 and 2023) increases central government debt to 63 percent of GDP by 2026.
  - Primary balance shock: A deterioration of the primary balance by 5.7 percentage points of GDP in years 2022 and 2023 increases public debt to about 63 percent of GDP by 2026 (16 percentage points higher than the baseline). GFNs increase by 3.5 percentage points of GDP to 12.3 percent in 2022, and to about 10 percent of GDP in 2023 compared to 4.6 percent in the baseline.
  - Interest rate shock: Higher interest payments increase public debt to 68.4 percent of GDP by 2026. In this scenario the debt trajectory becomes explosive and does not stabilize.
  - Combined macro-fiscal shock (growth + interest rate + primary balance + exchange rate): Central government debt and GFNs reach about 116 percent and 25.5 percent of GDP in 2026, respectively.
  - Contingent liability shock: Calibrated as 10 percent of banks’ assets (excluding claims on government). Oman’s explicit contingent liabilities from SOEs amount to 11 percent of GDP. This shock generates gross debt of 91.6 percent of GDP and GFNs of 11.6 percent of GDP by 2026.

### B. External Debt Sustainability Analysis — Developments and Baseline
- External debt levels and composition:
  - Total external debt increased from about 64 percent of GDP to 114.7 percent of GDP during 2016-2020.
  - Central government external debt rose from 20.5 percent of GDP to 60.2 percent of GDP during 2016-2020.
  - The non-financial private sector, mainly SOEs, also ramped up external borrowing over the period.
  - Total external debt is projected to decrease with ongoing fiscal consolidation.

- Key baseline external-debt projection figures (from Figure 6 table):
  - Baseline external debt (percent of GDP): 2016 = 63.9; 2017 = 82.5; 2018 = 83.6; 2019 = 94.3; 2020 = 114.7; 2021 = 101.1; 2022 = 95.0; 2023 = 92.9; 2024 = 90.8; 2025 = 88.9; 2026 = 85.0.
  - Change in external debt: 2016 = 14.4; 2017 = 18.6; 2018 = 1.1; 2019 = 10.7; 2020 = 20.4; 2021 = -13.6; 2022 = -6.1; 2023 = -2.1; 2024 = -2.1; 2025 = -1.9; 2026 = -3.8.
  - Gross external financing need (in billions of US dollars): 2016 = 27.8; 2017 = 22.0; 2018 = 16.9; 2019 = 18.5; 2020 = 24.0; 2021 = 24.2; 2022 = 25.4; 2023 = 19.0; 2024 = 17.6; 2025 = 18.1; 2026 = 17.7.
  - Gross external financing need (in percent of GDP): 2016 = 42.5; 2017 = 31.1; 2018 = 21.2; 2019 = 24.3; 2020 = 37.9; 2021 = 30.9; 2022 = 22.6; 2023 = 20.2; 2024 = 20.1; 2025 = 18.9; 2026 = 18.9.

### B. External Debt Sustainability Analysis — Sensitivity and Stress Tests
- External debt sensitivity highlights:
  - A one-time real exchange rate depreciation of 30 percent in 2021 would make external debt peak at 127 percent of GDP in 2026.
  - An increase in the current account deficit (excluding interest payments) by half a standard deviation in each year from 2021 onwards would make external debt peak at about 113 percent of GDP in 2026.
  - A combined permanent shock of one-fourth standard deviation applied simultaneously to the interest rate, growth rate, and non-interest current account balance would raise external debt to 104 percent of GDP by 2026.

### Policy-relevant Findings and Implications (drawn from analysis)
- Fiscal consolidation under the MTFP is essential to:
  - Reduce public debt from its 2020 peak and improve external sustainability.
  - Lower gross financing needs from 22.8 percent of GDP in 2020 toward the projected 7.8 percent of GDP by 2026.
- Key vulnerabilities to monitor and mitigate:
  - Inadequate implementation of the authorities’ fiscal consolidation plan.
  - Oil markets developments and volatility in energy prices.
  - Shocks to GDP growth, the exchange rate, and interest rates.
  - Rising external debt and sensitivity to exchange rate and current account shocks.
- Financing strategy considerations:
  - Projected GFNs are to be financed mainly through long-term external debt issuance and modest drawdowns of fiscal buffers; reliance on this strategy implies exposure to global financial conditions and interest rate shocks.

*Source: IMF staff (Annex IV. Risk Assessment Matrix, Oman).*

### Annex VI. Topography of Sovereign Asset and Liability

### Annex VI. Topography of Sovereign Asset and Liability Management

### A. Context
- Oman’s economy and budget rely on the hydrocarbon sector: during 2010-2019 the hydrocarbon sector accounted for 50 percent of GDP, 65 percent of exports, and 80 percent of government revenue.
- Government debt increased from 6.2 to 81.2 percent of GDP over recent years; low oil prices since mid-2014 created fiscal shortfalls financed by a mix of debt issuance, asset drawdowns, and privatization.
- Institutional changes in 2020:
  - Oman Investment Authority (OIA) established as the main investment arm to invest financial surplus from the hydrocarbon sector and manage public enterprises.
  - Energy Development of Oman (EDO) created as a holding company to manage and finance government investments in oil, gas, and renewables.

### B. Sovereign Assets — Overview and Composition
- Multiple pools of sovereign assets: foreign exchange (FX) reserves, sovereign wealth funds, and public enterprises.
- FX reserves:
  - Managed by CBO.
  - About 24 percent of GDP (US$15 billion) at end-2020.
  - Divided into: (i) liquidity tranche; (ii) bridge tranche; (iii) income tranche.
  - Decline since 2016 attributed to high twin deficits.
- Oman Investment Authority (OIA):
  - As of March 2021 total assets amounted to US$42 billion, around 66 percent of GDP.
  - Asset allocation: one third in public markets; the rest in public enterprises and private markets.
  - Assets transferred to OIA include SGRF, OIF, and public enterprises.
- State General Reserve Fund (SGRF):
  - Founded in 1980; assets about 31 percent of GDP (about US$20 billion).
  - Historically invested mainly abroad and in public markets.
- Oman Investment Fund (OIF):
  - Established in 2006 to invest in medium- and long-term projects domestically and globally.
- Public enterprises (excluding Petroleum Development Oman) transferred to OIA:
  - Account for approximately 28 percent of GDP (about US$18.2 billion).
  - There are 139 SOEs in 11 sectors with 36,000 staff.
  - OIA launched “Rawabet” program to enhance SOE governance and align strategies with Vision 2040.
  - OIA responsible to pay dividends to the public treasury on an annual basis.
- Petroleum Reserve Fund (PRF):
  - Established in 1993 for hydrocarbon investment inside and outside Oman.
  - Oil revenues equivalent to 20,000 barrels per day, on average, are transferred annually to the PRF.
  - As of May 2021 PRF assets amounted to 2.8 percent of GDP (approximately US$2.4 billion).
- Government deposits:
  - Government deposits with banks amounted to 22 percent of GDP and remained stable over recent years despite changes in fiscal balance 2016-2019.
  - Government deposits with CBO average around 4 percent of GDP and are more sensitive to fiscal balance changes.
- Energy Development Oman (EDO) and PDO:
  - Government owns 60 percent of Petroleum Development Oman (PDO), which accounts for 70 percent of Oman’s crude oil production and nearly all natural gas supply.
  - From 2021, EDO is responsible to fund 60 percent of operational and capital expenditure of PDO and 100 percent of the gas sector (previously covered by the state budget).
  - EDO to ensure at least the same amount of cash flows to Government as expected from PDO in the form of royalties, taxes and dividends.

### C. Sovereign Liabilities — Size and Structure
- Rapid increase in government debt:
  - Gross public debt rose from 4.6 percent of GDP in 2014 to 60.5 percent in 2019.
  - Gross nominal government debt reached 81.2 percent of GDP in 2020.
- External debt composition:
  - External debt accounts for 75 percent of total debt.
  - Eurobonds represent 55 percent of total external debt.
  - Syndicated loans represent 25 percent of total external debt.
  - Sukuk represent 10 percent of total external debt.
  - Others represent 10 percent of total external debt.
- Domestic debt composition:
  - Domestic development bonds and sukuk represent 55 percent of domestic debt.
  - Overdraft with CBO: 15 percent.
  - Sukuk: 10 (percent).
  - T-bills: 10 percent.
- SOE debt and contingent liabilities:
  - SOE debt (excluding Petroleum Development Oman) increased from 19 percent of GDP in 2015 to 39 percent of GDP in March 2021.
  - Increase largely attributed to OQ (Oman Oil Company), Electricity Holding Company, and Oman Air.
  - Explicit government guarantees to SOEs amounted to 11 percent of GDP.

### D. Policy Considerations and Recommendations
- Sovereign balance sheet definition and SALM:
  - Define sovereign balance sheet to include financial assets and liabilities and contingent liabilities; exclude present value of nonfinancial assets due to measurement difficulty.
  - Include CBO’s foreign exchange reserves, sovereign wealth funds, public sector debt, and contingent liabilities from SOEs.
- Advantages of a SALM framework:
  - Detect sovereign risk exposures by analyzing financial characteristics of the consolidated balance sheet (including commodity prices).
  - Identify sources of costs and risks and quantify correlations among these sources.
  - Noted exposure: higher foreign currency exposure in sovereign debt compared to foreign currency holdings.
  - Financial risk management strategy can manage such exposures.
- Institutional coordination and governance:
  - SALM requires comprehensive coordination among MoF, CBO, OIA, and EDO.
  - Establish a high-level SALM committee to monitor implementation of asset and debt management strategies while preserving autonomy of public entities.
  - Consider partial SALM implementations (examples cited: Canada, Mexico, New Zealand) to match currency mix and duration across portfolios to reduce currency and interest rate risks.
- Align OIA management to fiscal framework:
  - Inflow and outflow rules for OIA should be linked to the non-hydrocarbon structural primary balance.
  - Medium-Term Fiscal Plan (MTFP) aims to achieve zero overall balance by 2025; fiscal framework should target a sustainable longer-term trajectory for the non-hydrocarbon budget deficit.
- Accelerate SOE reforms:
  - Priority: assess each SOE’s business strategy and public policy considerations; strengthen corporate governance; mitigate financial exposures including intra-public sector assets and liabilities; create synergies among SOEs.
  - Draft a Code of Governance for SOEs based on OECD guidelines on Corporate Governance of SOEs.
  - Establish oversight and reporting mechanisms, strong coordination, and a clear SOE ownership policy guiding mandates.
  - Some SOEs could be restructured in the short-term and privatized over the medium- to long-term.
- Enhance transparency and reporting:
  - Regular public reporting on sovereign assets and liabilities should be expanded.
  - Publish strategy, financial performance, financial positions, and audits (where applicable) for OIA, public enterprises, and government debt to improve transparency and inform public debate.

*Prepared by Abdullah AlHassan*

### Annex VIII. Labor Market Reforms

### Annex VIII. Labor Market Reforms

### A. Background
- Rapid economic growth in the past several decades has supported strong job creation.
- Nationals accounted for 85 percent public sector employment as of 2019.
- There were about 1.7 million expatriate workers in Oman by the end of 2019, accounting for 86 percent of total private sector employment and slightly higher than the 82 percent observed in 2006.
- Among the expatriate workers in the public sector in 2019, about two thirds were in civil service and one third were with municipalities, state-owned enterprises, and others.
- The Omanisation Policy, introduced since late 1980s, aims to maximize the use of national human resources and enhance the return of investments from the rapidly expanding educational attainment of Omanis.
- The share of national workers had been increasing until 2005 and then declined; since 2016, the share started to increase again.
- In 2020, the COVID-19 pandemic accelerated the departure of expatriate workers.
- Oman’s Vision 2040 (launched in early 2021) sets out goals for a knowledge-based society and competitive national talents via inclusive education, lifelong learning, and scientific research; emphasizes enhancing the educational and vocational training system, supporting applied scientific research, and promoting innovation.

### B. Characteristics of the Omani Labor Market
- Omani employment concentrates in the public sector while the private sector heavily depends on expatriate labor.
  - During 2014-2019, about 0.22 million jobs were created, among which 95 percent were in the private sector.
  - Of the 0.21 million private-sector jobs created, nearly 70 percent were filled by foreign workers.
  - By occupation, the most common job for expatriates is principal and auxiliary engineers, followed by some type of service workers; Omanis’ occupations are more diversified with relatively higher shares of managerial and clerical positions.
  - By economic activities, expatriate employment concentrates in sectors including construction and household employment, while majority of the employment in the financial sector is filled by Omanis.
- Foreign labor is an important pillar of the Omani economy and is largely low-wage and low-skilled:
  - Less than 10 percent of foreign labor is identified as high-skilled (proxied by education levels).
  - The reliance on a large pool of relatively low-cost labor from abroad has contributed to labor market segmentation and constrained absorption of a growing and increasingly well-educated national workforce in the private sector.
- Demographics and female labor force participation (FLFP):
  - Oman has a young population that will lead to a large number of new labor force entrants in coming years that cannot primarily be absorbed by the public sector.
  - Current FLFP is 38 percent.
  - Education is significantly positively associated with higher female labor participation; women in urban areas are more likely to join the labor market.
  - Net secondary education enrollment ratios (2019, UNESCO data cited): 93 percent for female and nearly 100 for male; net tertiary education enrollment ratios: 55 percent for female and 30 percent for male.
  - Policy levers include extending maternity benefits, improving provision of childcare, facilitating job searching, promoting female entrepreneurship under SME initiatives.
- Wage gaps and public–private differentials:
  - Omani workers are better educated on average and primarily employed in the public sector, where they are generally paid higher wages, enjoy more benefits, and have greater job security.
  - The ratio of average public sector wage over the average private sector wage for Omanis declined from about 3.8 in 2011 to about 2 in 2014 (latest available data cited).
  - The basic salaries comprise roughly half of the government wage bill, with the other half on non-salary components such as allowances and other entitlements including housing, transportation, and cost of living allowances.
- Education outcomes and spending:
  - Oman has made big strides in educational attainment and is close to attaining universal literacy.
  - Oman’s public spending on education is, on average, similar to the level in Advanced Economies (AE), but TIMSS scores are lower than AE averages; Emerging Market (EM) economies have similar TIMSS scores as Oman but spend much less.
  - There is scope to diversify areas of specialization of college graduates toward health and welfare, natural science, mathematics, and education.
- Labor productivity trends:
  - Labor productivity has generally been declining or stagnating.
  - Falling productivity has resulted in declining external competitiveness as proxied by unit labor cost.
  - The COVID-19 shock adversely affected labor productivity across all sectors; the decline may be temporary but could have longer-term impacts if human capital and skills are lost or if labor shortages occur due to rapid decline of expatriate workers.

### C. Labor Market Policies and Potential Impact on the Economy
- Recent policy measures:
  - The Ministry of Manpower announced plans to allocate more jobs (including administration, finance, student affairs and career guidance at higher education establishments) to citizens and to strengthen partnership with private sector establishments on job creation.
  - Education reform and vocational training are national priorities under Vision 2040: establish a stimulating educational and vocational training system, strengthen the performance-based qualification system, promote scientific research and development, diversify funding sources, and strengthen academic–private sector partnerships.
  - The Job Security Scheme (established late 2020) provides temporary income and financial aid for Omani nationals as they seek new roles when their jobs are terminated for reasons beyond their control; this scheme provides protection and incentives for Omanis to look for jobs in the private sector.
  - In 2019, the government set up the labor dispute resolution center to fast track labor grievances.
  - Effective from January 2021, transfer of expatriate employees from one employer to another is allowed without requirement of a “no-objection-certificate” from the employer, facilitating labor reallocation.
  - A new labor law (under discussion) is expected to strengthen dispute resolution mechanisms, increase female labor force participation, and facilitate collective bargaining agreements.
- Evidence and expected effects:
  - Labor market reforms (product and labor market deregulation in non-tradable sectors) can enhance labor productivity in the medium term through higher total factor productivity (TFP) and capital intensity.
  - Easing employment protection legislation for regular workers can lift TFP by improving allocation of labor across firms and sectors.
- Scenario analysis for potential non-hydrocarbon GDP (Cobb-Douglas production function; potential output decomposed into capital, labor, and TFP):
  - Baseline: projected potential non-hydrocarbon potential (index: 2020=100).
  - Upside scenario 1 (Higher FLFP scenario):
    - Assumes FLFP increases from current 38 percent to the world average of about 50 percent in the next five years.
    - Additional labor is fully absorbed and employed.
    - Assumes female workers are equally skilled relative to male workers on average.
    - Capital-labor ratio and TFP growth are unchanged.
  - Upside scenario 2 (With TFP increase scenario):
    - Assumes TFP also increases when there is greater FLFP.
    - Growth contribution from TFP is assumed to be about half of growth contribution from higher FLFP.
  - Downside scenario:
    - Assumes the number of expatriate workers is about 5 percent lower than the baseline over the medium term (interpretable as a pace of expatriate departures that job vacancies could not be fully filled by nationals due to skills mismatch).
    - Capital-labor ratio and TFP growth are unchanged relative to the baseline.
  - Scenario outcomes:
    - Under the two upside scenarios, potential output will remain 4-7 percent higher than the baseline projection over the medium term.
    - Under the downside scenario, potential output will remain below the baseline projection throughout the medium term.
    - The analysis notes large uncertainty around these estimates due to underlying assumptions and omitted factors; positive impacts from labor and product market deregulation or fiscal structural reforms may differ from assumptions.

### D. Conclusion and Policy Recommendations
- (No additional text available in the provided content for this section.)

*Prepared by Fei Liu. Source: country authorities, IMF staff estimates and calculation. Data as of end-2019.*

### 14.      Labor market reforms are important to encourage the creation of private sector

### 14.      Labor market reforms are important to encourage the creation of private sector

### Objective and general approach
- Labor market reforms should create incentives for Omani nationals to seek private sector jobs by:
  - Highlighting the limited scope for public sector jobs going forward.
  - Better aligning public sector wages and benefits with those in the private sector.
- Reforms will involve adjustments for the private sector that relies heavily on expatriate labor; this calls for a gradual and coordinated approach to implementation.

### Promote employment in the private sector
- The private sector should be the main engine of job creation.
- Supported by flexible labor policies, private sector development will reinforce its role in creating jobs for qualified Omanis.
- Policies to promote private sector development include fostering investment partnerships between the Omani private sector and the international business community to help create private sector jobs.
- The government needs to set clear expectations about limited prospects for future public-sector employment to incentivize nationals to take private sector jobs.
- To foster sustained private sector job creation, public sector wage (and benefits) growth should not outpace that of the private sector.

### Female labor force participation
- Provide a more conducive environment for female labor force participation by measures such as:
  - Improving the provision of childcare.
  - Extending maternity benefits.
  - Providing flexibility in work schedules.
- Promote more women to senior positions and encourage female entrepreneurs under SME initiatives to generate positive demonstration effects that encourage further female participation.

### Expatriate labor policies
- Adopt more flexible expatriate labor policies recognizing expatriate workers will be needed:
  - In the immediate aftermath of the crisis to secure the needed economic recovery.
  - Over the medium term as the economy grows and develops.
- Greater mobility of workers could reduce the wage differential between expatriates and nationals and facilitate more efficient human resource reallocation.
- Reforms such as further improving social protection of expatriates would improve their mobility and attract more talents from abroad.
- Flexible labor policies and more comparable wage and compensation between the private and public sectors would enable nationals and expatriates to move more freely between declining and expanding sectors, reducing risks of labor shortages in expanding industries and excess labor in declining industries.
- Plans to further reduce the labor cost gap between Omanis and expatriates by increasing fees for hiring expatriates should be implemented with caution to avoid undermining the price competitiveness of the private sector.

### Education and vocational training
- Increase the efficiency of public spending on education and improve vocational training to achieve high quality education.
- Reforms to increase the quality of basic and higher education so that graduates have competitive qualifications and employability skills for local and international labor markets are recommended.
- Conduct a diagnosis of the cost-benefit of education spending to identify specific weaknesses and ways to improve.
- Improve the vocational training system to provide individuals with high-level skills to enter the labor market, reduce skills mismatch, and raise productivity.

### Quantitative evidence and assumptions (from the source)
- Jaumotte, Koloskova, and Saxena (2016) estimate that a 1 percentage point increase in the share of migrants in the working-age population can raise GDP per capita over the long term by up to 2 percent by increasing labor productivity and to a lesser extent boosting investment.
- Given limited information on the impact of female labor on productivity, a conservative assumption is utilized where 1 percent increase in labor (due to higher female workers) increases TFP by about 0.5 percent.

*Source: 1omnea2021001 - 14.      Labor market reforms are important to encourage the creation of private sector*

### 3.      The authorities released updated  fiscal data for 2020 and H1 2021.

### 1omnea2021001 - 3.      The authorities released updated  fiscal data for 2020 and H1 2021.

### Updated fiscal data and short-term implications
- The fiscal deficit for 2020 remains largely unchanged, with higher government spending offset by higher hydrocarbon revenue.
- Data for H1 2021 indicate a more gradual decline in electricity subsidies than projected, reflecting increased electricity consumption during COVID-19 lockdowns and a reduced pace of subsidy removal to ensure that vulnerable groups remain protected, which could lower the projected fiscal balance for 2021 by about 0.3 percent of GDP.
- Higher oil prices provide an upside risk to the fiscal outturn for 2021.

- Comparison of Fiscal Indicators: Updated versus Staff Report, 2020 (Percent of GDP)
  - Revenue and grants: Updated 34.6; SR 33.3; Difference 1.3
  - Hydrocarbon: Updated 26.0; SR 24.9; Difference 1.1
  - Nonhydrocarbon and grants: Updated 8.6; SR 8.4; Difference 0.1
  - Expenditure: Updated 53.5; SR 52.4; Difference 1.2
  - Current: Updated 43.3; SR 42.4; Difference 0.9
  - Capital: Updated 9.9; SR 9.6; Difference 0.2
  - Overall balance (Net lending/borrowing): Updated -19.3; SR -19.3; Difference 0.1

### Macroeconomic and pandemic response outcomes
- Health and containment:
  - Oman established a high-level committee in March 2020 and launched the Tarassud Plus platform to monitor COVID-19 cases.
  - Oman’s national vaccination strategy aims to have 70 percent of the targeted population inoculated by the end of this year.
  - About 58 percent of the targeted population have been fully or partially inoculated as of August 8, 2021.
  - In early August 2021, Oman launched a sultanate-wide vaccination campaign targeting 320,000 students aged 12 and older from public and private schools.

- Economic support measures:
  - The economic response package is estimated at 40 percent of GDP in 2020 and included interest-free emergency loans, temporary waivers or reduction of selected taxes, suspension of government fees and charges, and establishment of the Job Security Fund to provide unemployment benefits to Omanis for a period of 12 consecutive or intermittent months.
  - The Central Bank of Oman (CBO) eased financial conditions through lower interest rates, measures to maintain adequate liquidity, reduced the capital conservation buffer, and allowed deferment of loan installments for affected borrowers.

### Economic outlook and projections
- 2020 outcomes:
  - Output contraction of 2.8 percent of GDP in 2020.
  - Real hydrocarbon GDP drop was comparatively mild due to strong oil condensate production.
  - Non-hydrocarbon sector contracted by about 3.9 percent.

- 2021 and medium-term projections:
  - Economic activity is projected to rebound to 2.5 percent in 2021.
  - Inflation is expected to remain moderate at 3 percent on average in 2021 before returning to 2.5 over the medium term.
  - Staff projects non-hydrocarbon GDP growth of 4 percent by 2026, which authorities view as in line with the Tenth Development Plan (2021-2025).
  - The baseline oil price used for staff assessment in the Article IV report is $60.4 for 2021 while the 2021 budget adopted an oil price of $45.

### Fiscal reform measures and debt outlook
- Fiscal reform framework:
  - The Medium-Term Fiscal Plan (MTFP) aims to reduce primary and overall fiscal deficits as a percentage of GDP and target achieving a primary fiscal surplus over the medium term.
  - Measures include mobilizing non-hydrocarbon revenues, curtailing current spending, and improving effectiveness and efficiency of government spending.

- Revenue and tax measures:
  - A Value Added Tax (VAT) law was approved in October 2020, effective in April 2021, imposing a value-added tax of 5 percent on goods and services; basic food and essentials are exempted.
  - An excise tax of 50 percent on sugary and sweetened beverages came into effect in October 2020, in addition to 2019 excise taxes on tobacco and selected products.

- Expenditure rationalization:
  - Measures include lowering the wage bill primarily through mandatory retirement, reducing water and electricity subsidies, and rationalizing other current spending while increasing social- and health-related spending.

- Debt and financing:
  - The authorities share staff assessment that a debt stabilizing primary balance is projected to be achieved in 2021.
  - Government debt is expected to decline to about 47 percent of GDP by 2026.
  - Government financing needs for 2021 have been met; financing sources were diversified between domestic and foreign markets and non-debt creating financing from drawdown of assets.
  - Institutional steps: Debt Management Committee established; drafting of the Public Debt Law; ongoing work on medium-term debt strategy (MTDS) and Debt Management Office capacity building.

### Monetary, financial sector, and structural policies
- Exchange rate and reserves:
  - The exchange rate peg remains the nominal anchor and the authorities are fully committed to the peg.
  - CBO gross reserves at 6.3 months of imports.
  - The OIA’s external assets bring the reserves level up to 158 percent of the ARA metric.
  - SDR allocations have bolstered reserves.

- Banking system and financial stability:
  - Oman’s banking system remains well-capitalized, liquid and profitable.
  - The CBO maintained orderly market conditions and ample liquidity during 2020 shocks.
  - The CBO is strengthening regulatory and supervisory frameworks; the Banking Law is under review to strengthen the Bank Resolution Framework.

- Financial inclusion and capital markets:
  - The CBO is encouraging digital transformation and innovative technologies to enhance financial inclusion, especially for women, youth, and SMEs.
  - Capital Market Authority continued equity and debt market reforms, including enacting the Commercial Companies Law and developing the Securities Law.

- AML/CFT and tax transparency:
  - The National AML/CFT Strategy for 2020-2022 and associated work plan were approved.
  - Steps taken to implement the Common Reporting Standard and KYC procedures.

- Structural reforms and labor market:
  - Public sector restructuring: Royal Decrees in August 2020 reduced ministries from 26 to 19 and merged/eliminated agencies to improve efficiency.
  - Oman Investment Authority (OIA) established to assume ownership of government companies and investments.
  - Energy Development Oman (EDO) created to manage Petroleum Development Oman’s investments; EDO revenue shared with the government through royalty, taxation, and dividend after deducting operating and financing costs.
  - Labor-market reforms to raise nationals’ participation in the private sector, including simplifying multiple minimum wages and introducing a time-bound wage subsidy for first-time Omani jobseekers.
  - Social safety net strengthening: comprehensive reform in preparation for 2022 with technical support from ILO, UNICEF, and others; temporary social protection measures in place until the system is completed.
  - Measures to improve business environment: eliminated minimum capital requirement to start a business, established a one-stop shop for business e-services, automated and simplified licensing, and created an online single-window for trade facilitation.

### Key fiscal and economic figures cited
- Economic response package: 40 percent of GDP in 2020.
- Vaccination target: 70 percent of targeted population by end of this year.
- Vaccination progress: About 58 percent of targeted population fully or partially inoculated as of August 8, 2021.
- Student vaccination target: 320,000 students aged 12 and older.
- Output contraction in 2020: -2.8 percent of GDP.
- Non-hydrocarbon sector contraction in 2020: -3.9 percent.
- 2021 projected GDP growth: 2.5 percent.
- Inflation: 3 percent in 2021; 2.5 over the medium term.
- Oil price used for staff assessment (2021): $60.4.
- Oil price in 2021 budget: $45.
- Government debt projected by 2026: about 47 percent of GDP.
- CBO gross reserves: 6.3 months of imports.
- OIA external assets: reserves up to 158 percent of the ARA metric.
- VAT rate: 5 percent (effective April 2021).
- Excise tax on sugary beverages: 50 percent (effective October 2020).
- Job Security Fund unemployment benefit duration: 12 consecutive or intermittent months.

*Prepared By Middle East and Central Asia Department, August 19, 2021.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1omnea2021001.pdf_