## 1omnea2022001

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### Background
- Vaccination and COVID-19 response:
  - Nearly all persons 12 years and older had been at least partially vaccinated and about 90 percent were fully vaccinated as of end-May 2022.
  - With a high vaccination rate and declining infections, all COVID-19 social restrictions have been removed.
- Policy response and reforms:
  - Targeted fiscal, monetary, and financial measures in 2020-2021 provided relief to households, firms, and banks supporting non-hydrocarbon recovery.
  - Government implementing reforms under “Oman Vision 2040” focused on fiscal sustainability, SOE governance, non-oil private sector growth, job creation, and cleaner energy.
  - Financial markets supportive, borrowing spreads narrowed (reaching below emerging markets spreads for the first time since end-2018).
  - Fund provided technical assistance on fiscal frameworks, tax administration, public debt management, and external sector statistics.
- Oil prices:
  - Oil prices have risen to a multi-year high and are projected to remain high over the medium term, strengthening fiscal and external buffers.

### Recent economic developments
- Growth and sector performance:
  - Overall GDP growth: rebounded from -3.2 percent in 2020 to 3.0 percent in 2021.
  - Real hydrocarbon GDP growth: 3.7 percent in 2021.
  - Non-hydrocarbon GDP growth: 1.8 percent in 2021.
  - Construction and services remain below pre-pandemic levels.
  - Labor market: increased labor force participation of nationals offset reduction in expatriate workers; continued recovery in expatriate workers and new labor market entrants in 2022 H1.
- Inflation:
  - Headline CPI inflation: 1.5 percent (y-o-y) in 2021 following the introduction of VAT.
  - CPI inflation: 4.4 percent (y-o-y) in January 2022; 2.4 percent in August 2022.
  - PPI inflation has been significantly higher than CPI since 2021Q1 due to larger weight of hydrocarbon products in the PPI and administrative price settings.
- Fiscal developments:
  - Overall central government balance improved by 12.8 percentage points of GDP to a deficit of 3.2 percent in 2021.
  - Government covered EDO operational expenses amounting to 2.4 percent of GDP in 2021 until EDO was fully established.
  - Central government debt: 62.9 percent of GDP in 2021 (69.7 percent at end-2020).
  - SOE debt: 41.8 percent of GDP in 2021.
  - Net financial assets ratio: -25.5 percent of GDP (-28.5 percent at end-2020).
- External sector:
  - Current account deficit: 5.0 percent of GDP in 2021 (16.6 percent in 2020).
  - International reserves at the Central Bank of Oman: increased by US$4.7 billion in 2021 to US$19.7 billion (5.3 months of prospective imports and 71.4 percent of the IMF ARA metric); includes August 2021 SDR allocation (US$733 million).
  - Staff assessment: Oman’s external position moderately weaker than implied by fundamentals and desirable policies.
- Banking sector:
  - NPL ratio around 4.0 percent as of end-June 2022 with provisioning exceeding 113 percent.
  - Return on assets: 1.3 percent (1.1 percent at end-2021).
  - Private sector credit growth: 2.3 percent (y/y).
  - Claims on government and SOEs increased by 7.6 percent and 14.4 percent respectively; their deposits increased by 13.2 percent and 32.6 percent respectively.

### Outlook and risks
- Growth and inflation projections:
  - Overall GDP growth projected at 4.3 percent in 2022.
  - Non-hydrocarbon growth projected to strengthen gradually to 4.0 percent over the medium term.
  - Overall GDP growth projected at 2.7 percent over the medium term as hydrocarbon production stabilizes.
  - Inflation expected to reach 3.0 percent in 2022.
- Fiscal and external balances:
  - Substantial fiscal surplus expected in 2022, gradually diminishing to 1.0 percent of GDP by 2027 as oil prices decline.
  - Central government debt expected to decline to 36.8 percent of GDP by 2027.
  - External current account surpluses expected over the medium term; official reserves at the CBO projected to rise to 80.7 percent of the ARA metric by 2027.
- Impact of the war in Ukraine:
  - Direct spillovers small; positive thus far mostly via higher oil prices.
  - Oman dependent on Russia and Ukraine for about 60 percent of its total wheat imports; authorities have stockpiled food items and begun tapping new markets.
  - Potential adverse spillovers: slower global activity affecting oil demand, higher inflation from food and energy, supply-chain disruptions.
- Key risks:
  - Upside: higher-than-expected hydrocarbon windfall; accelerated structural reforms; realization of investment projects from regional partners.
  - Downside: uncertainty about the war in Ukraine and global economy and oil prices; renewed COVID-19 flare-ups; tighter-than-expected global financial conditions; increased inflationary pressures; persistent supply-chain disruptions; pressures to spend hydrocarbon windfalls; climate-related events.
- Authorities’ view:
  - Authorities broadly agreed with staff’s assessment and are pressing ahead with fiscal and structural reforms.

### Fiscal policy — strengthening fiscal frameworks
- 2022 budget stance and priorities:
  - Fiscal prudence: containing wages and goods & services expenditure while moderately increasing capital expenditure by 0.5 percent of GDP and social outlays of 1.9 percent of GDP (primarily in fuel subsidies).
  - Building on fiscal adjustment of 4.3 percent of GDP in the non-hydrocarbon structural primary balance during 2020-21; additional adjustment of about 2.5 percent of GDP undertaken in 2022 largely through containing the wage bill and other current expenditure.
  - Fiscal balance expected to improve to a surplus of 5.3 percent of GDP in 2022.
  - Government used hydrocarbon windfalls to repay, prepay, and buyback part of central government debt; central government debt expected to decline to 43.7 percent of GDP in 2022.
  - Scope for additional temporary targeted support without jeopardizing medium-term consolidation.
- Measures required to meet MTFP — mobilizing non-hydrocarbon revenue:
  - Tax revenue averaged 3.3 percent of GDP over 2017-2021 despite VAT introduction in 2021.
  - Scope to broaden VAT base by removing exemptions (except basic food items) and revisiting VAT rate over time.
  - Strengthen tax administration: addressing taxpayer registration, compliance, staffing, and IT systems with IMF TA support.
  - Personal income tax (PIT) on high-income earners prepared and estimated to yield 0.2 percent of GDP; expected implementation in 2024.
- Rationalizing expenditure and targeting subsidies:
  - Savings from mandatory retirement scheme and revised salary scales for new hiring amount to 1.2 percent of GDP in structural terms in 2022 and then remain constant in real terms.
  - Petroleum subsidies reduced from 3.2 to 0.1 percent of GDP between 2014 and 2021 but would rise in 2022 due to recent price caps.
  - Priority on phased withdrawal of untargeted energy and water subsidies, lifting caps, and resuming reforms through the National Subsidy System.
- Fiscal sustainability and intergenerational equity:
  - Steadfast implementation of MTFP will significantly reduce the gap with fiscal position consistent with intergenerational equity.
  - Nonhydrocarbon primary deficit would decline to 26.0 percent of nonhydrocarbon GDP, compared with the PIH norm of 19 percent.
  - Additional measures beyond the medium term needed to achieve full fiscal sustainability and equitable distribution of oil wealth.
- Key projection table figures (selected, verbatim):
  - Nominal GDP (in billions of Omani Rials): 2019: 33.9; 2020: 28.4; 2021: 33.0; 2022: 41.9; 2023: 42.7; 2024: 42.6; 2025: 42.8; 2026: 43.6; 2027: 44.7
  - Overall fiscal balance (adj.): 2019: 0.2; 2020: -10.1; 2021: -0.8; 2022: 5.2; 2023: 1.7; 2024: 2.5; 2025: 1.6; 2026: 1.1; 2027: 1.0
  - Gross financing needs: 2019: 9.9; 2020: 25.1; 2021: 8.6; 2022: 5.2; 2023: 1.0; 2024: 1.3; 2025: 3.1; 2026: 2.9; 2027: 3.9
  - Nonhydrocarbon fiscal balance: 2019: -25.5; 2020: -32.2; 2021: -27.5; 2022: -25.2; 2023: -25.4; 2024: -24.3; 2025: -24.2; 2026: -23.4; 2027: -22.8
  - Non-hydrocarbon structural primary balance 1/: 2019: -24.6; 2020: -22.4; 2021: -20.2; 2022: -17.7; 2023: -18.8; 2024: -18.0; 2025: -17.8; 2026: -17.2; 2027: -16.7
  - Structural non-hydrocarbon primary revenue 2/: 2019: 6.3; 2020: 7.0; 2021: 6.3; 2022: 5.8; 2023: 5.9; 2024: 6.7; 2025: 6.9; 2026: 7.3; 2027: 7.4
  - Value added tax: 2019: 0.0; 2020: 0.0; 2021: 0.9; 2022: 1.0; 2023: 1.1; 2024: 1.5; 2025: 1.6; 2026: 1.9; 2027: 1.9
  - Personal income tax: 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.0; 2023: 0.0; 2024: 0.2; 2025: 0.2; 2026: 0.2; 2027: 0.2
  - Expatriate license fees: 2019: 0.7; 2020: 0.5; 2021: 0.6; 2022: 0.5; 2023: 0.5; 2024: 0.5; 2025: 0.5; 2026: 0.5; 2027: 0.5
  - Structural primary expenditure 2/: 2019: 30.9; 2020: 29.4; 2021: 26.6; 2022: 23.5; 2023: 24.7; 2024: 24.6; 2025: 24.7; 2026: 24.5; 2027: 24.1
  - Wage bill: 2019: 10.2; 2020: 11.1; 2021: 9.4; 2022: 8.2; 2023: 8.5; 2024: 8.7; 2025: 9.0; 2026: 9.1; 2027: 9.1
  - Subsidies: 2019: 4.0; 2020: 4.0; 2021: 3.3; 2022: 3.8; 2023: 4.6; 2024: 4.0; 2025: 3.7; 2026: 3.5; 2027: 3.3
  - Primary expenditure (adj., in billions of Omani Rials): 2019: 10.8; 2020: 10.4; 2021: 10.4; 2022: 12.1; 2023: 12.4; 2024: 12.2; 2025: 12.3; 2026: 12.5; 2027: 12.6
  - Note: 3/ Mainly non-tax revenue and largely reflecting dividend income from OIA, which is constant in nominal term.
  - Note: 1/ Adjusted by the economic cycle, assuming revenue elasticity of one and expenditure elasticity of zero.
  - Note: 2/ Percent of nominal potential GDP.

### Fiscal frameworks, PFM, and sovereign balance sheet
- Fiscal frameworks and public financial management:
  - Recommendation: complement the implicit deficit ceiling of 3 percent of GDP with a rule on the non-hydrocarbon primary balance to non-hydrocarbon GDP.
  - Longer-run option: fiscal rule based on the non-hydrocarbon structural primary balance.
  - Reforms: strengthen medium-term macroeconomic framework; publish a fiscal risk statement; develop a medium-term expenditure framework; expand fiscal coverage.
- Transparency and PFM reforms:
  - First-ever pre-budget statement published in 2021.
  - OIA investment spending announced as part of the 2022 Budget.
  - TSA to be gradually rolled out starting in 2022H2 to centralize public revenue and improve cash management.
  - Joint committee formed between the MoF and the State Audit Institution to improve financial performance and governance.
  - Staff recommended publishing a fiscal risk statement and explicitly taking fiscal risks into account when setting the fiscal anchor.
- Sovereign balance sheet and debt strategy:
  - Developing a public debt law and a national register of government assets.
  - OIA asset split: National Development Portfolio (SOE assets) and Future Generations Portfolio (largely foreign assets).
  - Recommend expanding the scope of the Debt Management Committee (DMC) and drafting an inaugural Medium Term Debt Strategy (MTDS).

### Monetary policy, liquidity, and financial stability
- Monetary policy and exchange rate:
  - Exchange rate peg serves as a credible monetary anchor and helps deliver low and stable inflation.
  - Considerations: a more flexible exchange rate could support non-hydrocarbon tradable sector development over time, but moving away from the peg would remove a credible anchor and have limited near-term benefits.
  - Further hikes in the CBO’s policy rate expected in line with US monetary policy tightening.
- Monetary transmission and liquidity management:
  - Weak monetary transmission driven by structural excess liquidity in the banking sector.
  - CBO’s Monetary Policy Enhancement Project (MPEP) aims to upgrade liquidity management and improve transmission.
  - Measures to absorb structural excess liquidity include developing shariah-compliant instruments, reversing reserve requirement eligibility criteria, and reintroducing CBO certificates of deposit with non-overlapping maturities.
  - Effective monetary policy requires better fiscal-monetary coordination and deeper financial markets.
- Sovereign–bank nexus and TSA coordination:
  - 30.4 percent of bank deposits are from the sovereign (government and SOEs).
  - Banks’ claims on the sovereign: 21.7 percent of total assets at end-2021.
  - TSA establishment requires careful coordination to ensure adequate banking system liquidity.
- Banking sector resilience and prudential measures:
  - Pandemic support: loan moratorium phased out at end-December 2021; transition strategy allowed restructuring until end-September 2022; amount subject to deferment: 3.4 percent of gross loans at end-July 2022.
  - CBO intends to restore prudential measures (capital conservation buffers, liquidity ratio, lending ratio) to pre-pandemic levels.
  - CBO stress tests based on June 2022 data indicate sufficient capital buffers to withstand severe scenarios.

### Financial sector development and digitalization
- Banking system and regulation:
  - Islamic banking entities: about 16 percent of banking sector assets.
  - CBO finalizing medium-term strategy including a lender of last resort facility and a sharia-compliant deposit insurance scheme.
  - New Banking Law to align with Core Principles for Effective Banking Supervision and provide legal certainty for Bank Resolution Framework.
  - CBO aims to incorporate climate risks in financial stability assessments and promote green financing.
- Capital markets:
  - Securities Law enacted in 2022.
  - Capital Market Authority raised foreign ownership limits in joint stock companies to 100 percent.
  - Draft Regulation for Bonds and Sukuk being finalized; requirements for sustainable and responsible investment.
  - Authorities plan to list some SOEs in the stock market.
- Digitalization:
  - Fintech Regulatory Sandbox Framework launched; blockchain tested for trade finance.
  - Developing an open banking strategy and exploring a CBDC (early stages).
  - Monitoring AML/CFT risks of digital initiatives; revised supervisory instructions issued in April 2022.

### Structural reforms, labor market, and social safety nets
- Structural reform objective: private sector-led, job-rich, sustainable growth under Vision 2040.
- Labor market:
  - Relaxed restrictions on job transfers for expatriates; reduced hiring fees for expatriates.
  - Launched government-sponsored training and habilitation initiatives.
  - Job Security Fund established in November 2020 provides unemployment benefits.
  - Recommended reforms: eliminate factors hindering labor market efficiency and segmentation; revisit minimum wage of OMR325 per month; consider extending minimum wage to expatriates; ensure public sector wage growth does not outpace private sector; strengthen performance metrics and link to pay and promotion; increase female employment; improve expatriate policy framework; Investment Residency Program launched.
- Box — Empowering Omani Women:
  - Female labor force participation rose from 23 percent to 35 percent in 2021 over two decades.
  - Staff estimates: increasing female participation from 35 percent to world average of about 50 percent would lift non-hydrocarbon potential GDP by more than 3 percent over the medium term.
  - Policy options: improve working environment and flexibility, extend maternity benefits, improve childcare provision, facilitate job searching.
- Business environment and SOE reforms:
  - Foreign Capital Investment Law (FCIL) allows 100 percent foreign-owned companies.
  - Commercial Companies Law (CCL) and Executive Regulations (issued October 2021) improve regulatory framework.
  - Rawabet program and OIA Code of Governance of State-Owned Enterprises (February 2022) guide SOE governance.
  - OIA’s share in new projects limited to 40 percent to stimulate private sector participation.
  - Recommendation: promote market competition and gradually limit SOEs to strategic industries.

### Digitalization, climate, and data
- Digitalization:
  - ONDEP target: increase contribution of the digital economy from "2 percent of GDP to 10 precent of GDP by 2040."
  - Roadmap for Government Digital Transformation (2021-2025) aims at digitizing "80 percent of government services by 2025."
  - Reskilling workers is "crucial"; plan to institute strategic partnerships with private sector.
- Climate:
  - National Fund for Emergency established; Nationally Determined Contributions: reduce greenhouse gas emission by "7 percent by 2030."
  - National Energy Strategy target: "20 percent of electricity from renewables by 2027."
  - Decision: "freeze new gas-based power projects and meet any additional demand for electricity from renewable sources only."
  - Investment priorities: solar, wind, and green hydrogen.
  - Policy needs: integrate climate priorities into macroeconomic frameworks and develop green financing.
- Data improvements and gaps:
  - NCSI updated national accounts to SNA 2008 and adopted 2018 as new base year; started publishing quarterly real GDP.
  - Remaining data gaps: fiscal coverage beyond central government, assets and liabilities of SOEs, non-financial sector international transactions, historical non-oil trade data, financial soundness indicators, real estate price indices, and disaggregated labor market data.

### Inflation dynamics, pass-through, and policy implications
- Inflation drivers and recent developments:
  - Dominated by VAT base effects, price caps on selected food and fuels, and a stronger U.S. dollar since early 2022.
  - Bread and cereal account for 3 percent of the CPI basket.
  - Cap on domestic fuel prices remains until oil prices decline below US$75 per barrel.
  - Headline inflation peaked at 4.4 percent (y-o-y) in January 2022 and declined thereafter; 2.4 percent in May 2022 (y-o-y).
  - Global factors contributed about 70 percent to the total increase in inflation in March 2022 (y-o-y).
- Tradable vs non-tradable inflation:
  - Tradable items: about 60 percent of CPI components; tradables have historically had higher inflation and volatility.
  - Weight CPI Groups (as reported): 58.128 Tradables; 23.903 Food & Non-Alcoholic Beverages; 0.125 Tobacco; 5.961 Clothing & Footwear; 3.787 Furnishings, Household Equipment & Routine Maintenance; 19.167 Transport; 5.185 Miscellaneous Goods and Services; 41.872 Non-Tradables; 26.477 Housing, Water, Electricity, Gas and Other Fuels; 1.161 Health; 5.633 Communication; 1.135 Recreation and Culture; 1.368 Education; 6.098 Restaurants and Hotels.
- Pass-through estimates (local projection method):
  - 1 percent increase in international food price → about 0.2 percent increase in CPI within 11 months (impact disappears after 13 months).
  - 1 percent rise in international oil price → about 0.25 percent increase in CPI within 11 months (effects vanish after 13 months).
  - 1 percent shock in global supply chain pressure (GSCPI) → about 0.2 increase in CPI within 12 months (takes up to 22 months to vanish).
- ARDL model short-run drivers:
  - Inflation (L1) coefficient = 0.448*** [0.147]; Inflation (L4) = -0.543*** [0.105].
  - Output Gap coefficient = 0.052** [0.019]; Output Gap (L3) = 0.057** [0.020].
  - ∆ Food Price = 0.042** [0.019].
  - ∆ GSCPI and lags: small positive coefficients (statistically significant).
  - Observations: 44; R-squared (short term): 0.979; Long-run Bounds Test Statistic: 12.384***.
- Policy implications:
  - Oman’s inflation sensitive to external factors and tradable-weighted CPI implies strong pass-through.
  - Recommendations: reinforce fiscal sustainability, accommodate possible domestic liquidity needs, support hard-hit sectors if needed, rebuild FX buffers, and deepen domestic financial markets.

### External sector assessment (Annex II)
- NIIP and external assets/liabilities (end-2021):
  - NIIP: negative US$33.3 billion (compared with negative US$28.8 billion at end-2020).
  - External assets: US$95.1 billion at end-2021 (growth 8.0 percent).
  - CBO reserve assets: 20.7 percent of total foreign assets; government reserve assets: 18.3 percent.
  - External liabilities: US$128.4 billion at end-2021 (US$117.1 billion at end-2020).
- 2021 (% GDP) snapshot:
  - NIIP: -38.8; Gross Assets: 110.8; Res. Assets: 22.9; Gross Liab.: 149.5; Debt Liab.: 96.7
- Current account:
  - Current account deficit improved to 5.0 percent of GDP in 2021 from 16.6 percent in 2020.
  - CA balance projected to record a surplus in 2022 and over medium term for the first time since 2014.
  - EBA-lite current account gap in 2021: -1.5 percent of GDP (from -8.8 percent in 2020).
  - Policy gap: positive policy gap of 1.6 percent of GDP.
  - CA model estimates: -2.0 percent of GDP (constant annuity) and -3.9 percent (constant real per capita annuity).
  - REER assessments: REER overvalued by 4.0 percent (CA approach); annuity approaches imply REER overvalued by about 8.0 percent on average.
- Exchange rates and capital flows:
  - REER and NEER appreciated by 2.7 percent in 2021; both 1 percent above their 10-year average.
  - EBA-lite REER model gap: -2.5 percent.
  - Net financial flows: US$8.27 billion in 2021 (from US$10.5 billion in 2020).
  - Sovereign borrowing: US$5.5 billion in 2021.
  - Net FDI inflows: US$4.4 billion in 2021 (US$4.0 billion concentrated in hydrocarbon sector).
- Reserves and adequacy:
  - CBO reserves increased by US$4.7 billion in 2021 to US$19.7 billion (5.3 months of imports, 37.5 percent of broad money).
  - Corresponding to 71.4 percent of the Fund’s ARA metric (up from 61 percent in 2020), below suggested adequate range of 100‑150 percent.
  - Including OIA liquid external assets would put reserves above the adequacy ratio in 2021 and beyond if additional FX reserves are needed.
  - Projection: CBO foreign reserves are expected to significantly improve and reach 80.7 percent of the ARA metric by 2027 (projection statement in source truncated).

### Public debt, stress tests, and vulnerabilities
- Public debt developments:
  - Public debt surged from 4 percent of GDP in 2014 to about 70 percent in 2020; improved in 2021 due to high oil prices and MTFP.
  - Domestically-held debt: 18 to 15.7 percent of GDP between 2020-2021.
  - Externally-held debt: 51.7 to 47.2 percent of GDP between 2020-2021.
  - Bonds and sukuk account for about 75 percent and 70 percent of domestic and external debt at end-2021, respectively.
  - Net debt moved from minus 24.2 percent of GDP at end-2016 to 25.5 percent of GDP at end-2021.
- Baseline and financing assumptions:
  - Non-hydrocarbon growth projected to reach about 4 percent by 2027.
  - Overall growth expected at 2.7 percent in 2027.
  - GFNs: about 23.5 percent of GDP in 2021; projected to decline to 3.8 percent of GDP in 2022 and around 3.5 percent by 2023.
  - Gross public debt projected to decline to about 37 percent of GDP by 2027; net public debt to about -5.6 percent of GDP by 2027.
- Stress test outcomes:
  - Growth shock (1 SD ≈ 3.6 percentage points in 2023 and 2024): central government debt to 53.9 percent of GDP by 2027.
  - Primary balance shock (deterioration by 3.9 percentage points in 2023 and 2024): public debt to 48.3 percent of GDP by 2027; GFNs increase to 5.7 percent of GDP in 2023 and about 5.8 percent in 2024.
  - Interest rate shock: debt stabilizes around 51.7 percent of GDP by 2027.
  - Combined macro-fiscal shock: central government debt ~69 percent of GDP and GFNs 11.2 percent of GDP in 2027.
  - Contingent liability shock (10 percent of banks’ assets plus explicit SOE contingent liabilities ~10 percent of GDP): gross debt 54.1 percent of GDP and GFNs 7.4 percent of GDP by 2027.
- External debt stress tests:
  - External debt increased from about 72 to 93 percent of GDP during 2017-2021.
  - One-time real exchange rate depreciation of 30 percent in 2022 → external debt peaks at 96 percent of GDP in 2027.
  - Increase in current account deficit by half a standard deviation each year from 2022 → external debt peaks at 94 percent of GDP in 2027.
  - Combined permanent shock (one-fourth SD to interest rate, growth, non-interest current account): external debt 87 percent of GDP by 2027.
- Vulnerabilities and policy implications:
  - Key vulnerabilities: exposure to oil market developments and pressures to spend windfalls; sensitivity to primary balance, GDP growth, exchange rate, and interest rate shocks.
  - Policy imperatives: maintain fiscal discipline, rebuild buffers, continue fiscal consolidation under MTFP, use high oil prices and reforms to narrow public debt, and hold additional reserves above the ARA metric to be usable in case of an exchange rate shock.

### Inflation, trade, and Russia/Ukraine linkages
- Inflation dynamics since early 2022:
  - Dominant factors: VAT base effect, price caps on wheat, flour, and fuels (M91, M95, diesel since November 2021), and stronger U.S. dollar.
  - Headline inflation peak: 4.4 percent (y-o-y) in January 2022; decelerated subsequently.
  - Global factors contributed about 70 percent to inflation increase in March 2022 (y-o-y).
- Fiscal and external outlook linked to oil prices:
  - Every US$1 increase in the oil price will add about OMR100 million to fiscal revenue annually.
  - Fiscal balance expected to turn to a surplus of 5.5 percent of GDP in 2022, reducing GFNs to 3.7 percent of GDP.
  - External current account projected at 6.8 percent of GDP in 2022 (it was -5.6 percent of GDP in 2021).
- Trade and food security:
  - Imports from Russia and Ukraine constituted less than 1 percent of Oman’s total imports.
  - Oman depends on Russia and Ukraine for about 60 percent of its total wheat imports; stockpiled food items and tapped new markets to ensure food security.
  - Exports to Russia and Ukraine remain less than 0.1 percent of total non-oil goods trade.
  - Tourism: 0.65 million tourist arrivals in 2021; about three-fourths from GCC, India, Yemen, Pakistan, and Egypt; tourism accounts for less than 3 percent of GDP.
  - OIA assets (US$42.3 billion at end-Dec 2021): 60 percent in Oman, 18 percent North America, 10 percent Developed Europe, 5 percent Asia and Pacific; EM Europe and Central Asia ~1.5 percent (≈ $676 million).

### Risk Assessment Matrix — selected risks and responses
- Intensifying spillovers from Russia’s war on Ukraine (Relative Likelihood: High; Expected Impact: Low)
  - Policy responses: ensure food security, target energy and food subsidies, monitor and mitigate tighter global financial conditions.
- Commodity price shocks (Relative Likelihood: High; Expected Impact: High)
  - Policy responses: mobilize non-hydrocarbon revenue, establish clear fiscal anchor, resume energy price reforms, monitor banking liquidity and asset quality, accelerate structural reforms.
- Local Covid-19 outbreaks (Relative Likelihood: Medium; Expected Impact: Medium)
  - Policy responses: continue health support, use buffers for targeted policy support if needed.
- De-anchoring of inflation expectations and stagflation (Relative Likelihood: Medium; Expected Impact: Medium)
  - Policy responses: tighten monetary policy in line with the Fed, implement fiscal consolidation, target support to viable firms.
- Pressures to spend oil windfalls (Relative Likelihood: Medium; Expected Impact: Medium/Low)
  - Policy response: steady implementation of the MTFP and establishment of clear fiscal anchor.
- Natural disasters related to climate change (Relative Likelihood: Medium; Expected Impact: Low)
  - Cyclone Shaheen fiscal cost in 2021: about 0.6 percent of GDP.
  - National Fund for Emergency initial contribution: 0.3 percent of GDP.
  - Policy responses: rebuild buffers and improve business environment.

### Data compilation, dissemination, and surveillance
- Coverage gaps:
  - Published data do not provide comprehensive coverage of public sector: SOEs, pension funds, OIA, and EDO not fully covered.
  - Authorities provide Article IV missions with more comprehensive analytical budget presentations.
- Monetary and financial statistics:
  - CBO reports monetary and financial statistics using SRFs consistent with MFSMCG; published in IFS.
  - CBO submits basic indicators to Financial Access Survey and is working to disseminate FSIs to STA.
- Balance of payments and external statistics:
  - ITRS implemented; priorities: enhance quarterly BoP quality, improve foreign investment survey timeliness and coverage, enhance non-financial institution data, and improve cooperation with other entities.
  - Authorities do not currently publish Reserve Template or external debt; do not participate in Coordinated Direct Investment Survey.
- Table of Common Indicators Required for Surveillance (As of September 20, 2022) — selected observation dates and frequencies:
  - Exchange rates: Date of Latest Observation: Real time; Frequency of Data: D; Frequency of Publication: D
  - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation: Jun 2022; Frequency of Data: M; Frequency of Publication: M
  - Reserve/base money: Date of Latest Observation: Jun. 2022; Frequency of Data: M; Frequency of Publication: M
  - Broad money: Date of Latest Observation: Jun. 2022; Frequency of Data: M; Frequency of Publication: M
  - Consumer price index: Date of Latest Observation: Jun. 2022; Frequency of Data: M; Frequency of Publication: M
  - Revenue, expenditure, balance and composition of financing – central government: Date of Latest Observation: 2021; Frequency of Data: A; Frequency of Publication: A
  - GDP/GNP: Date of Latest Observation: Jun. 2022; Frequency of Data: Q; Frequency of Publication: Q
  - International investment position: Date of Latest Observation: 2021; Date Received: Sep. 2022; Frequency of Data: A

*International Monetary Fund — Oman: Selected chapter excerpts and staff findings (2022).*

### 2022. The team comprised Daniel Kanda (head), Abdullah AlHassan,

### 1omnea2022001 - 2022. The team comprised Daniel Kanda (head), Abdullah AlHassan,

### Background
- Vaccination and COVID-19 response:
  - Nearly all persons 12 years and older had been at least partially vaccinated and about 90 percent were fully vaccinated as of end-May 2022.
  - With a high vaccination rate and declining infections, all COVID-19 social restrictions have been removed.
- Policy response and reforms:
  - Targeted fiscal, monetary, and financial measures in 2020-2021 provided relief to households, firms, and banks supporting non-hydrocarbon recovery.
  - Government implementing reforms under “Oman Vision 2040” focused on fiscal sustainability, SOE governance, non-oil private sector growth, job creation, and cleaner energy.
  - Financial markets supportive, borrowing spreads narrowed (reaching below emerging markets spreads for the first time since end-2018).
  - Fund provided technical assistance on fiscal frameworks, tax administration, public debt management, and external sector statistics.
- Oil prices:
  - Oil prices have risen to a multi-year high and are projected to remain high over the medium term, strengthening fiscal and external buffers.

### Recent Economic Developments
- Growth and sector performance:
  - Overall GDP growth: rebounded from -3.2 percent in 2020 to 3.0 percent in 2021.
  - Real hydrocarbon GDP growth: 3.7 percent in 2021, mainly due to strong oil condensate production not covered by the OPEC+ agreement.
  - Non-hydrocarbon GDP growth: 1.8 percent in 2021, supported by gradual reopening and recovery.
  - Construction and services remain below pre-pandemic levels.
  - Labor market: increased labor force participation of nationals offset reduction in expatriate workers; continued recovery in expatriate workers and new labor market entrants in 2022 H1.
- Inflation:
  - Headline CPI inflation: 1.5 percent (y-o-y) in 2021 following the introduction of VAT.
  - CPI inflation edged up to 4.4 percent (y-o-y) in January 2022, then decelerated to 2.4 percent in August 2022.
  - PPI inflation has been significantly higher than CPI since 2021Q1 due to larger weight of hydrocarbon products in the PPI and administrative price settings.
- Fiscal developments:
  - Overall central government balance improved by 12.8 percentage points of GDP to a deficit of 3.2 percent in 2021.
  - Government covered EDO operational expenses amounting to 2.4 percent of GDP in 2021 until EDO was fully established.
  - Central government debt: declined to 62.9 percent of GDP in 2021 (69.7 percent at end-2020).
  - SOE debt: 41.8 percent of GDP in 2021; mitigated by OIA assets.
  - Net financial assets ratio: increased to -25.5 percent of GDP (-28.5 percent at end-2020).
- External sector:
  - Current account deficit narrowed to 5.0 percent of GDP in 2021 (16.6 percent in 2020).
  - International reserves at the Central Bank of Oman increased by US$4.7 billion in 2021 to US$19.7 billion (5.3 months of prospective imports and 71.4 percent of the IMF ARA metric), including August 2021 SDR allocation (US$733 million) that authorities intend to keep as part of reserves.
  - Staff assess Oman’s external position as moderately weaker than the level implied by fundamentals and desirable policies (Annex II).
- Banking sector:
  - As of end-June 2022, NPL ratio around 4.0 percent with provisioning exceeding 113 percent.
  - Return on assets: 1.3 percent (1.1 percent at end-2021).
  - Private sector credit growth: 2.3 percent (y/y) anemic.
  - Claims on government and SOEs increased by 7.6 percent and 14.4 percent respectively; their deposits increased by 13.2 percent and 32.6 percent respectively.

### Outlook and Risks
- Growth and inflation projections:
  - Overall GDP growth projected at 4.3 percent in 2022.
  - Non-hydrocarbon growth projected to strengthen gradually to 4.0 percent over the medium term.
  - Overall GDP growth projected at 2.7 percent over the medium term as hydrocarbon production stabilizes.
  - Inflation expected to reach 3.0 percent in 2022.
- Fiscal and external balances:
  - A substantial fiscal surplus is expected in 2022, gradually diminishing to 1.0 percent of GDP by 2027 as oil prices decline.
  - Central government debt expected to decline to 36.8 percent of GDP by 2027.
  - External current account surpluses expected over the medium term; official reserves at the CBO projected to rise to 80.7 percent of the ARA metric by 2027.
- Impact of the war in Ukraine:
  - Direct spillovers small; positive thus far mostly via higher oil prices.
  - Oman dependent on Russia and Ukraine for about 60 percent of its total wheat imports; authorities have stockpiled food items and begun tapping new markets.
  - Potential adverse spillovers include slower global activity affecting oil demand, higher inflation from food and energy, and supply-chain disruptions (Annex IV).
- Risks:
  - Upside: higher-than-expected hydrocarbon windfall; accelerated structural reforms; realization of investment projects from regional partners.
  - Downside: uncertainty about the war in Ukraine and global economy and oil prices; renewed COVID-19 flare-ups; tighter-than-expected global financial conditions; increased inflationary pressures; persistent supply-chain disruptions; pressures to spend hydrocarbon windfalls; climate-related events.
- Authorities’ view:
  - Authorities broadly agreed with staff’s assessment and are pressing ahead with fiscal and structural reforms.

### Policy Discussions — Overview
- Focus areas:
  - (i) Strengthening fiscal frameworks
  - (ii) Safeguarding financial stability
  - (iii) Securing more inclusive, diversified, and sustainable growth

### Fiscal Policy: Strengthening Fiscal Frameworks
- 2022 budget stance and priorities:
  - Fiscal prudence maintained: containing wages and goods & services expenditure while moderately increasing capital expenditure by 0.5 percent of GDP and social outlays of 1.9 percent of GDP (primarily in fuel subsidies).
  - Objectives: strengthen recovery, rebuild buffers, gradually reduce government debt.
  - Building on fiscal adjustment of 4.3 percent of GDP in the non-hydrocarbon structural primary balance during 2020-21, additional adjustment of about 2.5 percent of GDP undertaken in 2022 largely through containing the wage bill and other current expenditure.
  - Fiscal balance expected to improve to a surplus of 5.3 percent of GDP in 2022 (first time since 2013), considerably higher than budget projections.
  - Government used hydrocarbon windfalls to repay, prepay, and buyback part of central government debt; central government debt expected to decline to 43.7 percent of GDP in 2022, partly reflecting non-policy factors (increase in nominal GDP due to higher oil prices).
  - Scope for additional temporary targeted support to most affected households and sectors without jeopardizing medium-term consolidation.
- Measures required to meet MTFP:
  - Mobilizing non-hydrocarbon revenue:
    - Tax revenue averaged 3.3 percent of GDP over 2017-2021 despite VAT introduction in 2021.
    - Scope to broaden VAT base by removing exemptions (except basic food items) and revisiting VAT rate over time.
    - Strengthen tax administration: addressing taxpayer registration, compliance, staffing, and IT systems with IMF TA support.
    - Personal income tax (PIT) on high-income earners prepared and estimated to yield 0.2 percent of GDP; expected implementation in 2024.
  - Rationalizing expenditure:
    - Savings from mandatory retirement scheme and revised salary scales for new hiring amount to 1.2 percent of GDP in structural terms in 2022 and then remain constant in real terms.
    - Ministries submitting monthly reports to align spending with the Budget.
  - Targeting subsidies:
    - Petroleum subsidies reduced from 3.2 to 0.1 percent of GDP between 2014 and 2021 but would rise in 2022 due to recent price caps.
    - Priority on phased withdrawal of untargeted energy and water subsidies, lifting caps, and resuming reforms through the National Subsidy System.
- Fiscal sustainability and intergenerational equity:
  - Steadfast implementation of MTFP will significantly reduce the gap with fiscal position consistent with intergenerational equity.
  - Nonhydrocarbon primary deficit would decline to 26.0 percent of nonhydrocarbon GDP, compared with the Permanent Income Hypothesis (PIH) norm of 19 percent.
  - Additional measures beyond the medium term needed to achieve full fiscal sustainability and equitable distribution of oil wealth.
- Key figures from projection table (selected, verbatim):
  - Nominal GDP (in billions of Omani Rials): 2019: 33.9; 2020: 28.4; 2021: 33.0; 2022: 41.9; 2023: 42.7; 2024: 42.6; 2025: 42.8; 2026: 43.6; 2027: 44.7
  - Overall fiscal balance (adj.): 2019: 0.2; 2020: -10.1; 2021: -0.8; 2022: 5.2; 2023: 1.7; 2024: 2.5; 2025: 1.6; 2026: 1.1; 2027: 1.0
  - Gross financing needs: 2019: 9.9; 2020: 25.1; 2021: 8.6; 2022: 5.2; 2023: 1.0; 2024: 1.3; 2025: 3.1; 2026: 2.9; 2027: 3.9
  - Nonhydrocarbon fiscal balance: 2019: -25.5; 2020: -32.2; 2021: -27.5; 2022: -25.2; 2023: -25.4; 2024: -24.3; 2025: -24.2; 2026: -23.4; 2027: -22.8
  - Non-hydrocarbon structural primary balance 1/: 2019: -24.6; 2020: -22.4; 2021: -20.2; 2022: -17.7; 2023: -18.8; 2024: -18.0; 2025: -17.8; 2026: -17.2; 2027: -16.7
  - Structural non-hydrocarbon primary revenue 2/: 2019: 6.3; 2020: 7.0; 2021: 6.3; 2022: 5.8; 2023: 5.9; 2024: 6.7; 2025: 6.9; 2026: 7.3; 2027: 7.4
  - Value added tax: 2019: 0.0; 2020: 0.0; 2021: 0.9; 2022: 1.0; 2023: 1.1; 2024: 1.5; 2025: 1.6; 2026: 1.9; 2027: 1.9
  - Personal income tax: 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.0; 2023: 0.0; 2024: 0.2; 2025: 0.2; 2026: 0.2; 2027: 0.2
  - Expatriate license fees: 2019: 0.7; 2020: 0.5; 2021: 0.6; 2022: 0.5; 2023: 0.5; 2024: 0.5; 2025: 0.5; 2026: 0.5; 2027: 0.5
  - Structural primary expenditure 2/: 2019: 30.9; 2020: 29.4; 2021: 26.6; 2022: 23.5; 2023: 24.7; 2024: 24.6; 2025: 24.7; 2026: 24.5; 2027: 24.1
  - Wage bill: 2019: 10.2; 2020: 11.1; 2021: 9.4; 2022: 8.2; 2023: 8.5; 2024: 8.7; 2025: 9.0; 2026: 9.1; 2027: 9.1
  - Subsidies: 2019: 4.0; 2020: 4.0; 2021: 3.3; 2022: 3.8; 2023: 4.6; 2024: 4.0; 2025: 3.7; 2026: 3.5; 2027: 3.3
  - Primary expenditure (adj., in billions of Omani Rials): 2019: 10.8; 2020: 10.4; 2021: 10.4; 2022: 12.1; 2023: 12.4; 2024: 12.2; 2025: 12.3; 2026: 12.5; 2027: 12.6
  - Note: 3/ Mainly non-tax revenue and largely reflecting dividend income from OIA, which is constant in nominal term.
  - Note: 1/ Adjusted by the economic cycle, assuming revenue elasticity of one and expenditure elasticity of zero.
  - Note: 2/ Percent of nominal potential GDP.

*International Monetary Fund — Oman: Selected chapter excerpts and staff findings (2022).*

### 16.      There was agreement that establishing strong fiscal frameworks with clear fiscal

### 16–31. Fiscal frameworks, monetary and financial policies, and structural reforms

### Fiscal frameworks and public financial management
- Establishing strong fiscal frameworks with clear fiscal objectives and a long-term fiscal anchor would help achieve fiscal consolidation.
- Reforms to be situated within a broader framework for fiscal policy making, including:
  - strengthening the medium-term macroeconomic framework;
  - publishing a fiscal risk statement;
  - developing a medium-term expenditure framework;
  - expanding fiscal coverage (prerequisites for adopting an effective fiscal rule).
- Interim recommendation: complement the implicit deficit ceiling of 3 percent of GDP with a rule on the non-hydrocarbon primary balance to non-hydrocarbon GDP to delink expenditure decisions from commodity price volatility and more accurately assess the fiscal stance.
- Long-run option: a fiscal rule based on the non-hydrocarbon structural primary balance to disconnect spending from oil and gas price volatility and economic fluctuations (noted as potentially appropriate for Oman).

### Transparency, fiscal risk management, and PFM reforms
- Transparency:
  - First-ever pre-budget statement published in 2021.
  - OIA investment spending announced as part of the 2022 Budget.
  - Authorities aim to provide more disclosure on revenue, expenditure, and financing in the monthly fiscal performance bulletin.
  - Investment by the rest of the public sector amounted to 9.6 percent of GDP for OIA-affiliated entities and EDO in 2022 — broadening fiscal coverage beyond the central government is essential to assess Oman’s true fiscal stance.
- Public financial management reforms:
  - Treasury single account (TSA) to be gradually rolled out starting in 2022H2 to centralize public revenue and improve cash management.
  - Joint committee formed between the MoF and the State Audit Institution to improve financial performance and strengthen governance and efficiency.
- Fiscal risks:
  - Fiscal risks are multifaceted and potentially significant (Annex VI).
  - Staff recommended publishing a fiscal risk statement.
  - Explicitly taking risks into account in setting the fiscal anchor would strengthen robustness.

### Sovereign balance sheet, asset-liability management, and debt strategy
- Ongoing efforts to develop an integrated asset-liability management framework:
  - Developing a public debt law to regulate and manage debt operations.
  - Creating a national register of government assets to centralize asset management.
- OIA asset split:
  - National Development Portfolio (SOE assets) — aim to contribute to economy and support the Budget through dividends and privatization proceeds.
  - Future Generations Portfolio (largely foreign assets).
- Recommendation: expand the scope of the Debt Management Committee (DMC) to coordinate sovereign entities managing assets and liabilities to identify and mitigate public sector balance sheet risks.
- Drafting an inaugural Medium Term Debt Strategy (MTDS) to guide government borrowing, improve debt profile, deepen domestic debt markets, develop a yield curve, and maintain access to international capital markets.

*Authorities’ views on fiscal matters*
- Authorities committed to fiscal prudence and growth-friendly consolidation.
- Social safety net reform to strengthen household resilience; improving targeting of petroleum subsidies starting from 2023; examining options for reforming water subsidies.
- Intend to update the MTFP regularly and align it with five-year Development Plan under Vision 2040.
- Intend to expand the mandate of the DMC to oversee sovereign assets in addition to liabilities.

### Monetary policy framework and exchange rate
- Exchange rate peg continues to serve Oman well as a credible monetary anchor, helping deliver low and stable inflation.
- Considerations:
  - A more flexible exchange rate could, over time, support non-hydrocarbon tradable sector development and enable CBO to follow a more independent interest rate policy.
  - A move away from the peg would remove a credible monetary anchor, increase uncertainty, and have limited near-term benefits for competitiveness.
  - The peg should be reviewed regularly to ensure appropriateness.
- Further hikes in the CBO’s policy rate are expected in line with US monetary policy tightening.

### Monetary transmission, liquidity management, and MPEP
- Weak monetary transmission driven by structural excess liquidity in the banking sector — hinders interbank market and limits response of lending rates and bank credit to policy rate changes.
- Control of inflation has relied significantly on administered pricing and subsidies; as these tools are phased out, strengthening liquidity management and transmission is important.
- CBO’s Monetary Policy Enhancement Project (MPEP) aims to upgrade liquidity management and improve transmission.
- Measures to absorb structural excess liquidity include:
  - developing shariah-compliant instruments for Islamic banking entities;
  - reversing existing criteria for reserve requirement eligibility to only include non-security assets;
  - reintroducing CBO certificates of deposit with maturities that do not overlap with T-bills.
- Effective monetary policy requires better fiscal-monetary coordination, deeper financial markets, and strengthened liquidity management.

### Sovereign–bank nexus and TSA coordination
- Significant sovereign–bank nexus:
  - 30.4 percent of bank deposits are from the sovereign (government and SOEs).
  - Banks’ claims on the sovereign increased to 21.7 percent of total assets at end-2021.
- With TSA establishment, careful coordination needed to ensure banking system liquidity remains adequate to support credit provision.

### External conditions, banking sector resilience, and pandemic measures
- Impact of tighter global financial conditions expected to be limited, but vigilance required (Annex VIII).
- Banking sector features:
  - Negative NFA position, but ample liquidity and 36 percent of total deposits were non-interest-bearing at end-June 2022.
- Policy priorities: fiscal consolidation, rebuilding FX buffers, and deepening domestic financial markets to increase resilience.
- Pandemic support measures:
  - Loan moratorium phased out at end-December 2021.
  - Transition strategy allowed affected borrowers to restructure or reschedule loans based on revised cashflows until end-September 2022.
  - Amount subject to deferment stood at 3.4 percent of gross loans at end-July 2022.
  - CBO intends to restore remaining prudential measures (capital conservation buffers, liquidity ratio, and lending ratio) to pre-pandemic levels as pandemic impact declines.
  - CBO stress tests based on June 2022 data indicate sufficient capital buffers to withstand severe scenarios.

### Financial sector regulation, capital markets, and digitalization
- Banking system:
  - Islamic banking entities account for about 16 percent of banking sector assets.
  - CBO finalizing a medium-term strategy including a lender of last resort facility and a sharia-compliant deposit insurance scheme.
  - New Banking Law to align legislation with Core Principles for Effective Banking Supervision and provide legal certainty for Bank Resolution Framework.
  - CBO aims to incorporate climate risks in financial stability assessments and promote green financing.
- Capital markets:
  - Securities Law enacted in 2022.
  - Capital Market Authority raised foreign ownership limits in joint stock companies to 100 percent.
  - Draft Regulation for Bonds and Sukuk being finalized, including requirements for sustainable and responsible investment.
  - Authorities plan to list some SOEs in the stock market.
- Digitalization:
  - Fintech Regulatory Sandbox Framework launched; testing blockchain for trade finance.
  - Developing an open banking strategy and exploring adopting a CBDC (early stages).
  - Monitoring AML/CFT risks of digital initiatives is a priority.
- AML/CFT:
  - Revised supervisory instructions issued in April 2022 to improve compliance and risk-based supervision.
  - National AML/CFT Strategy aims to improve effectiveness; progress made on several goals.

*Authorities’ views on monetary and financial policies*
- Authorities acknowledged need to strengthen monetary transmission mechanism and are implementing MPEP and the TSA in coordination with stakeholders.
- Highlighted steps to develop capital markets, including a framework for local currency bond markets.

### Structural reforms: private sector-led growth, labor market, and SOEs
- Objective: strong, job-rich, sustainable private sector-led growth under Vision 2040.
- Implementation arrangements:
  - Vision 2040 Implementation Follow-up Unit developing and updating reform plans and following up with agencies.
  - Need for well-sequenced reform measures, steadfast implementation, and broad consultation.
- Key priorities: enhance labor market flexibility, improve business environment for private investment, advance SOE reforms, leverage digitalization, continue green initiatives.

### Labor market reforms and social safety nets
- Labor market progress and actions:
  - Relaxed restrictions on job transfers for expatriates; reduced hiring fees for expatriates.
  - Launched government-sponsored training and habilitation initiatives.
  - Job Security Fund established in November 2020 has provided unemployment benefits.
  - Work on updating the labor law is ongoing.
- Recommended deeper reforms:
  - Gradually eliminate factors hindering market efficiency and segmentation between private and public labor markets.
  - Revisit current minimum wage of OMR325 per month to better reflect labor productivity; consider extending minimum wage requirement to cover expatriates.
  - Ensure public sector wage growth does not outpace private sector.
  - Strengthen public sector performance metrics and link to pay and promotion.
  - Increase female employment by improving working environment, flexibility in schedules and locations, promoting women to senior positions, and encouraging female entrepreneurs under SME initiatives.
  - Improve expatriate policy framework and adopt more flexible expatriate labor policies; recent decisions include reduced fees for renewal and issue of expatriate work permits and allowing expatriates to invest in real estate.
  - Investment Residency Program launched to offer self-sponsored residence permits.
  - Leverage synergies between social safety net reforms and labor market reforms to strengthen social protection during transitions.

Box: Empowering Omani Women in the Labor Market (summary points)
- Female labor force participation rate rose from 23 percent to 35 percent in 2021 over two decades.
- Female participation remains low compared to most GCC countries and EMDEs and is less than half that of men.
- Staff estimates: increasing female participation from current 35 percent to the world average of about 50 percent would lift non-hydrocarbon potential GDP by more than 3 percent over the medium term.
- Policy options: improve working environment, flexibility, extend maternity benefits, improve childcare provision, and facilitate job searching.

### Business environment and SOE reforms
- Business environment improvements:
  - Foreign Capital Investment Law (FCIL) allows 100 percent foreign-owned companies and single shareholder companies.
  - Commercial Companies Law (CCL) and Executive Regulations (issued October 2021) improve regulatory framework.
  - Electronic licensing service launched via Invest-Easy Portal under FCIL.
- SOE reforms:
  - Rawabet program guides governance, strategic priorities, and evaluation across OIA-related entities.
  - OIA issued the Code of Governance of State-Owned Enterprises in February 2022.
  - OIA plans to disclose key financial performance metrics of SOEs.
  - OIA’s share in new projects limited to 40 percent to stimulate private sector participation.
  - Recommendation: promote market competition by strengthening the Competition Protection and Monopoly Prevention Centre and gradually limiting SOEs to strategic industries as the economy diversifies.

*Source: Excerpt from IMF staff report (sections 16–31).*

### 32.      Leveraging digitalization and managing its risks is key to promoting potential growth.

### 32.      Leveraging digitalization and managing its risks is key to promoting potential growth.

### Digitalization and labor market
- Oman’s National Digital Economy Program (ONDEP) target: increase contribution of the digital economy from "2 percent of GDP to 10 precent of GDP by 2040."
- Key ONDEP initiative: Roadmap for Government Digital Transformation (2021-2025) aims at digitizing "80 percent of government services by 2025."
- Reskilling workers is highlighted as "crucial to ensure their effective participation in the digital economy."
- Authorities plan to "institute strategic partnerships with the private sector to support the implementation of ONDEP’s programs."

### Climate adaptation, mitigation, and transition management
- Oman exhibits vulnerabilities to climate change (referenced "Figure 6").
- Institutions and targets:
  - Established the "National Fund for Emergency" to address climate challenges from natural disasters.
  - Committed under the Nationally Determined Contributions to reducing greenhouse gas emission by "7 percent by 2030."
  - National Energy Strategy target: derive "20 percent of electricity from renewables by 2027."
- Recent policy decisions: "freeze new gas-based power projects and meet any additional demand for electricity from renewable sources only."
- Ongoing investment priorities: "solar, wind, and green hydrogen."
- Policy needs identified:
  - "Ensure full integration of climate-related priorities into the macroeconomic policy frameworks."
  - Develop "green financing as Oman transition to a low-carbon economy."

### Data compilation and dissemination
- Improvements noted: "Data coverage is broadly adequate for surveillance."
- NCSI actions:
  - Updated national accounts based on "System of National Accounts 2008."
  - Adopted "2018 as a new base year for national accounts data instead of 2010."
  - "Started publishing quarterly real GDP data."
- Remaining data gaps and needs:
  - Improve fiscal data coverage "from central government to general government, and assets and liabilities of SOEs."
  - CBO progress on external sector statistics; room to improve "non-financial sector international transactions and historical data for non-oil trade activity."
  - Publish "financial soundness indicators of the banking system and real estate price indices" and provide "disaggregate labor market data."

### Authorities’ views (summary)
- Commitment to "accelerating structural reforms in line with Vision 2040."
- Institutional measures: "established offices in government entities to ensure better coordination in implementing these reforms."
- Labor market: "relaxing restrictions on part-time jobs and movements between the private and public sectors" and "drafting new labor and civil service laws."
- Climate: "finalizing a Carbon-Neutral Initiative and a draft climate law."

### Staff appraisal: macro outlook and policy priorities
- Economic recovery: "Non-hydrocarbon growth is expected to strengthen over the medium term, supported by the oil price outlook, planned investments, and structural reforms."
- Buffers: "Fiscal and external buffers have increased, supported by increased hydrocarbon revenues and substantial fiscal consolidation."
- Risks: "Downside risks, notably from global sources, dominate in the short run."

Policy recommendations and assessments:
- Fiscal consolidation
  - Authorities "remain committed to fiscal consolidation notwithstanding oil revenue windfalls and social pressures."
  - "Significant fiscal adjustment is being implemented in 2022," allowing increased social spending while "still generating a substantial surplus due to the oil windfall."
  - Further measures needed to "reinforce fiscal sustainability over the medium term, as envisaged under the MTFP," including:
    - "Strengthen tax administration and implement a PIT."
    - "Phased withdrawal of untargeted energy and water subsidies should be a priority."
    - "Intensive public outreach is essential to sustain support for fiscal consolidation amid rising oil windfalls."
- Fiscal frameworks
  - Recommend establishing "strong fiscal frameworks with clear objectives and a long-term anchor."
  - Suggested fiscal rule: "A rule based on the non-hydrocarbon structural primary balance, which is robust to hydrocarbon price volatility and economic fluctuations, could be appropriate."
  - Ongoing priorities: "improve public financial management and transparency" and "developing a sovereign asset and liability management framework should be a priority."
- Monetary and exchange rate
  - "The exchange rate peg remains appropriate."
  - Peg benefits: "provided a credible monetary anchor, helping to deliver low and stable inflation."
  - Further improvements: "Better coordination between fiscal and monetary authorities, improved liquidity management, and deeper financial markets would improve the capacity for a more independent monetary policy."
- Financial sector
  - "Financial system risks are low," but CBO should "continue its close monitoring of bank asset quality and its efforts to strengthen regulatory frameworks."
  - Priorities: "Restoring prudential rules to pre-pandemic levels should be a priority" and "Enacting the new Banking Law would align the legislation with international best practices."
  - Liquidity management: "Careful coordination is needed to ensure that banking system liquidity remains adequate as plans to enhance the liquidity management framework and establish the TSA are implemented."
  - "Progress in developing capital markets is welcome."
- Structural reforms
  - "Steadfast implementation of structural reforms under Vision 2040 is paramount to secure more inclusive, diversified, and sustainable growth."
  - Key reform priorities: "Strengthening the social safety net," "Advance SOE reforms," and "worker skills will need to be upgraded" to facilitate digital economy transformation.
  - "Pressing ahead with addressing climate challenges should be a priority."
- Surveillance
  - "Staff proposes that the next Article IV consultation with Oman follow the standard 12-month cycle."

### External sector assessment (Annex II): overview and key metrics
- Overall assessment: "Oman’s external position in 2021 was moderately weaker than the level implied by medium-term fundamentals and desirable policies."
- NIIP and external assets/liabilities (end-2021):
  - NIIP: "negative US$33.3 billion" (compared with "negative US$28.8 billion at end-2020")
  - External assets grew by "8.0 percent at end-2021 to reach US$ 95.1 billion."
  - CBO reserve assets: "constituted 20.7 percent of total foreign assets."
  - Government reserve assets: "18.3 percent."
  - External liabilities: "reached US$128.4 billion at end-2021, against US$117.1 billion at end-2020."
- 2021 (% GDP) snapshot:
  - "NIIP: -38.8"
  - "Gross Assets: 110.8"
  - "Res. Assets: 22.9"
  - "Gross Liab.: 149.5"
  - "Debt Liab.: 96.7"
- Current account:
  - Improvement: "current account deficit significantly improved to 5.0 percent of GDP in 2021 against a 16.6 percent deficit in 2020."
  - Projection: "The CA balance is projected to record a surplus in 2022 and over medium-term for the first time since 2014" given oil price forecast, fiscal consolidation, and non-hydrocarbon export growth.
  - Assessment metrics:
    - EBA-lite current account gap in 2021: "-1.5 percent of GDP" (improved from "-8.8 percent of GDP in 2020").
    - Policy gap: "positive policy gap of 1.6 percent of GDP."
    - CA model estimates (real annuity approaches): current account gap of "-2.0 percent of GDP under the constant annuity approach" and "–3.9 percent under the constant real per capita annuity approach."
    - REER assessments: "Under the CA approach, staff estimates show that the real effective exchange rate is overvalued by 4.0 percent." The two annuity approaches imply REER "overvalued by about 8.0 percent on average."
- Real exchange rate:
  - "Real and nominal effective exchange rates (REER and NEER) both appreciated by 2.7 percent in 2021."
  - "Both the REER and NEER were 1 percent above their 10-year average."
  - EBA-lite REER model gap: "-2.5 percent."
- Capital and financial accounts:
  - Net financial flows: "declined to US$8.27 billion in 2021 from US$10.5 billion in 2020."
  - Sovereign borrowing: "more than doubled to US$ 5.5 billion in 2021."
  - Net FDI inflows: "increased to US$4.4 billion, mainly driven by US$4.0 billion inflows," concentrated in the hydrocarbon sector.
  - Assessment: continued fiscal consolidation and diversification policies expected to reduce risks from sudden capital outflows and support non-hydrocarbon FDI.
- Reserves and reserve adequacy:
  - CBO reserves: "increased by US$4.7 billion in 2021."
  - Reserves level at end-2021: "US$19.7 billion (5.3 months of imports, 37.5 percent of broad money)."
  - Corresponding to "71.4 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric," up from "61 percent in 2020," but still below the "suggested adequate range of 100‑150 percent."
  - Assessment: including OIA liquid external assets to CBO official reserve would put reserves "above the adequacy ratio in 2021 and beyond in case additional FX reserves are needed."
  - Projection: CBO foreign reserves "are expected to significantly improve and reach 80.7 percent of the ARA metric in" (projection statement truncated in source).

*Source: IMF staff report content provided in the chapter titled "32.      Leveraging digitalization and managing its risks is key to promoting potential growth."*

### 2027. Nonetheless, the volatility of oil prices necessitates holding additional reserves above the ARA metric

### 1omnea2022001 - 2027. Nonetheless, the volatility of oil prices necessitates holding additional reserves above the ARA metric

### Public debt developments and baseline
- After surging from 4 percent of GDP in 2014 to about 70 percent in 2020, public debt improved in 2021 on account of high oil prices and the implementation of the Medium-Term Fiscal Plan (MTFP).
- Domestically-held debt decreased from 18 to 15.7 percent of GDP between 2020-2021; externally-held debt decreased from 51.7 to 47.2 percent of GDP over the same period.
- Bonds and sukuk account for about 75 percent and 70 percent of domestic and external debt at end-2021, respectively.
- Net debt (central government deposits at depository corporations and OIA’s liquid assets less central government debt) moved from minus 24.2 percent of GDP at end-2016 to 25.5 percent of GDP at end-2021.
- Baseline macro assumptions:
  - Non-hydrocarbon growth projected to reach about 4 percent by 2027.
  - Overall growth expected at 2.7 percent in 2027.
  - Overall fiscal balance to improve from a deficit of 3.2 percent of GDP in 2021 to a surplus in 2022 under the MTFP.
  - Non-hydrocarbon structural primary balance to increase from -20.2 percent of GDP to -17.7 percent of GDP from 2021 to 2022.
- Gross financing needs (GFNs):
  - GFNs amounted to about 23.5 percent of GDP in 2021. Repayments of T-bills accounted for 15 percent of GDP; stock of T-bills at end-2021 stood at 3.2 percent of GDP and is assumed to be rolled over.
  - GFNs projected to decline to 3.8 percent of GDP in 2022 and to around 3.5 percent of GDP by 2023.
- Debt trajectory under the baseline:
  - Gross public debt projected to decline to about 37 percent of GDP by 2027.
  - Net public debt projected to decline to about -5.6 percent of GDP by 2027.
  - Financing assumed to be mainly through issuance of medium to long-term domestic and external debt, and modest drawdowns of fiscal buffers.

### Stress tests and scenario outcomes
- Heatmap and risk assessment:
  - Heat map indicators are above high-risk DSA benchmarks for most debt-profile aspects under the baseline (except market perception, where sovereign spreads have narrowed).
  - Among standard stress tests, the negative GDP growth shock has the largest impact.
- Specific stress test outcomes:
  - Growth shock: A 1 standard deviation shock to real GDP growth (equivalent to 3.6 percentage points in each year 2023 and 2024) raises central government debt to 53.9 percent of GDP by 2027 (about 17 percentage points higher than the baseline).
  - Primary balance shock: A deterioration of the primary balance by 3.9 percentage points of GDP in years 2023 and 2024 increases public debt to 48.3 percent of GDP by 2027 (about 11.5 percentage points higher than the baseline). Gross financing needs would increase to 5.7 percent of GDP in 2023 and to about 5.8 percent of GDP in 2024 (4.5 percentage points higher than the baseline).
  - Interest rate shock: Real interest rate shock—driven by volatility in the GDP deflator and energy prices—stabilizes debt around 51.7 percent of GDP by 2027.
  - Combined macro-fiscal shock (growth, interest rate, primary balance shocks plus exchange rate shock): Central government debt reaches about 69 percent of GDP and gross financing needs reach 11.2 percent of GDP in 2027.
  - Contingent liability shock: Calibrated as 10 percent of banks’ assets (excluding claims on government); explicit contingent liabilities from SOEs of about 10 percent of GDP at end-2021. This shock yields gross debt of 54.1 percent of GDP and gross financing needs of 7.4 percent of GDP by 2027.

### Vulnerabilities and policy implications for public debt
- Key vulnerabilities:
  - Exposure to oil market developments and pressures to spend oil windfalls.
  - Sensitivity to shocks to primary balance, GDP growth, exchange rate, and interest rates.
- Policy recommendations and imperatives (as reflected in the analysis):
  - Maintain fiscal discipline and rebuild fiscal buffers to reinforce fiscal and external sustainability.
  - Continue fiscal consolidation underpinned by the MTFP.
  - Use high oil prices and ongoing structural reforms to narrow public debt over the medium term.
  - Hold additional reserves above the ARA metric to be usable in case of an exchange rate shock (motivated by oil price volatility).

### External debt developments and stress tests
- External debt levels and drivers:
  - External debt increased from about 72 to 93 percent of GDP during 2017-2021, largely driven by the increase in central government external debt from about 28.5 percent of GDP to 47.2 percent over the same period.
  - The non-financial private sector, mainly SOEs, also ramped up external borrowing.
  - Total external debt is projected to decrease with ongoing fiscal consolidation.
- External stress test outcomes:
  - A one-time real exchange rate depreciation of 30 percent in 2022 would make external debt peak at 96 percent of GDP in 2027.
  - An increase in the current account deficit (excluding interest payments) by half a standard deviation in each year from 2022 onwards would make external debt peak at 94 percent of GDP in 2027.
  - A combined permanent shock of a one-fourth standard deviation applied simultaneously to the interest rate, growth rate, and non-interest current account balance would raise external debt to 87 percent of GDP by 2027.
- External financing needs (from External Debt Sustainability Framework table):
  - Baseline external debt series (selected): 2017: 72.0; 2018: 72.9; 2019: 81.8; 2020: 98.4; 2021: 93.0; 2022: 70.6; 2023: 71.9; 2024: 72.5; 2025: 72.2; 2026: 70.9; 2027: 69.7.
  - Gross External Financing Need (in Billions of US Dollars): 2017: 21.5; 2018: 16.1; 2019: 18.5; 2020: 29.3; 2021: 23.6; 2022: 18.7; 2023: 12.5; 2024: 14.9; 2025: 16.9; 2026: 15.8; 2027: 18.1.
  - Gross External Financing Need (in percent of GDP): historical and projection series shown in the framework.

### Impact of the war in Ukraine
- Overall effect:
  - Direct adverse spillovers on the Omani economy from the war in Ukraine are small; the main direct impact is a positive spillover via higher oil prices.
  - Windfall from higher oil prices is expected to improve fiscal and external balances considerably.
- Channels and risks:
  - Higher global energy and food prices could have limited impact on Oman’s price developments via the import channel, given its exposure to Russia and Ukraine through wheat imports.
  - Financial and trade linkages with the conflict are limited.
  - Second-round effects: a deeper global slowdown (especially in China, which imports about 80 percent of Oman’s total oil exports) could adversely affect oil demand and thus Oman’s revenues.
  - High oil prices could increase energy transition risks to Oman over the medium term as the world moves to cleaner energy sources.
- Oman's production and capacity:
  - Estimated spare oil production capacity about 10 percent (approximately 100,000 bpd) with current production of almost 1 million barrels per day.
  - Natural gas production accounts for about 17 percent of hydrocarbon GDP in 2022 and is around full capacity.
- Mitigating actions:
  - Oman has been investing in green energy, including solar and green hydrogen, to mitigate energy transition risks.

*Source: IMF staff.*

### 2.      Food and energy inflationary pressures have been contained thus far. Since early 2022,

### 1omnea2022001 - 2.      Food and energy inflationary pressures have been contained thus far. Since early 2022,

### Inflation dynamics and recent developments
- Since early 2022, inflation dynamics have been dominated by:
  - the higher base from the introduction of the VAT in April 2021,
  - price caps on selected food items (wheat and flour) and selected fuels (M91, M95, and diesel since November 2021),
  - a stronger U.S. dollar.
- Bread and cereal account for 3 percent of the CPI basket.
- The cap on domestic fuel prices will remain until oil prices decline below US$75 per barrel.
- Oman remains exposed to global price developments via the import channel; higher global oil and food prices and higher production costs could have a larger impact on Oman’s price developments.
- Headline inflation peaked at 4.4 percent (y-o-y) in January 2022 and subsequently declined.
- After months of deflation, headline inflation turned positive in April 2021 following the introduction of the VAT.
- Global factors (higher international food and oil prices and supply chain disruptions) contributed about 70 percent to the total increase in inflation in March 2022 (y-o-y).
- Inflation decelerated to 2.4 percent in May 2022 (y-o-y).
- Oman’s inflation has been relatively lower than in EMDEs and the rest of the world in recent months due to:
  - the VAT base effect from 2021,
  - price caps on selected fuels and food items,
  - a stronger U.S. dollar.
- The exchange rate peg has helped contain inflationary pressures and anchor inflation expectations but limits nominal exchange rate adjustments that could correct an inflation-induced real exchange rate overvaluation.

### Fiscal and external outlook
- Higher oil prices will improve fiscal and external balances considerably in the near term.
- Oman has been benefiting from higher-than-budgeted hydrocarbon revenue relative to the budget assumption of $50 per barrel.
- Every $1 increase in the oil price will add about OMR100 million to fiscal revenue annually.
- The fiscal balance is expected to turn to a surplus of 5.5 percent of GDP in 2022 (first time since 2013), reducing gross financing needs to 3.7 percent of GDP.
- The external current account is projected at 6.8 percent of GDP in 2022 (it was -5.6 percent of GDP in 2021).

### Trade, food security, tourism, and financial linkages with Russia/Ukraine
- Direct trade links with Russia and Ukraine:
  - Imports from Russia and Ukraine constituted less than 1 percent of Oman’s total imports.
  - Oman depends on Russia and Ukraine for about 60 percent of its total wheat imports.
  - Oman has stockpiled food items and begun to tap new markets to ensure food security.
  - On Oman’s non-oil exports, exports to Russia and Ukraine remain less than 0.1 percent of total non-oil goods trade.
  - At end-2021, Russia was the 92nd export destination of Oman and Ukraine the 71st.
- Tourism:
  - Among 0.65 million tourist arrivals in 2021, about three-fourths came from GCC, India, Yemen, Pakistan, and Egypt.
  - Tourism accounts for less than 3 percent of GDP.
- Financial linkages:
  - No cross ownership in the banking system between Oman and Russia and Ukraine.
  - Links through foreign direct investment are non-existent (Coordinated Direct Investment Survey offers limited information).
  - As of end-Dec 2021, OIA assets (US$42.3 billion) are invested: 60 percent in Oman, 18 percent in North America, 10 percent in Developed Europe, and 5 percent in Asia and Pacific.
  - EM Europe and Central Asia account for about 1.5 percent of the OIA’s investments (approximately $676 million).

### Risk Assessment Matrix — key risks, expected impacts, and policy responses
- Intensifying spillovers from Russia’s war on Ukraine (Relative Likelihood: High; Expected Impact: Low)
  - Direct spillovers on Oman are limited; initial direct impact has been positive via higher oil prices.
  - Food security remains an issue due to about 60 percent dependence on Russia/Ukraine for wheat.
  - Policy responses:
    - Continue to ensure food security by supporting the agriculture sector and tapping new markets.
    - Target energy and food subsidies to the most vulnerable groups.
    - Monitor and mitigate the impact of tighter global financial conditions on government debt and the financial sector.
- Commodity price shocks (Relative Likelihood: High; Expected Impact: High)
  - Higher oil prices improve fiscal and external positions; lower oil prices harm the non-hydrocarbon sector.
  - Higher energy prices would increase energy subsidies.
  - Food prices contained so far through advance wheat stocks and administrated prices.
  - Policy responses:
    - Mobilize non-hydrocarbon revenue to reduce reliance on oil revenue.
    - Establish a clear fiscal anchor to reduce procyclical fiscal risks.
    - Resume energy price reforms.
    - Monitor banking system liquidity and asset quality.
    - Accelerate structural reforms to enhance competitiveness and diversify the economy.
- Local Covid-19 outbreaks (Relative Likelihood: Medium; Expected Impact: Medium)
  - Renewed outbreaks likely affect Oman through global oil demand and domestic economic activity.
  - Policy responses:
    - Continue health system support including large-scale testing and vaccination.
    - Use existing buffers to provide additional and targeted policy support if needed.
- De-anchoring of inflation expectations and stagflation (Relative Likelihood: Medium; Expected Impact: Medium)
  - Supply shocks could de-anchor inflation expectations, trigger tighter global monetary policy, and lead to weaker global demand and currency depreciations in EMDEs.
  - Policy responses:
    - Continue tightening monetary policy in line with the Fed and closely monitor FX and financial market developments.
    - Steadfast implementation of fiscal consolidation to reduce borrowing spreads and rebuild buffers.
    - Target support to viable firms in hard-hit sectors.
- Pressures to spend oil windfalls (Relative Likelihood: Medium; Expected Impact: Medium/Low)
  - Delays in implementing the Medium-Term Fiscal Plan (MTFP) would increase fiscal and external vulnerabilities.
  - Policy response:
    - Steady implementation of the MTFP and establishment of a clear fiscal anchor.
- Natural disasters related to climate change (Relative Likelihood: Medium; Expected Impact: Low)
  - Cyclone Shaheen fiscal cost in 2021 was about 0.6 percent of GDP.
  - Authorities established the National Fund for Emergency with an initial contribution of 0.3 percent of GDP.
  - Policy responses:
    - Rebuild fiscal and external buffers.
    - Improve business environment to boost productivity, competitiveness, and diversification.

### Fiscal risks, exposures, and mitigation priorities
- Hydrocarbon dependence and public sector size (Context)
  - As of end-2021:
    - Hydrocarbons represent about 35 percent of GDP.
    - Hydrocarbons account for 75 percent of total fiscal revenue.
    - Hydrocarbons represent 58 percent of total export of goods.
    - The public sector includes close to 170 state-owned enterprises (SOEs).
- Sources of fiscal risk
  - Macroeconomic uncertainty, especially oil price volatility:
    - Fiscal deficits reached 19 percent of GDP and 16 percent of GDP in 2020 due to sharp oil price falls.
    - Stress scenario: a one standard deviation adverse oil price shock would materially affect fiscal positions and financial buffers.
    - Authorities have an implicit target of containing central government debt below 60 percent of GDP over the medium term as part of the MTFP.
  - Realization of contingent liabilities from SOEs:
    - SOE debt increased from 16 percent in 2015 to about 42 percent of GDP in 2021.
    - Explicit government guarantees to SOEs amounted to 10 percent of GDP.
    - Limited financial data on SOEs; OIA plans to disclose key SOE financial metrics.
  - Public private partnerships (PPPs) are at an incipient stage since the Public Private Partnership Law adopted in 2019 and can create fiscal risks.
  - Climate change-related risks:
    - Fiscal cost of cyclone Shaheen in 2021 was about 0.6 percent of GDP.
    - National Fund for Emergency established with initial contribution of 0.3 percent of GDP.
  - Pension funds:
    - In 2021, 11 pension plans were merged into two funds: (i) “Social Security Fund” (civil pension fund for public and private sectors) and (ii) “Military and Security Service Retirement Fund”.
- Policy recommendations to manage fiscal risks
  - Strengthen comprehensive and timely fiscal data, extending coverage beyond central government.
  - Better understand fiscal risks and increase transparency, including publishing a “Fiscal Risk Statement” that highlights specific fiscal risks and their impact on GDP growth and the fiscal balance.
  - Explicitly incorporate fiscal risks into the fiscal anchor and ensure the operational fiscal rule is robust to risk materialization.
  - Weigh benefits of risk reduction against probabilities and costs of mitigation (e.g., buffers and contingencies).

_International Monetary Fund — Oman: Selected Issues (excerpts)._

### 5. Inflation has been largely driven by tradable items, reflecting high dependence on

### 5. Inflation has been largely driven by tradable items, reflecting high dependence on imports and susceptibility to volatility in international prices

### Tradable vs. non-tradable inflation: overview and CPI composition
- The share of tradable items in the CPI basket remains high at about 60 percent of CPI components.
- Historically, tradable items have experienced higher inflation and volatility relative to non-tradable items due to the large shares of food and transport items that are more exposed to volatility in international prices.
- Tradable inflation has played a major role in the recent surge in headline inflation (y-o-y). Tradable inflation moderated in April 2022 (y-o-y), largely driven by the decline in transport inflation, before increasing again in May due to higher transport inflation. Overall inflation (y-o-y) continued to decelerate in April and May 2022, reflecting the high base effect and declining non-tradable inflation.

- Weight CPI Groups (as reported)
  - 58.128 Tradables
  - 23.903 Food & Non-Alcoholic Beverages
  - 0.125 Tobacco
  - 5.961 Clothing & Footwear
  - 3.787 Furnishings, Household Equipment & Routine Maintenance
  - 19.167 Transport
  - 5.185 Miscellaneous Goods and Services
  - 41.872 Non-Tradables
  - 26.477 Housing, Water, Electricity, Gas and Other Fuels
  - 1.161 Health
  - 5.633 Communication
  - 1.135 Recreation and Culture
  - 1.368 Education
  - 6.098 Restaurants and Hotels

### Pass-through of external factors into domestic inflation (impulse-response findings)
- International food and oil prices and global supply chain bottlenecks have played an important role in driving domestic inflation dynamics in Oman.
- Pass-through characteristics (local projection method, monthly data):
  - A one-percent increase in the international food price could translate into about 0.2 percent increase in the CPI within 11 months of the initial shock, with the initial impact disappearing after 13 months.
  - A one-percent rise in the international oil price culminates in about 0.25 percent increase in domestic CPI within 11 months; pass-through effects vanish 13 months after the initial shock.
  - A one-percent shock in the global supply chain pressure (proxied by GSCPI) translates into about 0.2 increase in domestic CPI within 12 months, taking up to 22 months to vanish.
- Caps and subsidies on selected fuel and food items contribute to limiting pass-through effects from changes in international oil and food prices.
- Correlations reported (correlation matrix)
  - International Food Price — International Oil Price: 0.73
  - International Food Price — Domestic Inflation: 0.62
  - International Food Price — GSCPI: 0.34
  - International Oil Price — Domestic Inflation: 0.54
  - International Oil Price — GSCPI: -0.18
  - Domestic Inflation — GSCPI: 0.14

### Key drivers of inflation (ARDL model results and interpretation)
- Short-run drivers (ARDL results)
  - Inflation expectations (proxied by lagged inflation) are a key short-term driver: Inflation (L1) coefficient = 0.448*** [0.147].
  - The fourth lag of inflation is negative and significant: Inflation (L4) coefficient = -0.543*** [0.105], indicating inflation is expected to be contained in about a year.
  - Demand pressures (output gap) exert upward pressure: Output Gap coefficient = 0.052** [0.019]; Output Gap (L3) = 0.057** [0.020].
  - International food price change affects short-term inflation: ∆ Food Price = 0.042** [0.019].
  - Global supply chain pressures affect short-term inflation: ∆ GSCPI = 0.0004** [0.0002]; ∆ GSCPI (L1) = 0.0005*** [0.0001]; ∆ GSCPI (L2) = 0.0005*** [0.0001].

- Long-run drivers (ARDL long-run equation)
  - Population Growth coefficient = 0.168*** [0.012], indicating population dynamics contribute to long-term inflationary pressures.
  - Output Gap (long run) = 0.103*** [0.027].
  - ∆ Oil Price (long run) = 0.037*** [0.011].
  - ∆ GSCPI (long run) = 0.001*** [0.0003].
  - ∆ Food Price (long run) = 0.041 [0.020] (not statistically marked with stars in the table).
- Model diagnostics
  - Observations: 44 (short term and long term)
  - R-squared (short term): 0.979
  - Long-run Bounds Test Statistic: 12.384*** 
  - Breusch-Godfrey Serial Correlation LM Test (p-value): 0.502
  - Breusch-Pagan-Godfrey Heteroskedasticity Test (p-value): 0.216
  - Robust standard errors reported in square brackets; *** p<0.01, ** p<0.05.

### Conclusions and policy implications
- Inflation in Oman is sensitive to external factors due to high dependence on imports and larger weight of tradable items in the CPI basket, yielding relatively strong pass-through from international oil and food prices and global supply chain pressures into domestic inflation.
- Inflation expectations, population dynamics, and excess demand pressures also have significant impacts on domestic inflation.
- Policy-relevant observations and measures reported in the annex and main text:
  - Fiscal consolidation efforts have improved economic resilience. Specific measures:
    - Reduced public debt by US$5.4 billion during the first seven months of 2022.
    - Saved more than US$330 million in future interest payments.
    - Lowered public debt to US$48.4 billion by end-July 2022 against US$54.1 billion at end-2020.
  - Government debt maturity and refixing exposure as of end-2021:
    - Debt maturing (refixing) in 1 year representing 18.8 percent (28.8 percent) of the total debt as of end-2021.
  - U.S. monetary policy spillovers and domestic financial resilience:
    - The Federal Reserve raised its policy rate by 375 basis points since January 2022, raising repo rates from 0.5 percent in Dec-2021 to 3.75 percent in end-September 2022.
    - Staff VAR estimates: a 75 basis points hike in the Fed rate negatively reduces non-oil GDP in Oman by 0.2percent on impact with effects dissipating after one year; the effect becomes negligible when controlling for high oil price periods (70 dollars per barrel and above) and credit to the economy.
    - Banks’ balance-sheet and liquidity features:
      - Banks’ assets grew from 62 percent of GDP in 2011 to 117 percent in 2021.
      - Non-interest-bearing deposits comprised 36 percent of total deposits at end-June 2022.
      - Banks’ share of foreign liabilities ranged between 5 to 10 percent of total deposits.
    - Policy recommendations highlighted:
      - Reinforce fiscal sustainability.
      - Accommodate possible domestic liquidity needs in the system.
      - Support hard-hit sectors if needed.
      - Rebuild FX buffers and deepen domestic financial markets to improve resilience against shifts in global risk appetite.

*Source: IMF staff report (Oman), chapter/section titled “5. Inflation has been largely driven by tradable items, reflecting high dependence on imports and susceptibility to volatility in international prices.”*

### 2013. The published data do not provide comprehensive coverage of the public sector, not covering state-owned

### 1omnea2022001 - 2013. The published data do not provide comprehensive coverage of the public sector, not covering state-owned

### Coverage gaps in public sector statistics
- Published data do not provide comprehensive coverage of the public sector, not covering state-owned enterprises (SOEs), pension funds, the Oman Investment Authority (OIA), and Energy Development Oman (EDO).
- The authorities provide Article IV consultation missions with a more comprehensive analytical presentation of the budget as well as information on government debt, OIA assets, and SOEs debt.

### Monetary and financial statistics
- The Central Bank of Oman (CBO) reports monetary and financial statistics for the CBO and other depository corporations (ODCs) using standardized report forms (SRFs) which comply with the methodology of the IMF’s Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG).
- These are published in the International Financial Statistics (IFS).
- The CBO submits data on some basic indicators and series to the Financial Access Survey (FAS), including the two indicators adopted by the UN to monitor Target 8.10.1 of the Sustainable Development Goals (SDGs).

### Financial sector surveillance
- Financial soundness indicators (FSIs) are communicated to Article IV consultation missions, but not yet disseminated to STA.
- The CBO is working on a system to disseminate FSIs to STA.

### Balance of payments and external sector statistics
- Data for most balance of payment entries are adequate.
- Following previous IMF TA recommendations, the CBO has implemented an International Transactions Reporting System (ITRS) to collect additional information on external transactions of Omani residents.
- Main priorities identified:
  - Enhance the quality of quarterly BoP data.
  - Improve the timeliness and coverage of quarterly foreign investment surveys.
  - Enhance the coverage of data for non-financial institutions.
  - Further develop cooperation with other government and non-government entities.
- The 2022 TA mission worked with external sector compilers to improve compilation and dissemination of external sector statistics (ESS) and adapt the Balance of Payments and International Investment Position Manual (BPM6).
- The authorities do not currently publish Reserve Template, external debt, and do not participate in the Coordinated Direct Investment Survey.
- Data are being provided to Article IV consultation missions.
- Additional methodological and coverage updates needed for:
  - Treatment of free economic zones.
  - Remittances.
  - Transactions related to production sharing agreements and direct investment assets.
  - Breakdown accounting on financial flows.

### Data Standards and Quality
- In August 2018, Oman fully implemented the e-GDDS by launching a National Summary Data Page.
- Metadata for most data categories were updated in May 2018.

### Table of Common Indicators Required for Surveillance (As of September 20, 2022)
- Exchange rates
  - Date of Latest Observation: Real time
  - Date Received: Real time
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International reserve assets and reserve liabilities of the monetary authorities
  - Date of Latest Observation: Jun 2022
  - Date Received: Jul. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Reserve/base money
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jul. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad money
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jun. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central bank balance sheet
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jul. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated balance sheet of the banking system
  - Date of Latest Observation: June. 2022
  - Date Received: Jul. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest rates
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jul. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consumer price index
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jul 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, expenditure, balance and composition of financing – central government
  - Date of Latest Observation: 2021
  - Date Received: Jun. 2022
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Stocks of central government and central government-guaranteed debt
  - Date of Latest Observation: 2021
  - Date Received: Jun. 2022
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- External current account balance
  - Date of Latest Observation: 2021
  - Date Received: Jun. 2022
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Exports and imports of goods
  - Date of Latest Observation: Mar. 2022
  - Date Received: Jun. 2022
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of Latest Observation: Jun. 2022
  - Date Received: Jul. 2022
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross external debt
  - Date of Latest Observation: 2021
  - Date Received: Jun. 2022
  - Frequency of Data: A
  - Frequency of Reporting: I
  - Frequency of Publication: NA
- International investment position
  - Date of Latest Observation: 2021
  - Date Received: Sep. 2022
  - Frequency of Data: A
  - Frequency of Reporting: I
  - Frequency of Publication: NA

*Source: IMF staff compilation, as presented in the content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1omnea2022001.pdf_