## 1. Medium-Term Fiscal Plan (2020-2024) ## Source details **Canonical URL:** [1. Medium-Term Fiscal Plan (2020-2024)](https://www.imf.org/-/media/files/publications/cr/2022/english/1omnea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1omnea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1omnea2022002.pdf.json) --- ### Context and role of fiscal policy - Fiscal policy converts oil and gas (hydrocarbon) wealth into economic outcomes for Oman’s population. - Oil and gas are the major sources of export income and fiscal revenues; government spending on infrastructure, education, health, and social programs has supported high living standards. - Oil-price volatility and episodes cited: - Prices moved up by around 400 percent (2001-2008). - Prices increased by 100 percent (2009-2013). - Prices declined by 40 percent (2014-2019). - Two competing policy challenges: - Avoiding procyclical fiscal policy. - Supporting long-term growth amid difficult commodity price forecasting. - Key policy direction: - Strengthen fiscal frameworks—including clearly defining fiscal policy objectives and the long-term fiscal anchor—before introducing a formal fiscal rule. - A fiscal rule is effective only if supported by strong institutions. ### Retrospective of fiscal policy (2000s–2020): drivers, outcomes, and policy responses Findings on revenue and spending drivers - Government revenues correlation with oil price: 0.93 during 2000-2020. - Hydrocarbon revenues averaged 83 percent of total budget revenues since 2000. - Non-hydrocarbon tax base: about 7 percent of total budget revenues on average. - Link between oil prices and government spending: correlation coefficient of 0.53. - During 2012-2019, Oman ramped up expenditures more than its GCC peers. Fiscal outcomes and vulnerabilities - Fiscal balance examples: - Fiscal balance reached 14.6 percent in 2008. - Fiscal balance reached -19.6 percent of GDP in 2016. - Central government debt: - Rose from 29.3 percent of GDP in 2016 to 69.7 percent in 2020. - Was 52.5 percent at end-2019. - Net financial assets ratio (central government debt less deposits at depository corporations and OIA’s liquid assets) declined from 24.2 percent of GDP to -28.5 percent during the same period. - Breakeven oil price increased sharply from early 2000s to 2016 and remained above actual oil prices due to limited expenditure reductions; large increases in wages and subsidies occurred during 2010-2015. Policy responses introduced (MTFP and institutional changes) - Authorities announced the Medium-Term Fiscal Plan (MTFP) and broad public-sector reforms in 2020. - Key measures and institutions: - Introduction of VAT in April 2021 (in line with GCC VAT Treaty). - Preparation to introduce a personal income tax and measures to improve tax collection. - Establishment of the Oman Investment Authority (OIA) to assume ownership of government companies and investments previously overseen by the MoF. - Creation of Energy Development Oman (EDO) to manage government investments in oil, gas, and renewables; EDO revenue to be shared with the government through royalty taxation and dividend after deducting operational spending and debt service. - Fiscal reporting improvements: - Since February 2021, MoF publishes the monthly Fiscal Performance Bulletin with high-level aggregates. - Some central government fiscal outturn details published in the monthly statistical bulletin by NCSI. - Data coverage remains limited beyond central government; MoF plans to regularly publish central government debt management operations. Box — MTFP pillars (published November 2nd, 2020) - MTFP objective: achieve fiscal balance over the medium term; enabler for “Oman Vision 2040.” - Pillars: - Support economic growth (improve business environment, encourage domestic and FDI). - Diversify and enhance government revenues (increase non-hydrocarbon revenues as share of GDP). - Rationalize government expenditures (prioritization, efficiency, greater private sector involvement). - Enhance social safety net (target vulnerable groups, promote intergenerational equity). - Strengthen public financial management (structural reforms, capacity development). ### Strengthening fiscal frameworks, anchors, and near‑term objectives Purpose and long-run objective - Fiscal frameworks ensure coherence between long-run fiscal sustainability and short/medium-term stabilization. - Fiscal sustainability framed as whether current fiscal stance can be maintained absent further measures; a positive fiscal sustainability gap leads to asset depletion and rising debt-to-GDP. - For resource-rich countries, anchors must account for large financial assets and the hydrocarbon time horizon. Permanent Income Hypothesis (PIH) as fiscal anchor for Oman - PIH anchor estimates net wealth = net financial wealth + resource wealth (PV of future hydrocarbon revenues) and computes sustainable income flow that maintains wealth constant. - For Oman: - PIH anchor estimated as a nonhydrocarbon primary deficit of 19 percent of nonhydrocarbon GDP (keeps wealth constant in real per capita terms). - Steadfast implementation of the MTFP will cause the nonhydrocarbon primary deficit to decline to 24.7 percent of nonhydrocarbon GDP by 2027, reducing but not closing the gap with PIH-consistent position—additional consolidation needed beyond the medium term for full fiscal sustainability. - Under PIH: composition of wealth shifts over time (hydrocarbon resource wealth declines; net financial wealth increases if hydrocarbon revenues are saved/invested). PIH approaches overview - Standard PIH: perfect consumption smoothing; consumption is a constant share of net wealth. - Variant: Modified PIH allows temporary deviations for large infrastructure needs with future adjustment. - Fiscal Sustainability Framework allows higher investment that raises growth and non-resource revenues. - Bird-in-hand approach: save all oil revenue as financial assets and spend only the yield. Near- to medium-term focus: macro stabilization - Fiscal policy should be countercyclical: - Tighten in booms to contain demand and external imbalances. - Loosen in slack to support aggregate demand, jobs, and growth. - Magnitude of cyclical actions should reflect output gap and medium-term fiscal path consistent with long-run anchor. - Hydrocarbon price volatility exerts pressure to spend windfalls in booms, risking future crises. ### Implications and recommended sequencing - Strengthen medium-term macroeconomic framework, fiscal strategy, fiscal governance, and medium-term budget framework; expand fiscal coverage beyond central government before formal fiscal rules. - Consider an explicit long-term fiscal anchor (PIH-based) to guide consolidation and countercyclical policy. - Improve fiscal transparency and expand fiscal data coverage beyond central government. - Prioritize structural reforms: revenue diversification, expenditure rationalization, targeted social safety nets, and public financial management improvements to reduce fiscal vulnerabilities and align with MTFP. --- ### 15. A fiscal rule is often adopted to guide medium-term policy making consistent with ### Definition and primary function - Fiscal rules: numerical targets on fiscal aggregates (expenditure, revenue, budget balance, cyclically adjusted balance) that constrain fiscal discretion. - Rules often enshrined in legislation; in Oman there is an implicit fiscal deficit ceiling of 3 percent of GDP, not legislated. ### Desirable features for selecting an effective fiscal rule (Kopits and Symansky (1998) highlights) - Sustainability: ensures long-term debt sustainability. - Stabilization: should not increase economic volatility; allow automatic stabilizers and countercyclical changes. - Simplicity: easily understood by decision makers and the public. - Operational guidance: clear translation into annual budget process; targeted aggregates under policymaker control. - Resilience: sustained period to build credibility; not easily abandoned after shocks. - Flexibility: modifiable for permanent shocks; escape clauses triggered by pre-established rules. - Ease of monitoring and enforcement: easy verification and accountability for deviations. ### Strengthening fiscal frameworks in Oman: components and gaps Key components to develop/strengthen: - (i) medium-term macroeconomic framework; - (ii) medium-term fiscal framework (MTFF); - (iii) fiscal strategy document (translates MTFF, contains fiscal risk analysis); - (iv) medium-term budget or expenditure framework (MTBF/MTEF); - (v) annual budget consistent with above. - Focus of paper: items (i) to (iii). Assessment of current MTFP: - Reports fiscal developments since 2014 in highly aggregated manner (total revenues, expenditures, fiscal balance in nominal terms for next five years, share of non-hydrocarbon revenues, fiscal balance and debt as % of GDP). - Does not describe rationale for proposed deficit path or macro assumptions. - Sets out five pillars but lacks details on fiscal impact; does not report fiscal scenarios or provide sustainability analysis. Fiscal risks, SOE coverage, and transparency - Fiscal risks: exogenous (oil price shocks) and endogenous (SOE risks). - SOE statistics and vulnerabilities: - SOEs operate in 11 sectors with 36,000 staff, accounting for approximately 28 percent of GDP (about US$18.2 billion) at end-March 2021. - SOE debt (excluding Petroleum Development Oman) increased from 16 percent in 2015 to 42 percent of GDP in 2021. - Explicit government guarantees to SOEs amount to about 10 percent of GDP. - Since September 2021, gas and oil sector expenditures were hived off the central government budget to EDO. - Fiscal transparency recommendations: - Report fiscal developments and outlook with assumptions and deviations per IMF Fiscal Transparency Code (IMF 2019). - Expand Monthly Financial Performance Bulletin with more detail, narrative, and analysis. - Publish annual fiscal accounts analyzing compliance with fiscal targets and options if non-compliant. - Publish a fiscal risk statement outlining key risks, effects on MTFP, and mitigation/management policies. ### Overview and assessment of selected fiscal rules (summary) - Overall balance rule: - Strengths: simple, easy to communicate, closely linked to debt dynamics. - Weaknesses: oil-price changes can give misleading signals; can be procyclical. - Golden rule (deficit net of capital expenditures): - Strengths: protects public investment; supports intergenerational equity. - Weaknesses: may encourage creative accounting; weak link to debt sustainability. - Cyclically adjusted rule: - Strengths: stabilizes expenditures via automatic stabilizers. - Weaknesses: challenging to compute/enforce; requires timely output gap estimates and is prone to revisions. - Structural rule: - Strengths: smooths oil-price volatility using long-term price estimates and structural balance target. - Weaknesses: estimating target balance is challenging; requires assumptions on potential output and long-term commodity prices. - Expenditure rule: - Strengths: easy to communicate and monitor; allows macro stabilization; clear operational guidance; can ensure debt sustainability if well-designed. - Weaknesses: may hurt adjustment quality; may reduce incentives to raise revenues. - Revenue rule: - Strengths: raise revenue or limit tax burden. - Weaknesses: weak link to debt sustainability; could be procyclical. - Non-resource primary balance rule: - Strengths: excludes resource revenues/expenditures; suitable for resource-rich countries; easy to monitor; could encourage non-resource revenue generation. - Weaknesses: difficult to communicate; narrow coverage; weaker link to financing needs/debt. Tabulated assessment highlights (verbatim conclusions in source) - Overall Balance: +Easy to communicate and monitor; +Closely linked to debt sustainability; +Clear operational guidance; -Could lead to procyclicality; -Could adversely affect quality of adjustment. - Golden: +Protect public investment; +Intergenerational equity; -Weak link to debt sustainability; -Creative accounting. - Expenditure: +Easy to communicate and monitor; +Allow macroeconomic stabilization; +Clear operational guidance; +Could ensure debt sustainability if well-designed; -Could adversely affect quality of adjustment; -May reduce incentive to raise revenues. - Revenue: +Raise revenue or limit tax burden; -Weak link to debt sustainability; -Could lead to procyclicality. - Cyclically Adjusted and Structural: +Foster economic stabilization; +Good operational guidance; -Difficult to compute and monitor. - Non-Resource Primary Balance: +Easy to monitor; +Could encourage non-resource revenue generation; -Difficult to communicate; -Narrow coverage and weaker link to financing needs/debt. ### Trade-offs, multi-rule approaches, and capacity needs - Trade-offs between resilience and operational guidance (escape clauses complicate budgeting). - Multiple-rule approaches ("second generation rules") address single-rule shortcomings but increase complexity and risk inconsistency. - Estimating cyclically adjusted or structural rules requires timely reliable output gap and long-term commodity price estimates; requires institutional capacity within MoF and enhanced data quality. Recommendation for Oman - A rule based on the non-hydrocarbon structural primary balance could be appropriate: - Benefit: disconnects spending from oil and gas price volatility; requires saving hydrocarbon revenue when prices are high and drawing on savings when prices fall. - Challenges: estimating structural balances is difficult given assumptions on targeted balance and real-time cyclical assessment, especially during structural reforms under Vision 2040. - Interim step: complement implicit overall balance rule in the MTFP with an explicit rule on the non-hydrocarbon primary balance linked to the long-term fiscal anchor. - Priorities before formal rule adoption: - Strengthen fiscal frameworks (medium-term macro framework, MTFF, fiscal strategy). - Undertake fiscal consolidation and build institutional capacity. - Define a long-term fiscal anchor to guide fiscal rule formulation balancing short-term macro-management, medium-term development, and longer-term saving goals. ### Conclusion on fiscal rules - Strong fiscal frameworks are important given reliance on hydrocarbon resources and oil/gas price volatility. - Formal fiscal rule can reinforce frameworks once well-developed; successful implementation typically follows fiscal consolidation and framework strengthening. - Government must first define its long-term fiscal anchor to guide potential fiscal rule(s). --- ### Annex II — Illustrative simulations of fiscal rules (Oman case): setup, findings, and policy implications Simulation setup and approach - Simulations use historical data (2010-2020) and projections (2021-2027). - Fiscal balance each year determined by the rule; if actual balance is better than rule-implied ceiling, actual figures are used; otherwise outcome bound by rule-implied ceiling. - Balances adjusted to remove hydrocarbon capital and operation expenditures. - Selected rules simulated: overall fiscal balance rule; non-hydrocarbon primary balance rule; expenditure rule. Main simulation findings - Overall fiscal balance rule: - Tends to lead to a procyclical stance. - 2010-2014 boom: rule would have permitted ramping up spending; overall fiscal surpluses masked a sharp deterioration in non-hydrocarbon balance (from -50 percent in 2010 to -80 percent of non-hydrocarbon GDP in 2012). - Rule rarely binding except 2015-2017 and 2020. - Non-hydrocarbon primary balance rule: - Excludes hydrocarbon revenues/expenditures; better measures fiscal policy impact on domestic demand. - For 2010-2020, ceiling set based on average of PIH benchmark for a particular year; for 2021-2027 ceiling corresponds to 2021 medium-term PIH benchmark. - Rule would have been binding during 2010-2020. - Rule would have been consistent with long-term fiscal sustainability and more countercyclical compared to overall balance rule. - Challenges: estimation and communication of equilibrium level; need mechanisms for phased adjustment and periodic benchmark revisions. - Expenditure rule: - Ceiling on government spending as percent of nonhydrocarbon GDP estimated from emerging economies average. - Simulation: rule would have been binding. - Steadfast implementation of MTFP would significantly narrow fiscal gap over medium term. - Drawback: leaves revenues outside coverage; if revenues fall as share of GDP, expenditure-to-GDP ratio remaining constant could allow widening deficits. Policy implications from simulations - Nonhydrocarbon primary balance and expenditure rules more binding for long-term debt sustainability and stabilization than overall balance rule. - Careful design required to address: - Measurement and communication of structural benchmarks (potential GDP, long-term resource prices). - Mechanisms for phased adjustment when current deficits deviate substantially from equilibrium. - Periodic revision of benchmarks to reflect changing conditions (long-term prices, reserves, production levels, rate of return on assets). - Consider rules' coverage (expenditure-only rules may need revenue safeguards) and escape clauses for severe shocks. --- ### Oman — economic context, labor market, and reform priorities ### Key stylized facts (relevant to fiscal rule and reform discussion) - Hydrocarbon sector and GDP: - 2016–2020: crude oil and natural gas production accounted for about 32 percent of total real GDP. - Downstream oil and gas activities accounted for about 4 percent of total real GDP. - Non-oil sector share moved from 58 to 63 percent of real GDP between 2010 and 2020. - GDP per capita in Oman was about half of the U.S. level in 1980 and in 2020. - Growth and productivity: - 2001–05: real GDP growth averaged around 0.9 percent; non-oil growth averaged around 3.9 percent per year. - 2006–2010: real GDP growth about 5.2 percent per year; non-oil growth averaged around 7.2 percent. - Potential growth has slowed recently; TFP contribution small and turned negative since the global financial crisis. - 2020: COVID-19 and oil price shock caused a large recession. - Export diversification: - Share of oil and minerals in total exports decreased from 75 percent to about 61 percent between 1996 and 2019. - 2019: non-oil export basket about 39 percent of total exports. ### Labor market structure, employment needs, and public sector constraints Labor market and nationals vs expatriates - Public sector jobs attract due to higher wages, benefits, and job security. - Private sector employment relies more on expatriates. - About 1.4 million expatriate workers in Oman by end-2021, accounting for 80 percent of total employment. - Share of nationals in private sector employment has been trending up over past two decades. Young entrants and job creation needs - In a five-year horizon nearly 280,000 young Omanis would be added to working-age population. - Accounting for participation rates and retiree replacement, about 120,000 new jobs will need to be created over that horizon. - To provide sufficient opportunities, non-oil sector would need annual growth of about 6.8 percent (based on estimated employment-output elasticities). Fiscal and wage constraints - High government wage bill limits capacity to absorb additional employees without adding fiscal vulnerabilities. - Wage gaps skew Omani labor supply toward public sector and private demand toward expatriates. - Differential labor policies between nationals and expatriates increase employment costs for businesses hiring nationals. Education, skills mismatch, and productivity - Omani workers better educated on average than expatriates; TIMSS scores similar to emerging markets average. - Public spending on education higher than EM averages, yet skills mismatch persists (large share of college graduates in business, administration and law). - R&D expenditure averaged 0.1 percent of GDP during 2010-19, compared to 2.4 percent in advanced economies. - Innovation outputs limited relative to investment; patent submissions per capita low relative to R&D expenditure. - Competitiveness decline driven by lower productivity and relatively high wages; unit labor cost–based real exchange rate indicates significant decline. Policy and reform recommendations (labor, education, competitiveness) - Improve efficiency of public spending on education and diversify labor skills (IT, data science, climate, renewables). - Revisit minimum wage of OR325/month to better reflect productivity; consider extending minimum wage to expatriates. - Wage growth in public sector should not outpace private sector. - Strengthen public sector performance metrics and link to pay/promotion. - Temporary transition support: job search and training, unemployment benefit adjustments. - Increase female labor force participation via better working environment, flexible schedules, childcare, maternity benefits, senior post promotion, and entrepreneurship support. ### Business environment, SMEs, and investment SME support and financing - CBO requirement: at least 5 percent of total bank credit disbursed to SMEs. - Oman Development Bank provides subsidized loans; SME Development Fund created in 2014. - Public Authority for SME Development runs technical support programs; Sharakah and similar entities provide finance and consultation. - Number of registered SMEs: 62.3 thousand in November 2021, up from 47.8 thousand a year earlier and 44.1 thousand in March 2020. FDI, business environment, and structural reforms - Tenth Development Plan aims to accelerate private investment, PPPs, and attract FDI. - Invest-Easy Portal launched under Foreign Capital Investment Law. - Recommended actions: - Promote competition and strengthen Competition and Anti-Monopoly Law enforcement. - Strengthen procurement policy, project appraisal, audits, risk management, and e-tendering. - Establish formal regulatory notification/public comment mechanisms and impact assessments. - Provide more flexible FDI policies embedded in broader reforms. - Create a forum for dialogue with foreign investors and reduce non-trade barriers. - Enable business environment for green investment. Access to finance and corporate restructuring - Institutional developments: - Oman Credit and Financial Information Centre (Mala’a) established by Royal Decree 38/2019 (8 May 2019). - Oman Development Bank (ODB) administers loans with an OMR 1 million ceiling and offers SME loan guarantees, interest subsidies, export financing. - 2013: OMR 70 million Al Raffd fund launched to finance start-ups. - Bankruptcy Law in force July 2020; expect improved enforcement and business environment. - Recommendations: - Strengthen market-driven restructuring, greater reliance on out-of-court mechanisms. - Promote non-bank financing and develop stock and local debt markets. - Design SME Credit Guarantee Scheme (CGS) with clear legal framework, governance, monitoring, and quality credit information. Medium-term cross-cutting reforms - Invest in infrastructure, human capital, R&D, digital technology, and renewables. - Human capital: improve spending efficiency, expand vocational training, diversify college specializations (STEM, IT, data science), strengthen university–industry collaboration. - R&D: government direct investment and policies to encourage private R&D. - Fintech and digital technology: develop fintech ecosystem, harness AI/ML for supervisory and financial-sector improvements. --- ### Box 3 — Fintech in Oman Regulatory and institutional developments - CBO drafting an Open Banking API Strategy as part of Oman Fintech strategy to establish a fintech ecosystem. - December 2020: CBO launched the Financial Regulatory Sandbox to live-test fintech solutions under central bank supervision. Cross-border cooperation and digital skills - November 2021: Oman and Saudi Arabia signed MoU to strengthen communications and IT cooperation. - Saudi-Omani Digital Skills Initiative launched to exchange best practices, expertise, and implement joint programs to develop digital skills. Bank initiatives and private-sector activity - September 2020: Bank Muscat launched a US$100 million fintech investment vehicle called BM Innovate. - KPMG Oman Banking Perspectives 2021: banks harness data and advanced analytics and partner with third parties to increase speed to market and reduce costs. --- *Source: IMF staff report excerpt — “1. Medium-Term Fiscal Plan (2020-2024)”, October 24, 2022.* ### 1. Medium-Term Fiscal Plan (2020-2024) _______________________________________________ 7 ### 1. Medium-Term Fiscal Plan (2020-2024) ### Context and role of fiscal policy - Fiscal policy is the main vehicle for converting oil and gas (hydrocarbon) wealth into economic outcomes for Oman’s population. - Oil and gas are the major sources of export income and fiscal revenues; government spending on infrastructure, education, health, and social programs has supported high living standards. - Volatility and unpredictability of oil prices have increased, with boom and bust episodes including prices moving up by around 400 percent (2001-2008), increasing by 100 percent (2009-2013), and declining by 40 percent (2014-2019). - Forecasting commodity prices is exceptionally difficult, creating two competing policy challenges: avoiding procyclical fiscal policy and supporting long-term growth. Key policy direction - Need to strengthen fiscal frameworks—including clearly defining fiscal policy objectives and the long-term fiscal anchor—before introducing a formal fiscal rule. - A fiscal rule is effective only if supported by strong institutions. ### Retrospective of fiscal policy (2000s–2020) Findings on revenue and spending drivers - Government revenues are highly correlated with the oil price, with a correlation coefficient of 0.93 during 2000-2020. - Hydrocarbon revenues averaged 83 percent of total budget revenues since 2000. - The non-hydrocarbon tax base is narrow, representing on average about 7 percent of total budget revenues; the remainder is from non-hydrocarbon non-tax revenues. - The link between oil prices and government spending has been procyclical, with a correlation coefficient of 0.53 (spending less volatile due to constraints on cutting spending during slumps and increasing it during booms). - During 2012-2019, Oman ramped up expenditures more than its GCC peers. Fiscal outcomes and vulnerabilities - Fiscal position deteriorated over 2014-2020. Examples: - Fiscal balance reached 14.6 percent in 2008 and -19.6 percent of GDP in 2016. - Central government debt rose from 29.3 percent of GDP in 2016 to 69.7 percent in 2020 (52.5 percent at end-2019). - Net financial assets ratio (central government debt less deposits at depository corporations and OIA’s liquid assets) declined from 24.2 percent of GDP to -28.5 percent during the same period. - Breakeven oil price increased sharply from early 2000s to 2016 and remained above actual oil prices due to limited expenditure reductions; large increases in wages and subsidies occurred during 2010-2015. - After 2016, efforts intensified to contain expenditures, including containing the wage bill and gradually removing fuel subsidies while protecting vulnerable groups. Policy responses introduced - The authorities announced the Medium-Term Fiscal Plan (MTFP) and broad public-sector reforms in 2020 to address rising fiscal vulnerabilities. - Key fiscal measures and institutional changes: - Introduction of VAT in April 2021 (in line with GCC VAT Treaty). - Preparation to introduce a personal income tax and measures to improve tax collection. - Establishment of the OIA to assume ownership of government companies and investments previously overseen by the MoF. - Creation of Energy Development Oman (EDO) to manage government investments in oil, gas, and renewables; EDO revenue to be shared with the government through royalty taxation and dividend after deducting operational spending and debt service. - Fiscal reporting improvements: - Since February 2021, MoF publishes the monthly Fiscal Performance Bulletin with high-level aggregates on revenues, expenditures, financing, and economic developments. - Some central government fiscal outturn details are published in the monthly statistical bulletin by NCSI. - Data coverage remains limited beyond central government; MoF plans to regularly publish central government debt management operations. Box: Medium-Term Fiscal Plan (MTFP) (published November 2nd, 2020) - MTFP objective: achieve fiscal balance over the medium term; viewed as an enabler for “Oman Vision 2040.” - MTFP pillars: - Supporting economic growth through improving business environment and encouraging domestic and foreign direct investment. - Diversifying and enhancing government revenues by increasing non-hydrocarbon revenues as a share of GDP. - Rationalizing government expenditures through prioritization, increased efficiency, and larger private sector involvement. - Enhancing the social safety net through targeting government support for vulnerable groups, increasing social cohesion, and promoting intergenerational equity. - Strengthening public financial management through fiscal structural reforms and enhanced capacity development. ### Strengthening fiscal frameworks, anchors, and near‑term objectives Purpose of fiscal frameworks - Fiscal frameworks help ensure that fiscal policy objectives—ranging from long-run fiscal sustainability to short/medium-term macroeconomic stabilization—are met coherently. Long-run objective: fiscal sustainability - Fiscal sustainability question: given the current fiscal stance, if no further fiscal measures are taken, can the stance be maintained over the long run? If not, the fiscal sustainability gap is positive and leads to asset depletion and ever-rising debt-to-GDP ratios. - Fiscal frameworks typically adopt a long-term fiscal anchor to ensure consistency with sustainability. - In many non-resource-rich countries, the anchor is a ceiling for the debt-to-GDP ratio. - For resource-rich countries, assessment must explicitly account for large financial assets and the time horizon of hydrocarbon resources. - IMF (2021) definition cited: public debt is “...sustainable when the primary balance needed to at least stabilize debt under both the baseline and realistic shock scenarios is economically and politically feasible, such that the level of debt is consistent with an acceptably low rollover risk and with preserving potential growth at a satisfactory level”. Permanent Income Hypothesis (PIH) as a fiscal anchor for resource-rich countries - PIH-based anchor estimates net wealth as net financial wealth (financial assets minus debt) plus resource wealth (present value of future hydrocarbon revenues), then computes the sustainable flow of income that maintains wealth constant. - For Oman: - The PIH anchor is estimated as a nonhydrocarbon primary deficit of 19 percent of nonhydrocarbon GDP (which would keep wealth constant in real per capita terms). - Steadfast implementation of the MTFP will cause the nonhydrocarbon primary deficit to decline to 24.7 percent of nonhydrocarbon GDP by 2027, significantly reducing the gap with the PIH-consistent position but indicating additional consolidation would be needed beyond the medium term to achieve full fiscal sustainability. - Under the PIH anchor, total net wealth is kept constant while composition shifts over time: hydrocarbon resource wealth declines as reserves are depleted or climate-driven valuation falls, offset by increases in net financial wealth as hydrocarbon revenues are saved and invested. Box: Overview of the Permanent Income Hypothesis (PIH) - PIH provides a benchmark for designing long-term macro-fiscal policy to mitigate resource management challenges and to address intergenerational equity. - Two broad approaches to long-term resource management (IMF 2015): - Standard PIH approach: perfect consumption smoothing across generations; consumption target is a constant share of net wealth each year. Variants: - Modified PIH: allows temporary deviations for large infrastructure needs, with future fiscal adjustment to rebuild financial assets to the standard PIH level. - Fiscal Sustainability Framework: allows for higher investment that raises growth and non-resource revenues, offsetting drawdown. - Bird-in-hand approach: save all oil revenue as financial assets and spend only the yield from accumulated financial assets. Near- to medium-term focus: macroeconomic stabilization - Fiscal policy should be countercyclical to stabilize the economy: tighten in booms to contain demand and external imbalances; loosen in slack to support aggregate demand, jobs, and growth. - The magnitude of cyclical tightening/loosening should reflect the output gap and the requirement to stay on a medium-term fiscal path consistent with the long-run anchor. - Volatility of hydrocarbon prices adds pressure to spend windfalls in booms, risking future fiscal crises when prices fall. ### Implications and recommended sequencing - Strengthen medium-term macroeconomic framework, fiscal strategy, fiscal governance, and medium-term budget framework; expand fiscal coverage beyond central government before introducing formal fiscal rules. - Consider adopting an explicit long-term fiscal anchor (PIH-based for resource-rich Oman) to guide medium-term consolidation and countercyclical policy. - Improve fiscal transparency and expand fiscal data coverage beyond central government to support rule implementation and accountability. - Prioritize structural reforms—revenue diversification, expenditure rationalization, social safety net targeting, and public financial management improvements—to reduce fiscal vulnerabilities and align with the MTFP. *Source: IMF staff report excerpt — “1. Medium-Term Fiscal Plan (2020-2024)”, October 24, 2022.* ### 15. A fiscal rule is often adopted to guide medium-term policy making consistent with ### 15. A fiscal rule is often adopted to guide medium-term policy making consistent with ### Definition and primary function - Fiscal rules are constraints on fiscal policy through a simple numerical target on fiscal aggregates such as expenditure, revenue, the budget balance, or cyclically adjusted balance. - The primary function of fiscal rules is to constrain the government’s use of fiscal discretion. - Rules are often enshrined in legislation, signal the importance attached to reinforcing fiscal sustainability, and detail the circumstances under which the rules can be amended. - In Oman, the government has an implicit fiscal deficit ceiling of 3 percent of GDP, but this is not legislated. ### Desirable features for selecting an effective fiscal rule (as highlighted by Kopits and Symansky (1998)) - Sustainability: compliance with the rule should ensure long-term debt sustainability. - Stabilization: following the rule should not increase (and might even decrease) economic volatility; the rule should let automatic stabilizers operate and/or allow discretionary countercyclical changes in taxes or expenditures. - Simplicity: the rule should be easily understood by decision makers and the public. - Operational guidance: the rule should translate into clear guidance in the annual budget process; budget aggregates targeted by the rule should be largely under the control of the policymaker. - Resilience: the rule should be in place for a sustained period to build credibility and should not be easily abandoned after a temporary shock. - Flexibility: the rule should be modifiable in case of permanent economic shocks; escape clauses can provide flexibility but should be triggered by pre-established rules. - Ease of monitoring and enforcement: compliance should be easy to verify and policy makers should be held accountable for deviations. ### Strengthening fiscal frameworks in Oman (framework components and gaps) - Key components that should be developed or strengthened: - (i) medium-term macroeconomic framework (multiyear projections of key economic variables); - (ii) medium-term fiscal framework (MTFF) (multiyear targets or ceilings on aggregate fiscal variables given projected economic variables, subject to sustainability and macro stabilization constraints); - (iii) fiscal strategy document (translates MTFF into medium term fiscal policy priorities and contains fiscal risk analysis); - (iv) medium-term budget or expenditure framework (MTBF or MTEF) (translates MTFF into multiyear expenditure ceilings and policies); - (v) annual budget (basis for legal appropriations, should be consistent with the above). - The focus of the paper is on items (i) to (iii). - The current MTFP: - Reports fiscal developments since 2014 in a highly aggregated manner (total revenues, expenditures, fiscal balance in nominal terms for the next five years, share of non-hydrocarbon revenues on total revenues, fiscal balance and debt as a percentage of GDP). - Does not describe the rationale for the proposed deficit path or the macroeconomic assumptions underlying fiscal projections. - Sets out five pillars (supporting economic growth; revenue enhancement and diversification; expenditure rationalization and efficiency; social safety net; public financial management and governance) but does not provide details on their fiscal impact. - Does not report fiscal scenarios or provide sustainability analysis. ### Fiscal risks, SOE coverage, and transparency - Fiscal risks are factors that may cause fiscal outcomes to deviate from forecasts; sources can be exogenous (e.g., oil price shocks) or endogenous (e.g., risks from SOEs). - Fiscal risks can be managed through mitigation, provisioning, and accommodation. - Improving oversight and management of SOEs could help mitigate related risks; ongoing SOE reforms are welcome. - Oman Investment Authority (OIA) and Capital Market Authority are developing a Code of Governance for SOEs based on OECD guidelines. - Current fiscal coverage excludes important spending units such as SOEs: - SOEs operate in 11 sectors with 36,000 staff, accounting for approximately 28 percent of GDP (about US$18.2 billion) at end-March 2021. - SOE debt (excluding Petroleum Development Oman) increased from 16 percent in 2015 to 42 percent of GDP in 2021. - Explicit government guarantees to SOEs amount to about 10 percent of GDP. - Since September 2021, expenditures on gas and oil sectors were hived off the central government budget to EDO. - Greater fiscal transparency recommendations: - Report fiscal developments and outlook including underlying assumptions and deviations in line with IMF Fiscal Transparency Code (IMF 2019). - Monthly Financial Performance Bulletin could provide more detail, narrative, and analytical content. - Annual fiscal accounts document could analyze compliance with fiscal targets and explain causes and short-term policy options in case of non-compliance. - Publish a fiscal risk statement outlining key risks, their effects on the MTFP, and mitigation/management policies. ### Overview and assessment of selected fiscal rules (Box 3 summary) - Overall balance rule: - Strengths: simple, easy to communicate, closely linked to debt dynamics. - Weaknesses: large impact of oil price changes could give misleading signals; can be procyclical. - Golden rule (overall deficit net of capital expenditures): - Strengths: protects public investment, supports intergenerational equity. - Weaknesses: may encourage creative accounting; weak link to debt sustainability. - Cyclically adjusted rule: - Strengths: helps stabilize expenditures by letting automatic stabilizers operate. - Weaknesses: challenging to compute and enforce; requires timely reliable estimates of the output gap and is prone to ex-post revisions. - Structural rule: - Strengths: smooths oil price volatility using long-term oil price estimates (e.g., 5 or 10-year average) and a target for the structural balance. - Weaknesses: estimating the targeted balance is challenging; requires assumptions on potential output and long-term commodity prices. - Expenditure rule: - Strengths: easy to communicate and monitor; allows macroeconomic stabilization; clear operational guidance; could ensure debt sustainability if well-designed. - Weaknesses: could adversely affect quality of adjustment; may reduce incentives to raise revenues. - Revenue rule: - Strengths: raise revenue or limit tax burden. - Weaknesses: weak link to debt sustainability; could be procyclical. - Non-resource primary balance rule: - Strengths: excludes resource revenues and expenditures, suitable for resource-rich countries; easy to monitor; could encourage non-resource revenue generation. - Weaknesses: difficult to communicate; narrow coverage and weaker link to financing needs/debt. - Tabulated assessment highlights: - Overall Balance: +Easy to communicate and monitor; +Closely linked to debt sustainability; +Clear operational guidance; -Could lead to procyclicality; -Could adversely affect quality of adjustment. - Golden: +Protect public investment; +Intergenerational equity; -Weak link to debt sustainability; -Creative accounting. - Expenditure: +Easy to communicate and monitor; +Allow macroeconomic stabilization; +Clear operational guidance; +Could ensure debt sustainability if well-designed; -Could adversely affect quality of adjustment; -May reduce incentive to raise revenues. - Revenue: +Raise revenue or limit tax burden; -Weak link to debt sustainability; -Could lead to procyclicality. - Cyclically Adjusted and Structural: +Foster economic stabilization; +Good operational guidance; -Difficult to compute and monitor. - Non-Resource Primary Balance: +Easy to monitor; +Could encourage non-resource revenue generation; -Difficult to communicate; -Narrow coverage and weaker link to financing needs/debt. ### Trade-offs, multi-rule approaches, and capacity needs - Not all desirable features can be achieved with a single rule; flexibility often increases design complexity. - Trade-offs include resilience versus operational guidance (escape clauses complicate budget process). - Multiple-rule approaches ("second generation rules") address shortcomings of single rules but increase complexity and risk of inconsistencies. - Estimating cyclically adjusted or structural rules requires timely reliable estimates of the output gap and long-term commodity prices; institutional capacity within the MoF and enhanced data quality are prerequisites. ### Recommendation for Oman - On balance, a rule based on the non-hydrocarbon structural primary balance could be appropriate for Oman: - Benefit: disconnects spending from oil and gas price volatility; requires saving hydrocarbon revenue when prices are high and drawing on savings when prices fall. - Challenges: estimating cyclically adjusted or structural balances is difficult due to assumptions needed for the targeted balance and real-time assessment of the cyclical position, especially amid structural reforms under Vision 2040. - Interim step: complement the implicit overall balance rule in the MTFP with an explicit rule on the non-hydrocarbon primary balance linked to the long-term fiscal anchor. - Priorities before formal fiscal rule adoption: - Further strengthen fiscal frameworks (medium-term macro framework, MTFF, fiscal strategy). - Undertake fiscal consolidation and build institutional capacity. - Define a long-term fiscal anchor to guide formulation of fiscal rule(s) balancing short-term macro-management, medium-term development, and longer-term saving goals. ### Conclusion - Strong fiscal frameworks are important for Oman because of significant reliance on hydrocarbon resources; volatility of oil and gas prices has resulted in large swings in public expenditures and GDP growth. - A formal fiscal rule can reinforce fiscal frameworks once frameworks are well-developed; successful implementation is generally preceded by fiscal consolidation and framework strengthening. - The government must first define its long-term fiscal anchor to guide potential fiscal rule(s). *Source: 1omnea2022002 - 15. A fiscal rule is often adopted to guide medium-term policy making consistent with (IMF PDF chapter).* ### 3. Botswana (expenditure rule, since ### 3. Botswana (expenditure rule, since ### Fiscal rule descriptions: selected country practices - Botswana (expenditure rule, since 2003) - A ceiling on the expenditure-to-GDP ratio is set at 40 percent. - A debt rule introduced in 2005 limits domestic and foreign debt each to 20 percent of GDP. - Chile (structural balance rule, since 2001) - Government expenditures budgeted in line with a structural balance target and structural revenue. - Structural revenue defined as revenues that would be achieved if: (i) the economy were operating at full potential; and (ii) the prices of copper and molybdenum were at their long-term average (10-year). - Starting from the 2015 budget, revenues are no longer adjusted based on long-term prices of molybdenum. - Expenditure is the residual after subtracting the structural balance target from estimated structural revenue. - Implementation timeline: - 2001–07: constant target for the structural balance (a surplus of 1 percent of GDP). - 2008: target changed to 0.5 percent of GDP. - 2009: target set at zero and an escape clause introduced for countercyclical measures. - A fiscal council established in 2013 oversees two independent committees (on potential GDP and long-run copper price), advises the Minister of Finance, and makes its views public (non-binding). - Norway (non-oil primary balance rule, since 2001) - Ties the non-oil primary deficit to the investment income of the sovereign wealth fund (SWF). - Net cash flows from oil and gas transferred to the SWF; government can use only the yield from these assets for spending. - Rule ceiling: non-oil primary deficit not to exceed 3 percent of the accumulated financial wealth (corresponds to expected long-run real rate of return of its SWF). - Transfers from the SWF may be higher during downturns for countercyclical stabilization and expenditure smoothing. - Russia (evolving rules, since 2007) - First rule (2007–2009): targeted a long-term non-oil deficit of 4.7 percent of GDP to be achieved by 2011; suspended in 2009. - Abolished in 2012; replaced with redesigned rule beginning in 2013 (2013–2017): - Ceiling on expenditures = oil revenue (measured at the benchmark oil price) + non-oil revenues + net borrowing limit of 1 percent of GDP. - Benchmark oil revenues calculated using a 10-year backward looking oil price rule. - Oil revenues above the benchmark saved in the Reserve Fund until it reaches 7 percent of GDP; thereafter at least half of excess oil revenues to the National Wealth Fund and remaining resources to budget for infrastructure and priority projects. - When oil prices are below the benchmark, Reserve Fund can be tapped to maintain expenditures. - In prolonged declines, benchmark oil price formula reset to equal the three-year backward average. - After the 2014 oil shock, the rule was suspended in 2015 because it did not allow fast-enough adjustment of the benchmark oil price. - In 2018, a modified rule targeted a non-oil primary deficit of 1 percent of GDP in 2018 (and zero for 2019 and beyond) at a fixed benchmark oil price per barrel of $40 (in real 2017-dollar terms) with a proposed annual adjustment by the US CPI inflation. - Timor-Leste (non-oil primary balance rule, since 2005) - Annual transfers from the Petroleum Fund to the budget equal the Estimated Sustainable Income (ESI), set at 3 percent of government wealth. - Government wealth estimated as the sum of financial assets in the Petroleum Fund and the net present value of expected future petroleum revenues. - ESI formulation aligns with the permanent income hypothesis (PIH) approach; ESI updated annually and allows deviations to scale up public investment. ### Key implementation features across resource-rich countries (as illustrated) - Use of benchmark commodity prices (10-year or backward-looking averages) to compute structural/benchmark revenues. - Separate treatment of hydrocarbon/resources via non-oil/non-hydrocarbon fiscal metrics or sovereign wealth funds to smooth expenditure over time. - Escape clauses or countercyclical provisions permit temporary deviation (e.g., Chile 2009; Norway transfers in downturns; Russia Reserve Fund usage). - Institutional oversight (e.g., Chile fiscal council) to improve parameter estimation, transparency, and credibility. ### Observed challenges and adjustments - Benchmark price formulas may fail to adjust quickly enough during large price shocks (example: Russia after 2014), prompting suspensions or redesigns. - Estimating structural parameters (potential GDP, long-term commodity prices, equilibrium non-oil primary deficit) poses technical and communication challenges. - Designing mechanisms to structure adjustments when large gaps exist between current non-oil deficits and equilibrium levels is required, including periodic revisions of medium-term benchmarks to reflect changing conditions (e.g., assumed long-term oil and gas prices, proven reserves and production levels, rate of return on financial assets). ### Annex II — Illustrative simulation of fiscal outcomes using fiscal rules (Oman case) - Simulation setup and approach - Simulations use historical data (2010-2020) and projections (2021-2027). - Fiscal balance in each year determined by the rule; if actual fiscal balance is better than the rule-implied ceiling, actual figures are used; otherwise the outcome is bound by the rule-implied ceiling. - Balances adjusted to take out hydrocarbon capital and operation expenditures (consistent with internationally accepted practice). - Selected rules simulated: overall fiscal balance rule; non-hydrocarbon primary balance rule; expenditure rule. - Main simulation findings - Overall fiscal balance rule - Tends to lead to a procyclical stance. - During the boom in oil prices in 2010-2014, the rule would have permitted ramping up of spending as higher oil revenues enabled the deficit rule to be met easily. - Overall fiscal surpluses masked expansionary fiscal policies where non-hydrocarbon balance deteriorated sharply (from -50 percent in 2010 to -80 percent of non-hydrocarbon GDP in 2012). - The rule was rarely binding except for 2015-2017 (after the 2014 oil shock) and 2020 (during the pandemic and collapse in oil prices). - Non-hydrocarbon primary balance rule - Excludes hydrocarbon revenues and expenditures; better measures fiscal policy impact on domestic demand. - For simulations: - For 2010-2020, the non-hydrocarbon primary deficit ceiling as a percent of non-oil GDP is set based on the average of PIH benchmark for a particular year. - For 2021-2027, the ceiling corresponds to 2021 medium-term benchmark calculated using the PIH. - The rule would have been binding during 2010-2020. - The rule would have been consistent with long-term fiscal sustainability and more countercyclical compared to the overall balance rule. - Challenges: estimation and communication of the equilibrium level for fiscal sustainability; need mechanisms to structure adjustment when sizable gaps exist and to allow periodic revisions of benchmarks. - Expenditure rule - Imposes a ceiling on government spending in percent of nonhydrocarbon GDP; ceiling estimated based on emerging economies average of expenditure to GDP. - Simulation results show the rule would have been binding. - Steadfast implementation of the Medium-Term Fiscal Plan (MTFP) would significantly narrow the fiscal gap over the medium-term. - Drawback: leaves revenues outside coverage; if revenues fall as a share of GDP, the rule could allow widening deficits over time since the expenditure-to-GDP ratio would remain broadly constant under the rule. ### Policy implications from simulations - Nonhydrocarbon primary balance rules and expenditure rules are more binding in ensuring long-term debt sustainability and economic stabilization compared to an overall balance rule. - Careful design is required to address: - Measurement and communication of structural benchmarks (potential GDP, long-term resource prices). - Mechanisms for phased adjustment when current deficits deviate substantially from equilibrium levels. - Periodic revision of medium-term benchmarks to reflect changing conditions (long-term prices, proven reserves, production levels, rate of return on assets). - Consideration needed for rules' coverage (expenditure-only rules may need revenue safeguards) and for escape clauses that enable countercyclical responses in severe shocks. ### Oman — economic context and key stylized facts (excerpts relevant to fiscal rule discussion) - Hydrocarbon sector and GDP - In 2016–2020, crude oil and natural gas production accounted for about 32 percent of total real GDP. - Downstream oil and gas activities (refining and petrochemical manufacturing) accounted for about 4 percent of total real GDP. - Progress in raising the share of the non-oil sector limited: non-oil sector share moved from 58 to 63 percent of real GDP between 2010 and 2020. - GDP per capita in Oman was about half of the U.S. level in 1980 and in 2020. - Growth and productivity - Real non-hydrocarbon GDP growth slowed since the global financial crisis. - 2001–05: real GDP growth averaged around 0.9 percent; non-oil growth averaged around 3.9 percent per year. - 2006–2010: real GDP growth increased to about 5.2 percent per year with non-oil growth averaging around 7.2 percent. - Potential growth has slowed recently due to declines in trend growth of capital investment growth, employment, and total factor productivity (TFP). - Contribution of TFP has been relatively small and turned negative since the global financial crisis. - 2020: COVID-19 crisis and oil price shock caused a large recession. - Exports and diversification - Export diversification has improved but scope for improvement remains. - Share of oil and minerals in total exports decreased from 75 percent to about 61 percent between 1996 and 2019. - In 2019, the non-oil export basket accounted for about 39 percent of total exports and included chemicals, agricultural products, metal, vehicles, electronics, textile, and services. - Exports of manufactured goods are generally of lower technology values; export share of high-technology products is low compared to high-income countries but relatively high compared to GCC countries. *Source: IMF chapter/section content provided in the supplied PDF excerpt.* ### 9. Public sector jobs, which generally pay higher wages and benefits and provide greater ### 1omnea2022002 - 9. Public sector jobs, which generally pay higher wages and benefits and provide greater ### Labor market structure and Omani employment trends - Public sector jobs remain attractive due to higher wages, benefits, and greater job security. - Private sector employment relies more on expatriate workers. - There were about 1.4 million expatriate workers in Oman by the end of 2021, accounting for 80 percent of total employment. - The share of nationals in private sector employment has been generally trending up over the past two decades. ### Young entrants and job creation needs - Based on population structure, in a five-year horizon nearly 280,000 young Omanis would be added to the working-age population. - Taking account of labor participation rates and replacement of retirees, about 120,000 new jobs will need to be created over that horizon. - To offer sufficient opportunities to job seekers, the non-oil sector would need an annual growth rate of about 6.8 percent (based on estimated employment-output elasticities between non-oil growth and employment). ### Fiscal and public wage constraints - The relatively high government wage bill points to limited capacity to absorb additional employees without adding to fiscal vulnerabilities. - Sizeable wage gaps skew the supply of Omani labor toward the public sector and the demand for labor in the private sector toward expatriates. - Differences in labor policies between nationals and expatriates (dismissal procedures, pensions, social security) make employing nationals relatively more costly for businesses. ### Education, skills mismatch, and public spending efficiency - Oman has raised educational attainment; Omani workers are better educated on average than expatriates. - Educational outcomes, as proxied by TIMSS scores, are similar to emerging markets (EM) average. - Public spending on education in Oman is higher than averages in EMs, yet skills mismatch remains a challenge—large share of college graduates majored in business, administration and law. - Recommendation implication: improve efficiency of public spending on education and diversify labor skills. ### Role of expatriates - Expatriates have contributed to economic growth by addressing local labor shortages, containing overheating during high oil prices, and moderating aggregate wage increases because of their lower wages. - Expatriate labor is likely to continue to play a role in future development. ### Productivity and competitiveness - Competitiveness has declined mostly owing to lower productivity and relatively high wages. - Rising oil prices since 2000 financed rapid public spending increases, boosting low-productivity non-tradable sectors. - Unit labor cost (ULC)-based real exchange rate indicates a significant decline in competitiveness due to divergence between wage and price inflation rates. - Some sectors (transport and communication, construction, manufacturing) showed output per worker improvements in 2016-2019; other services (financial and business services, education, wholesale and retail trade) showed lower output per worker. - Bolstering competitiveness requires lowering unit labor costs by increasing productivity and containing relatively high average wages. ### Innovation and R&D - Expenditure on R&D averaged 0.1 percent of GDP during 2010-19, compared to 2.4 percent in advanced economies (AEs). - Oman’s innovation outputs have been limited relative to its level of innovation investments (measured by Global Innovation Index metrics). - Oman performs well on education, ICTs, and infrastructure inputs, but lags on output sub-indices: knowledge creation, knowledge diffusion, and creative goods and services. - Patent submissions per capita (used as a proxy for innovation outputs) are low relative to R&D expenditure. ### Business environment and governance reforms - Oman has implemented reforms under "Oman Vision 2040" including updates to Commercial Companies Law, Foreign Capital Investment Law, Privatization Law, Public-Private Partnership Law, and Bankruptcy Law. - Capital Market Authority issued regulations on shareholders and boards of directors in 2019; Executive Regulations of the CCL issued in October 2021. - Under the new FCIL, 100 percent foreign-owned companies and single shareholder companies are allowed; clarity on the exact scope of activities allowed for 100 percent foreign ownership is being developed. - Public Authority for Special Economic Zones and Free Zones (OPAZ) was created in August 2020. - Ministry of Commerce, Industry, and Investment Promotion (MOCIIP) was restructured in August 2020 to consolidate investment promotion functions. - Trade-weighted average tariff rate is about the same as other GCC countries, but prevalence of non-tariff barriers is relatively high compared to other GCC countries. - Reforms undertaken: transparent tender system, modified labor laws for workforce flexibility, increased access to credit, sped approvals for new businesses, permissions for foreign investment in new industries, expanded land use. ### Governance and investment implications - Improving economic governance would support higher investment. - An improvement in the corruption index by one standard deviation is estimated to increase investment by as much as 3 percent of output (based on Mauro, 1995). - Oman’s rule of law, voice and accountability, and political stability indicators are above the GCC average, but lag advanced economies. ### Capital inputs, public investment, and FDI - Private investment has been generally volatile and trending down since 2015. - Public investment expanded rapidly with oil revenue growth; non-oil investment share has been generally declining. - Oman’s public capital stock/GDP ratio exceeds GCC, AE, and EME averages; infrastructure quality indicators are above average. - Recommendation implication: better project prioritization and enhanced efficiency in public project implementation to increase "value for money". - FDI inflows strengthened somewhat since 2018, with a large hydrocarbon-related FDI in 2018; ongoing reforms could further strengthen and diversify FDI inflows. ### Corporate performance and SMEs - Corporates’ Return on Equity (RoE) has been declining over past decades; the decline is broadly distributed across sectors. - Lower corporate investment is associated with declining corporate profitability. - SMEs constitute a small part of Oman’s economy and have large room for development; SMEs are important for diversification and job creation. - Number of registered SMEs: 62.3 thousand in November 2021, up from 47.8 thousand a year earlier and 44.1 thousand in March 2020. - SMEs’ contribution to GDP and share of total loans is relatively limited in Oman. *Source: Oman 2021 Article IV Consultation staff report excerpts and IMF staff calculations as provided in the content unit.* ### 24. Policies have been deployed to support the development of SMEs. To address SMEs’ ### 24. Policies have been deployed to support the development of SMEs ### Support for SMEs: measures and institutions - Central Bank of Oman (CBO) requirement: at least 5 percent of total bank credit be disbursed to SMEs. - Oman Development Bank: provides subsidized loans to SME subsectors. - SME Development Fund: created in 2014 to foster entrepreneurship and help finance SMEs. - Public Authority for SME Development: runs a technical support program. - Sharakah and similar entities: provide financial support and consultation to SMEs. ### Investment in renewables and green transition - Oman’s National Energy Strategy target: derive 30 percent of electricity from renewable sources by 2030. - Ministry of Energy and Minerals: identifying areas for green hydrogen and renewable energy-related investments with other governments. - Model simulation finding (IMF, 2020b): an initial green investment push combined with initially moderate and gradually rising carbon prices would deliver needed emission reductions while supporting GDP and employment in the near term. - Medium-term benefits cited: spur innovation, create new sources of growth, reduce poverty and inequality, and deliver cleaner air and water. ### Rationale for reforms: objectives and urgency - Objective: strong, job-rich, and sustainable non-hydrocarbon private sector-led growth to ensure higher living standards. - Urgency: global transition to renewable energy threatens fiscal revenues and economic activity in oil exporters, making diversification and transformation more urgent for Oman. - Key enablers: a more diversified and competitive tradable sector and growth that generates sufficient high-quality jobs for well-educated Omanis and future generations. ### Overarching reform principles and sequencing - Principle I. Broad-Based Reform - Tackle challenges from multiple areas within a coherent framework rather than piecemeal. - Address effects and spillovers from separate policy measures and harmonize them. - Principle II. Proper Sequencing - Implement near-term policies that foster a conducive business environment and attract private investment. - Harmonize labor market policies and accompany them with social safety net reforms. - Proceed on cross-cutting issues with measured pace considering implementation capacity. - Principle III. Multi-Year Efforts - Persistent efforts required to fully implement comprehensive reforms. - Focus on resolving unexpected challenges dynamically and sustain broad consultation with private stakeholders and the public. - Medium-term fiscal framework: to avoid procyclical fiscal policies and anchor spending rationalization. ### Near-term reform priorities - Improve business environment for private investment. - Advance national program for diversification: renewable energy, manufacturing, tourism. - Promote digital transformation and fintech. - Continue implementation of National Strategy for Adaptation and Mitigation to Climate Change. - Near-term three-pronged reform: improving business environment, enhancing access to financing, further liberalizing labor market policies and strengthening social safety nets. - Enablers for export-oriented private sector: facilitate financing for corporates and SMEs; build a capable and motivated workforce outside the public sector, including entrepreneurs. ### Pillar I — Reforming labor market policies and strengthening social safety net Findings and recent measures: - 10th Five Year Development Plan: modify employment structure toward skilled manpower, encourage investments based on knowledge-economy, develop education, increase female participation. - Simplified multiple minimum wages and introduced a single minimum wage of OMR 325/month in 2020. - Time-bound wage subsidy: OMR 200/month for first time Omani jobseekers to facilitate private sector employment of Omanis. - Relaxed restrictions on job transfers for expatriates; reduced hiring fees for expatriates. - Government-sponsored training and habilitation initiatives for job seeking in public and private sectors. - Job Security Fund: established in November 2020 and has provided unemployment benefit to facilitate worker reallocation. - Work on updating the labor law is ongoing. Deeper reform recommendations (quoted guidance): - Gradually eliminate other factors that may hinder market efficiency and segment the private and public labor markets, including flexibility in hiring and firing workers, and other differential policies for nationals versus expatriates. - The current minimum wage of OR325 per month can be revisited to better reflect labor productivity and there is merit to extend minimum wage requirement to cover expatriates. Wage growth in the public sector should not outpace that of the private sector. - Strengthen transparent public sector performance metrics and link them to pay scale and promotion. - Build a social incentive structure that encourages entrepreneurship and employment in the private sector and signals limited future jobs in the public sector. - Deploy temporary policy measures as needed to alleviate transition costs: enhance job search and training; adjust unemployment benefits and coverage periods. - Further increase female employment by improving working environment for women, providing flexibility in work schedules and locations, promoting women to senior positions, and encouraging female entrepreneurs under SME initiatives. - Diversify college graduate specializations toward information technology, data science, climate issues and renewable energy. Box 1 — Enhancing Female Labor Force Participation (summary of findings and recommendations) - Benefits of higher FLFP: - Boosts growth and productivity by increasing domestic demand and aggregate productivity. - Promotes more inclusive growth as services (which expand with development) are more gender-equal in employment. - Can raise male wages where gender complementarity increases productivity. - Context in Oman: - Basic Law confirms equality between men and women; government initiatives guided by National Strategy for Advancement of Omani Women (2007-2020) and Oman Vision 2040. - Current FLFP is low compared to other GCC countries and middle-income countries; education level and urban proximity positively associated with higher FLFP; social norms and traditional customs remain challenges. - Women in Oman are well-educated: high net enrollment ratios for secondary education (comparable to male) and higher net enrollment ratios for tertiary education than male (IMF, 2021). - Recommendations: - Improve working environment for women, provide flexible schedules and locations, extend maternity benefits, improve childcare provision, and facilitate job searching. - Promote women to senior positions and encourage female entrepreneurs under SME initiatives. - Press ahead with structural reforms to promote private sector development and diversification to create a virtuous cycle supporting women’s economic empowerment. ### Policies toward expatriates - Expectation: expatriate labor will continue to be needed in the foreseeable future though demand could decline as Omanis shift to private sector and productivity rises. - More flexible expatriate labor policies can facilitate resource reallocation across industries and attract high-skilled labor. - Recent reduction of fees for hiring expatriates is welcomed. - Policy framework for expatriates could harness positive spillovers (skill transfer, consumption, savings, investment). - Investment Residency Program: offers self-sponsored residence permits to generate job opportunities and attract/retain investment. - Allowing expatriates to invest in residential and commercial real estate under the usufruct system would encourage expatriate consumption and investment and support domestic demand. - Example from region: restrictions on expatriate real estate investment have been gradually relaxed in other GCC countries. ### Social safety net reforms - Ongoing reforms aim to simplify various social assistance programs, tackle weaknesses, improve efficiency, and strengthen adequacy. - Potential future savings from improved efficiency can be reallocated to higher-priority areas. - Job Security Fund establishment and its extension to first time job seekers are noted as positive steps. ### Pillar II — Improving the business environment - Private investment is driven by profitability, determined by competitiveness and productivity. - Freezones and tax incentives help only initially; sustained private investment requires higher competitiveness and productivity supported by flexible labor market and conducive business and regulatory environment. - Recommended steps: - Reinforce ease of entry for firms and ease of exit for underperforming or zombie firms to reallocate resources to productive uses. - Establish a transparent and level playing field based on robust competition policy to strengthen competition among firms. *Source: 1omnea2022002 (IMF).* ### 34. Better business environment would help improve investment including FDI. The Tenth ### 1omnea2022002 - 34. Better business environment would help improve investment including FDI. The Tenth ### Improving the business environment to attract investment and FDI - The Tenth Development Plan targets setting up necessary infrastructure to accelerate private investment, execute major strategic projects and public-private partnership projects, and attract direct foreign investment. - The Ministry of Commerce, Industry and Investment Promotion launched an electronic licensing service via its Invest-Easy Portal governed by the Foreign Capital Investment Law; this is cited as a welcome step. - Specific policy considerations to improve the business environment: - Promote market competition to achieve lower prices, higher-quality goods and services, greater variety, and more innovation; competition is also critical in labor markets to ensure competitive wages and working conditions. - Strengthen the Competition and Anti-Monopoly Law (Royal Decree No. 67/2014) enforcement and the role of the Competition Protection and Monopoly Prevention Center established under Royal Decree 2/2018 to investigate infringing parties, regulate market practices, and promote competition. - Strengthen procurement policymaking and implementation, including capacity for project appraisal, systemic audits of investment projects, risk management, and broader use of the e-tendering system developed under e-government initiatives to foster a fairer, more open and transparent process. - Establish formal mechanisms for regulatory notification and public comment, soliciting comments on proposed regulations and conducting impact assessments to improve quality, effectiveness, transparency, and investor confidence. - Provide more flexible policies toward FDI and address challenges faced by foreign investors; embed FDI liberalization within a broader reform agenda (Korea’s experience referenced). - Create a forum or venue for regular public dialogue including foreign investors, ministries, and different levels of government; follow up on foreign investors’ feedback and address practical challenges they face. - Reduce non-trade barriers to help attract foreign investment and facilitate trade. - Enable the business environment for green investment, recognizing that renewables and green projects require specific infrastructure and skilled labor which affect attractiveness to foreign investors. ### Key observations on FDI dynamics and policy lessons - Once an economy of scale is established, attracting a critical mass of FDI can create a positive feedback loop making further FDI attraction easier, as presence of other foreign investors signals a positive environment. - Korea’s policy experience: the Foreign Investment Promotion Act (enacted November 1998) eased regulations and restrictions, expanded tax incentives, and streamlined administrative procedures—offering an example of embedding FDI liberalization in broader reforms. - China’s approach combined preferential policies (tax concessions, Open Economic Zones) with practical assistance responding to foreign investor complaints, though empirical evidence on preferential policies’ impact on FDI is mixed. ### State intervention and industrial policy (Box 2) - Debate summary: - Traditional critiques: information asymmetry (government not best placed to pick industries) and rent-seeking (bribes and lobbying causing distortions). - Counterarguments: policy can aid structural transformation and diversification; Rodrik’s “economic self-discovery” process proposes interactive public–private cooperation to identify opportunities and constraints. - Proposed principles for successful diversification (Cherif and Hasanov, 2019): - Support domestic producers in sophisticated industries beyond initial comparative advantage. - Pursue export orientation. - Enforce fierce competition with strict accountability. - Emphasis: state intervention should correct market failures and enforce market discipline rather than protect under-performing, under-innovating, or rent-seeking firms. ### Enhancing access to financing (Pillar III) - Institutional developments: - Oman Credit and Financial Information Centre (Mala’a) established by Royal Decree 38/2019 issued on 8th May 2019; independent organization supervised by the Central Bank of Oman providing credit information services and collaborating with government registries to centralize credit and financial information. - Oman Development Bank (ODB) administers loans with an OMR 1 million (USD 2.6 million) ceiling to support development of smaller industries in agriculture, fisheries, petroleum, mining, and services; ODB offers an SME loan guarantee program, interest subsidies, and attractive export financing rates. - In 2013, the government launched the OMR 70 million Al Raffd fund to finance start-ups and entrepreneurial ventures. - Corporate restructuring and market resource reallocation: - Recommendation to strengthen market-driven restructuring mechanisms to allow non-viable firms to exit efficiently and facilitate resource reallocation. - Greater reliance on out-of-court restructuring mechanisms as cost-effective and speedy alternatives; these may require government involvement via financial and regulatory incentives and mediation/arbitration. - Oman’s Bankruptcy Law came into force and effect in July 2020; its executive regulations and enforcement are expected to improve the business environment and attract more foreign investment. - Promote non-bank financing sources for corporate restructuring (e.g., special investment vehicles) while ensuring safeguards against moral hazard and conflicts of interest if public capital injection is used. - Further development of the Oman stock market and local debt market would diversify corporate funding sources and support non-oil private sector development. ### SME-specific measures - SMEs face distinct challenges; policy goals include helping existing SMEs grow, integrate into industrial chains, or enable new SMEs to emerge to promote innovation and diversification. - Recommended SME supports: - Better business incubation support and improved access to credit, aligned with labor market reforms to incentivize private-sector entrepreneurship. - Enhanced business incubation such as sharing information and providing training on business management and marketing. - Design and implement an SME Credit Guarantee Scheme (CGS) following World Bank principles: - Clearly defined legal framework covering ownership, funding sources, financial accounting standards, and independent oversight. - Sound corporate governance and risk management with a clearly defined mandate. - Regular monitoring and evaluation. - Quality and timely credit information to help relax collateral requirements. - Evidence that collateral registries for movable assets can increase likelihood of firm access to bank financing. ### Medium-term cross-cutting reforms: infrastructure, human capital, R&D, digital technology, and renewables - Summary point: Investing in infrastructure, education, R&D, facilitating financing, and opening trade supports growth and development; expanding digital technology use and investing in renewable energy are instrumental for export diversification and economic transformation. - Human capital and education: - Investing in human capital (knowledge, skills, education, health) improves productivity and is key for sustained economic growth amid rapid technological change. - Recommendations to improve spending efficiency and education outcomes, expand vocational training, diversify college specializations (including STEM, information and digital technology, data science and engineering, and social science), and encourage citizens to pursue high educational outcomes. - Vocational training should use flexible modalities combining on-site job training and classroom learning and respond to market needs. - Improvements in education, stronger research institutions, and university–industry collaboration would raise returns to R&D investment. - Research and development: - Promote investment in R&D to improve product quality and competitiveness. - Government can invest directly (subsidize targeted scientific programs in universities and government research institutes) and design policies to encourage private R&D given its high risk, fixed costs, and medium- to long-term returns. - Fintech and digital technology: - Development of Fintech, AI, and ML can improve efficiency, reduce costs, enhance forecasting, and strengthen risk management and compliance; they can also enhance financial inclusion and geographic competition among banks. - ML and Natural Language Processing tools are being used by Financial Stability authorities for data analysis, processing, validation, and plausibility; AI can flag anomalies in real time and improve supervision quality. - Adopting digital technologies as part of Oman’s e-government initiatives and investing in relevant education are important to support development and economic diversification. *Source: IMF chapter content provided in the supplied PDF excerpt.* ### Box 3. Fintech in Oman ### Box 3. Fintech in Oman ### Regulatory and institutional developments - The CBO has taken steps to develop Fintech and the digital transformation journey in the financial and banking sector. - The CBO has been drafting an Open Banking API Strategy, as part of a broader push to stimulate innovation in the finance sector. - The Open Banking API Strategy is part of the Oman Fintech strategy, which aims at establishing a comprehensive and nurturing fintech ecosystem in Oman. - In December 2020, the CBO launched the Financial Regulatory Sandbox, allowing participants to live-test their innovative fintech solutions in a safe environment under the supervision of the central bank. - “A Regulatory Sandbox allows the regulator, innovators, financial service providers and customers (as final users) to conduct field tests in an off-market development environment and collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.” ### Cross-border cooperation and digital skills - In November 2021, Oman and Saudi Arabia signed a memorandum of understanding (MoU) to strengthen cooperation in the fields of communications and information technology. - The Saudi-Omani Digital Skills Initiative was launched at the same time. - The initiative “aims at exchanging best practices and expertise, participating in meetings and joint working sessions, and implementing joint programs and initiatives, to develop digital skills to meet the needs of the labor market.” ### Bank initiatives and private-sector activity - In September 2020, Bank Muscat launched a US$100 million fintech investment vehicle called BM Innovate to create a strong network in the fintech ecosystem and invest in both local and international fintech companies. - The Oman Banking Perspectives 2021 (KPMG report) notes that: - Some banks are harnessing data and advanced analytics to get a real-time understanding of their customers. - Others are engaging and partnering with third parties to increase speed to market, reduce costs and close capability gaps. *Source: Box 3. Fintech in Oman, IMF staff report content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1omnea2022002.pdf_