## 1. Recent Economic Developments ## Source details **Canonical URL:** [1. Recent Economic Developments](https://www.imf.org/-/media/files/publications/cr/2024/english/1omnea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1omnea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1omnea2024001.pdf.json) --- ### Background - Oman launched the Medium-Term Fiscal Plan (MTFP) in 2020 aimed at fiscal sustainability through diversification of fiscal revenues, expenditure control, and prudent management of hydrocarbon windfall savings; policies underpin Oman Vision 2040. - Reforms underway: strengthening the social safety net, dynamizing labor markets, overhauling the state-owned enterprise (SOE) sector, enhancing the monetary policy framework, and developing the financial sector. - Sovereign credit rating upgraded to one notch below investment grade. ### Recent economic performance - Output and growth - Real GDP growth: 4.3 percent in 2022 (from 3.1 percent in 2021), driven primarily by strong hydrocarbon expansion. - Non-hydrocarbon growth: 1.2 percent in 2022 (from 1.9 percent in 2021); accelerated to 2.7 percent (y-o-y) in 2023H1. - Real GDP growth moderated to 2.1 percent in 2023H1, primarily reflecting OPEC+-related oil production cuts. - Employment - Employment grew by 16.2 percent in 2022, primarily driven by expatriate employment recovery. - Omani employment growth: 3.6 percent in 2022. - Recent data: continued expatriate employment increase but waning Omani employment in 2023H1. - Inflation and monetary policy - Inflation: 1.5 percent in 2021; 2.8 percent in 2022; receded to 1.2 percent (y-o-y) during January–September 2023. - CBO policy: repo rate raised by 550 bps since 2022 (in line with the Fed). - Credit to the economy: increased by 4.3 percent in 2022 and 6.0 percent by end-September 2023 (from 4.1 percent in 2021). - Private sector credit growth: 4.3 percent in 2022 and 6.2 percent end-September 2023. - Credit to the public sector: 4.2 percent in 2022 and 5.2 percent end-September 2023 (down from 19.4 percent in 2021). - Fiscal developments - Overall fiscal balance: surplus of 10.1 percent of GDP in 2022 (from a deficit of 3.1 percent of GDP in 2021) due to higher hydrocarbon revenues, larger tax yields, and lower expenditures. - Fuel subsidies: 2.9 percent of non-hydrocarbon GDP in 2022 (from 0.2 percent in 2021). - Non-hydrocarbon primary deficit: 31.6 percent of non-hydrocarbon GDP in 2022 (from 32.4 percent in 2021). - Non-hydrocarbon primary adjustment during 2021–2022: nearly 6 percentage points of non-hydrocarbon GDP. - Central government debt: declined from 61.3 percent of GDP in 2021 to 39.9 percent of GDP in 2022 (authorities used windfall to prepay government debt). - SOE debt: reduced from 40.7 percent of GDP in 2021 to 29.9 percent of GDP in 2022. - Government's net financial assets-to-GDP: increased from –24.9 percent in 2021 to –10.3 percent in 2022. - External sector and reserves - Current account: surplus of 5.0 percent of GDP in 2022 (first current account surplus since 2014). - Non-hydrocarbon exports: more than doubled from 2019 levels; about one-third of total exports in 2022. - CBO reserves: $17.6 billion in 2022 (covering 4.5 months of imports and 64 percent of the ARA metric). - Overall reserves including OIA’s liquid foreign assets: $35.7 billion and 106 percent of the ARA metric in 2022. - Staff assessment: external position broadly in line with fundamentals and desirable policies. - Banking sector and markets - Banking sector resilient: profitability recovered to pre-pandemic levels; capital and liquidity ratios above regulatory requirements. - NPLs: 4.4 percent in June 2023 with loan-loss provisioning around 69 percent. - Banks’ foreign liabilities: around 10 percent of total liabilities at end-June 2023; net FX open position to capital ratio around 13 percent. - Sovereign spreads: downward trajectory, nearly at par with GCC average and below emerging market average. - Credit rating: upgraded to one notch below investment grade with stable outlook. ### Key recent statistics (selected) - Employment growth (2022): 16.2 percent; Omani employment growth (2022): 3.6 percent. - Inflation: 1.5 percent (2021); 2.8 percent (2022); 1.2 percent (Jan–Sep 2023). - Repo rate: raised by 550 bps since 2022. - Credit growth: 4.3 percent (2022); 6.0 percent (end-Sep 2023). - Fiscal balance: 10.1 percent of GDP surplus (2022); –3.1 percent of GDP deficit (2021). - Central government debt: 39.9 percent of GDP (2022); 61.3 percent of GDP (2021). - SOE debt: 29.9 percent of GDP (2022); 40.7 percent of GDP (2021). - Net financial assets-to-GDP: –10.3 percent (2022); –24.9 percent (2021). - CBO reserves: $17.6 billion (2022); overall reserves $35.7 billion (2022). - NPLs: 4.4 percent (June 2023); provisioning ~69 percent. ### Authorities’ assessment - Authorities broadly agreed with staff’s assessment and are committed to sustaining reform momentum to mitigate risks, enhance resilience, and further diversify the economy. ### Outlook and risks - Growth projections - Real GDP: estimated 1.3 percent in 2023 (from 4.3 percent in 2022); projected 1.4 percent in 2024. - Non-hydrocarbon growth: projected 2.5 percent in 2024; set to gradually increase to 4 percent over the medium term. - Duqm refinery: expected full capacity in 2024 at 230 thousand barrels per day; expected to contribute 0.3 percentage point to GDP growth in 2024. - Inflation outlook - Inflation: 1.2 percent in 2023; projected to converge to 2 percent over the medium term in line with the currency peg to the U.S. dollar. - Fiscal and external outlook - Overall fiscal balance: estimated surplus of 5.5 percent of GDP in 2023; projected 3.7 percent of GDP in 2024 (driven by higher social spending); projected to remain in surplus and decline to 3.3 percent of GDP by 2028. - Central government debt: estimated 37.7 percent of GDP in 2023; projected around 30 percent of GDP by 2028. - Current account balance: projected 2.8 percent of GDP in 2023–2024; projected to trend down to 1.8 percent of GDP by 2028. - CBO reserves: projected to increase to about $28 billion by 2028 (covering 6 months of imports). - Diversification outcomes by end of projection period - Share of non-hydrocarbon GDP: expected to rise by 13 percentage points (57 percent in 2022). - Share of non-hydrocarbon fiscal revenues: expected to rise by 12 percentage points (19 percent in 2022). - Share of non-hydrocarbon exports: expected to rise by 12 percentage points (35 percent in 2022). - Risk assessment - Risks balanced (Annex IV). - Upside risks: higher oil prices, acceleration of Oman Vision 2040 reforms, increased regional investment, faster global disinflation. - Downside risks: sharp decline in oil prices (including from China slowdown), slowdown in reform implementation due to social pressures, spillovers from conflict in Gaza and Israel. ### Policy discussions and recommendations - Overarching focus: maintain fiscal discipline and institutionalize fiscal frameworks; strengthen monetary policy frameworks; enhance financial sector development while safeguarding stability; and boost non-hydrocarbon private sector-led growth. - Fiscal policy and institutions - Mobilize non-hydrocarbon revenues and accelerate the phase-out of untargeted subsidies. - Adopt binding fiscal targets. - Institutionalize a full-fledged medium-term fiscal framework. - Further enhance fiscal transparency. - Develop a sovereign asset and liability management framework. - Monetary and financial policies - Enhance liquidity management. - Further strengthen regulatory and supervisory frameworks. - Foster financial sector development. - Structural policies to support diversification and inclusion - Accelerate diversification efforts and sustain progress on SOE reforms. - Implement new social protection and labor laws. - Further improve the business environment. - Advance strategy for an orderly transition to net zero emissions. ### Recent fiscal actions and near-term outlook - 2023 fiscal performance: non-hydrocarbon primary deficit improved by 3.4 percent of non-hydrocarbon GDP driven by subsidy reduction (1.8 percent) and decline in capital expenditures (1 percent). - 2023 fiscal actions included successful buyback of Eurobonds, one sukuk, and prepayment of syndicated loans; central government debt reduced by about $5 billion to 37.7 percent of GDP in 2023. - New social protection law effective January 2024; expected to add 1.6 percent of non-hydrocarbon GDP to social spending envelope. - 2024 budget: primary expenditures projected to increase by 0.9 percent of non-hydrocarbon GDP relative to 2023, with efforts to contain the wage bill; projected non-hydrocarbon primary deficit to increase to 29 percent of non-hydrocarbon GDP in 2024 from 28.2 percent in 2023. ### Fiscal stance, anchors, and medium-term outlook - Staff estimate that a central government debt-to-GDP ratio of 30 percent would provide sufficient buffers so that the authorities’ debt ceiling (60 percent of GDP) is not breached under large shocks over the medium term. - Permanent Income Hypothesis (PIH) implication: the non-hydrocarbon primary deficit should decline to 19 percent of non-hydrocarbon GDP to ensure intergenerational equity (keeping sovereign wealth constant in real per capita terms). - Under current plans, the non-hydrocarbon primary deficit is expected to decline to 21.8 percent of non-hydrocarbon GDP by 2028 (a 7-percentage-point improvement between 2024 and 2028). - Sources of the planned 7-percentage-point improvement by 2028: - Savings of 1.6 percent of non-hydrocarbon GDP from further rationalizing the wage bill (supported by forthcoming public employment law). - Savings of 1.8 percent of non-hydrocarbon GDP from phasing out energy subsidies through 2030. - Savings of 4 percent of non-hydrocarbon GDP from limiting other public spending growth in real terms. - Additional measures needed to reach the PIH anchor: 2.8 percent of non-hydrocarbon GDP, primarily via reducing the tax gap and accelerating subsidy phase-out. ### Non-hydrocarbon revenues and tax reform - Tax revenues increased by 2 percent of non-hydrocarbon GDP between 2015 and 2022. - VAT C-efficiency ratio is about 40 percent, indicating a large tax gap. - Tax administration reform (four-year plan) priorities: - Improve filing and payment compliance of registered taxpayers; adoption of VAT e-invoicing. - Expand the taxpayer registry for all taxes by detecting unregistered businesses. - Reduce compliance costs by simplifying reporting and record keeping for SMEs. - Assess and monitor tax expenditures, including fiscal costs of tax incentives in special economic zones. - Conduct a TADAT assessment to identify tax administration gaps. - Personal income tax (PIT): - Enacting the PIT law on high-income earners would generate additional tax revenues of about 0.4 percent of non-hydrocarbon GDP. - The tax authority foresees starting to test the related IT system in the near future. ### Subsidy reform and social spending efficiency - Subsidy estimates (2023): - Electricity subsidies: 2 percent of non-hydrocarbon GDP (planned phase-out by 2030). - Petroleum subsidies: 1.4 percent of non-hydrocarbon GDP. - Other subsidies (support of SOEs and water sector): about 1 percent of non-hydrocarbon GDP. - Policy guidance: - Lift the price cap on petroleum products and accelerate withdrawal of untargeted electricity subsidies. - Strengthen social safety net to protect vulnerable groups while phasing out subsidies. - Social spending performance: - Staff analysis suggests potential pockets of inefficiency in education and health spending; performance outcomes remain below peers with similar levels of spending. - Identified reform areas: reducing redundancies in medical procedures, harmonizing prescription practices, enhancing operations management and financing of the school system, restructuring scholarship and vocational training programs, and rolling out digital systems to enhance spending efficiency. ### Institutional fiscal frameworks and rules - MTFF/MTFP recommendations: - Include clear fiscal targets and measures/reforms to achieve them. - Produce realistic revenue projections. - Use fiscal targets as basis for setting near- and medium-term aggregate expenditure ceilings. - Ensure aggregate expenditure ceiling determines line ministry expenditure ceilings. - Establish a legally-mandated MTFF with a transparent preparation and approval process at the Council of Ministers. - Strengthen and institutionalize MTFF through upcoming revisions to the Finance Law. - Fiscal rule guidance: - Preconditions: institutionalized MTFF, strengthened budget preparation, enhanced fiscal transparency, management and disclosure of fiscal risks (including publication of a fiscal risk statement), and expanded fiscal coverage to the broader public sector. - Suggested rule design: based on the non-hydrocarbon primary balance supplemented by a central government debt anchor. ### Public financial management, transparency, governance, and SALM - Treasury Single Account (TSA): - Inventory of government bank accounts completed; TSA structure designed; pilot implementation rolled out for Ministries of Education, Health, Labor, and Tax Authority. - Coordination with CBO critical, including sharing treasury cash flow projections to support liquidity forecasting. - Gradual TSA rollout recommended to allow banks to adjust to changes in deposit base. - PFM and procurement digitalization: - Adoption of e-tendering for all government procurement and extension of participation to SMEs. - Transparency and SOE reporting: - Rest of public sector public investment estimated at about 8 percent of GDP in 2023 for SOEs under OIA’s management and EDO. - Staff welcomed OIA’s and EDO’s disclosure of operations but called for publishing audited financial statements of all SOEs and more granular reporting in the Ministry of Finance’s monthly fiscal performance bulletin. - Governance and risk mitigation: - OIA’s Rawabet program: established a Code of Governance for SOEs, audited performance assessments, and risk registries with mitigation plans. - Accelerate adoption of digital solutions per the Roadmap for Government Digital Transformation (2021-2025). - Sovereign asset-liability management (SALM) efforts: - Expanded mandate of the Debt Management Committee to sovereign asset and liability oversight. - Debt Management Office coordination and approval of SOE borrowing. - Establishing the National Asset Registry. - OIA’s oversight of SOE asset and liability management. ### Debt management and local currency bond market development - Debt management strategy objectives: - Lengthen debt maturities, lower borrowing costs and refinancing risks, and develop the local currency government bond market (LCBM) while preserving presence in international capital markets. - Staff recommendations: - Publish Medium-term Debt Management Strategy, annual borrowing plans, and quarterly debt bulletins. - Enhance bond market liquidity by concentrating offers in few issues and key tenors to establish benchmarks. - Identify market makers to establish a primary dealer system as prerequisites to develop the LCBM. - Passage of the public debt law welcomed. ### Monetary policy framework and central bank toolkit - Exchange rate peg: - Peg remains a credible monetary anchor; monetary policy should continue to follow the Fed to support the peg. - Monetary Policy Enhancement Project (MPEP) priorities: - Address very limited passthrough from policy rates to effective lending rates due to persistent excess liquidity, sizable unremunerated deposits, and an interest rate cap on personal loans. - Develop an interest rate corridor, prepare initiation of open market operations (OMOs), and build CBO capacity for liquidity forecasting. - Gradually remove eligibility of government bonds for reserve requirements and consider renewed issuance of certificates of deposits to support OMOs. - TSA rollout and liquidity implications: - TSA rollout should be well calibrated to safeguard financial stability; coordination required to ensure banking system liquidity remains adequate while mopping up excess liquidity. - Gradual TSA adoption recommended to allow banks to adjust deposit base. - Authorities’ views on monetary policy: - Reviewing reserve requirement framework and assessing merits of resuming issuance of certificates of deposit. - Foresee a slow decline in government deposits following full TSA implementation, potentially compensated by additional liquidity provision through OMOs or increased interbank market activity. ### Financial sector supervision, stability, and development - Stress testing and resilience: - CBO revamped stress testing to a multi-year forward-looking framework with Fund TA in 2023. - CBO 2023 Financial Stability Report findings: under the most severe stress scenario of NPLs rising to 14.4 percent of gross loans by end-2025, only one bank would become undercapitalized (since 2006, NPLs have not exceeded 7 percent). - Under a system-wide liquidity shock, the Omani banking system could withstand an overall cash outflow amounting to 17 percent of its total liabilities over six months. - Staff recommends further strengthening stress testing by simulating simultaneous liquidity and solvency stress. - Regulatory enhancements: - Re-assess list of domestic systemically important institutions amid bank merger activity. - Expand residential real estate index to include commercial real estate prices to better monitor construction-related NPL risks. - Consider removing the temporary reduction in the capital conservation buffer (from 2.5 to 1.25 percent) and consider activating the countercyclical capital buffer if credit growth continues and the credit gap turns positive. - Emergency response frameworks: - Fund TA supporting CBO to finalize Emergency Liquidity Assistance (ELA) framework. - Plans for CBO's Emergency Readiness, Management and Response Framework should be consistent with ELA and include clear transparency arrangements. - Interest rate cap on personal loans: - Lending rates on personal loans are capped at 6 percent (equal to current policy rate). - CBO should consider lifting the cap to allow banks to reflect credit risk, broaden access to credit, and maintain margins amid elevated funding costs. - Persisting cap risks: banks increasing lending margins for other sectors, exacerbating vulnerabilities, higher NPLs, and hampered credit growth in productive sectors. - Financial sector development sequencing: - First phase: develop government bond and money markets to establish the yield curve and benchmark for pricing riskier assets. - Second phase: develop corporate bond market and equity markets by improving liquidity and broadening investor base. - Complementary measures: grow FinTech sector, increase usage of the credit registry (Mala’a), and facilitate easier capital market access for large firms to reallocate bank funding toward SMEs. - Ongoing “Estidamah” program aims to increase SME access to finance, targeted sector finance, sustainable financing, domestic capital formation, and foreign investment participation. - Caution: new financing tools require mindful design to manage potential financial stability implications. ### Digitalization, payments, FinTech, and AML/CFT - CBO launched a new advanced national Real Time Gross Settlement System (RTGS). - The CBO’s FinTech regulatory sandbox has graduated three cohorts in: digital wallets, blockchain technology for trade finance, and alternative financing methods. - Staff view: more investment is required in digital infrastructure, including cybersecurity and human capital, while monitoring risks to financial stability and financial integrity from new technologies and innovative FinTech business models. - Oman is implementing a 2023-2025 enhanced AML/CFT national strategy to align rules and regulations with FATF standards. - CBO has developed its AML/CFT department; Oman is undergoing the mutual evaluation process by MENAFATF in 2023-2024. ### Labor market, social protection, and pension reforms - Social protection law: - Enacts non-contributory benefits: universal child, disability, and senior citizen benefits, family support for low-income households (Annex VIII), job-seeker allowances, and maternity benefits. - Transforms 11 fragmented pension funds into a single unified pension scheme. - Pension system projected to be sustainable at current contribution rates for a period of 100 years without government financing. - New labor law and related initiatives: - Introduces a remote work model and allows terminating non-productive workers for the first time in Oman. - Supports Omanization through employer annual plans for hiring/replacement of expatriates and increased penalties for non-compliance. - Wage Protection System (WPS) became effective in July 2023; requires private sector employers to transfer workers’ wages to domestic licensed banks within a maximum of 7 days from their due date. - Staff reform priorities: - Further enhance labor market flexibility, including relaxing restrictions on foreign workers’ mobility. - Contain public sector wages to reduce the public-private wage premium and make private jobs more attractive. - Improve education quality and expand vocational training, including adopting a dual education system with onsite training. - Expand women’s contribution: align maternity leave to international standards, require nursing-break areas, institutionalize flexible work arrangements, promote women to senior positions, and support female entrepreneurs. ### Climate, energy, and green investment - National commitments: - National Strategy for Adaptation and Mitigation to Climate Change (2020-2040). - Committed to achieving net zero emissions by 2050 through the National Strategy for an Orderly Transition to Net Zero. - National Energy Strategy target: secure 20 percent of total energy generation from renewable sources by 2030. - Progress and projects: - Renewables share in power generation increased from null in 2015 to 4 percent in 2022. - EDO established Hydrom to facilitate private sector-led green hydrogen investments expected to start from 2030. - Hydrom has signed 5 contracts with international partners, with committed investments at $30 billion (33 percent of GDP). - Hydrom projects will be entirely financed by developers and international partners; Hydrom grants land and collects land fees at discounted rates during development and paid in full during production; government will collect income taxes per Omani law. - Staff advice: accelerate reforms to phase out fossil fuel energy subsidies and replace them with targeted support to vulnerable households while promoting green investments. ### Data, statistics, and transparency - Improvements noted but gaps remain: - NCSI publishes quarterly real GDP by economic sectors, but quarterly real GDP from the expenditure side is not yet produced. - Coverage and consistency between annual and high-frequency labor market data need improvement. - Timelines and sectoral coverage of inward and outward FDI surveys need enhancement. - Room to extend granularity of central government data and fiscal coverage to the broader public sector, including public sector assets and liabilities. - CBO progress on external sector statistics is notable; further improvements needed in classification of trade activity in free trade zones and publication of quarterly BOP and IIP data. - Publish data on financial soundness indicators and real estate price indices. ### Staff appraisal and macro-fiscal outlook - Outlook: - Supported by favorable oil prices and sustained reforms, Oman’s economic outlook remains favorable. - Non-hydrocarbon growth is set to continue strengthening over the medium term supported by global demand recovery, continued structural reforms, and robust private investment shifting toward non-hydrocarbon sectors. - Fiscal and external balances expected to remain in comfortable positions, supported by hydrocarbon revenues and fiscal discipline. - Risks are balanced but uncertainty is exacerbated by potential indirect spillovers from the ongoing conflict in Gaza and Israel. - Key policy priorities reiterated: - Comprehensive tax administration reform and passage of the personal income tax law on high-income earners to reduce the tax gap and expand the tax base. - Accelerate phase-out of untargeted subsidies while leveraging the revamped social safety net to protect the vulnerable. - Institutionalize the MTFF with clear fiscal targets and binding aggregate expenditure ceilings to entrench fiscal discipline and credibility and lay the foundation for a future fiscal rule. - Continue measures to strengthen the monetary transmission mechanism by deepening the money and capital markets. - Prioritize development of government bond and money markets to establish a yield curve and provide a benchmark for pricing riskier assets; diversify financing products and leverage digitalization to support financial inclusion while monitoring associated risks. ### Annex IV — Risk Assessment Matrix (high-level) - Global risks (conjunctural and structural): commodity price volatility (Likelihood: High; Expected Impact: Medium), abrupt global slowdown (Likelihood: Medium; Expected Impact: Medium), systemic financial instability (Likelihood: Medium; Expected Impact: Low), deepening geoeconomic fragmentation (Likelihood: High; Expected Impact: Medium), disorderly energy transition (Likelihood: Medium; Expected Impact: High). - Domestic risks: slowdown in the reform agenda (Likelihood: Medium; Expected Impact: Medium), extreme climate events (Likelihood: Medium; Expected Impact: Low). - Policy responses emphasize accelerating fiscal and structural reforms, strengthening buffers, and targeted support to vulnerable groups. ### Stress testing (banking sector) — summary - Four stress scenarios simulated: liquidity shock; liquidity shock + 200-basis-point interest rate increase; corporate sector stress amid higher rates; combined scenario. - Key findings: - Individual liquidity and corporate sector stress scenarios: excess losses are below 10 percent of capital (with one exception); Tier-1 regulatory capital ratios would decline by less than 2 percentage points (with one exception). - Combined stress: losses could range up to 40 percent of regulatory capital; one bank (bank 3) would breach the CBO’s minimum capital requirements, with its Tier-1 capital ratio dropping to below 10 percent. - Banks identified as more vulnerable: Bank 3 (weak ex-ante profitability), Banks 2 and 4 (relatively low holdings of liquid assets). - Recommendations to strengthen stress testing and supervision include richer scenario design, sector- and loan-class-specific default models, explicit ELA framework, and reviewing DSIB designations. ### Annex VII — Diversification objectives and targets (high-level) - Oman Vision 2040 targets (selected): - Share of Non-hydrocarbon GDP: 61 percent in 2017; 84 percent in 2030; 92 percent by 2040. - Target for FDI inflows: rise up to 10 percent of GDP by 2040 (from the 10-year historical average of 2.5 percent of GDP). - Priority sectors: pharmaceuticals, solar and wind energy, food, electromechanical, metals and minerals, tourism, logistics. - SEZ incentives: tax and customs exemptions for up to 30 years; 100 percent repatriation of capital and profits; 0 percent deferral for goods coming into SEZs; Omanization quotas 10 to 20 percent. - Notable projects and targets: - Hydrom: 5 contracts; committed investment of $30 billion; target production of 1 million tons of green hydrogen annually by 2030. ### Selected numerical facts preserved exactly as reported - Real GDP growth: 4.3 percent (2022); 1.3 percent (2023 estimated); 1.4 percent (2024 projected). - Inflation: 1.2 percent (2023); projected to converge to 2 percent over the medium term. - Fiscal surplus: 10.1 percent of GDP (2022); estimated 5.5 percent of GDP (2023); projected 3.7 percent of GDP (2024). - Central government debt (percent of GDP): 61.3 (2021); 39.9 (2022); 37.7 (2023); projected ~30 by 2028. - CBO reserves: $17.6 billion (2022); overall reserves $35.7 billion (2022). - Non-hydrocarbon primary deficit: 31.6 percent of non-hydrocarbon GDP (2022); projected to decline to 21.8 percent by 2028 under current plans. - VAT C-efficiency ratio: about 40 percent. - Electricity subsidies: 2 percent of non-hydrocarbon GDP (2023 estimate); petroleum subsidies: 1.4 percent; other subsidies: about 1 percent. - Duqm refinery capacity: 230 thousand barrels per day (expected full capacity in 2024); contribution 0.3 percentage point to GDP growth in 2024. - Hydrom committed investment: $30 billion (33 percent of GDP). - Pension projection: sustainable for 100 years at current contribution rates without government financing. - Interest rate cap on personal loans: 6 percent. - Repo rate: raised by 550 bps since 2022. - NPLs: 4.4 percent (June 2023); provisioning ~69 percent. *Source: IMF staff report — "1. Recent Economic Developments" (Content unit: 1omnea2024001).* ### 1. Recent Economic Developments ____________________________________________________________ 27 ### 1. Recent Economic Developments ### Background - Oman launched the Medium-Term Fiscal Plan (MTFP) in 2020 aimed at fiscal sustainability through diversification of fiscal revenues, expenditure control, and prudent management of hydrocarbon windfall savings; policies underpin Oman Vision 2040. - Reforms underway: strengthening the social safety net, dynamizing labor markets, overhauling the state-owned enterprise (SOE) sector, enhancing the monetary policy framework, and developing the financial sector. - Sovereign credit rating upgraded to one notch below investment grade. ### Recent Economic Performance - Output and growth - Real GDP growth: 4.3 percent in 2022 (from 3.1 percent in 2021), driven primarily by strong hydrocarbon expansion. - Non-hydrocarbon growth: 1.2 percent in 2022 (from 1.9 percent in 2021); accelerated to 2.7 percent (y-o-y) in 2023H1. - Real GDP growth moderated to 2.1 percent in 2023H1, primarily reflecting OPEC+-related oil production cuts. - Employment - Employment grew by 16.2 percent in 2022, primarily driven by expatriate employment recovery. - Omani employment growth: 3.6 percent in 2022. - Recent data: continued expatriate employment increase but waning Omani employment in 2023H1. - Inflation and monetary policy - Inflation: 1.5 percent in 2021; 2.8 percent in 2022; receded to 1.2 percent (y-o-y) during January–September 2023. - CBO policy: repo rate raised by 550 bps since 2022 (in line with the Fed). - Credit to the economy: increased by 4.3 percent in 2022 and 6.0 percent by end-September 2023 (from 4.1 percent in 2021). - Private sector credit growth: 4.3 percent in 2022 and 6.2 percent end-September 2023. - Credit to the public sector: 4.2 percent in 2022 and 5.2 percent end-September 2023 (down from 19.4 percent in 2021). - Fiscal developments - Overall fiscal balance: surplus of 10.1 percent of GDP in 2022 (from a deficit of 3.1 percent of GDP in 2021) due to higher hydrocarbon revenues, larger tax yields, and lower expenditures. - Fuel subsidies: 2.9 percent of non-hydrocarbon GDP in 2022 (from 0.2 percent in 2021). - Non-hydrocarbon primary deficit: 31.6 percent of non-hydrocarbon GDP in 2022 (from 32.4 percent in 2021). - Non-hydrocarbon primary adjustment during 2021–2022: nearly 6 percentage points of non-hydrocarbon GDP. - Central government debt: declined from 61.3 percent of GDP in 2021 to 39.9 percent in 2022 (authorities used windfall to prepay government debt). - SOE debt: reduced from 40.7 percent of GDP in 2021 to 29.9 percent of GDP in 2022. - Government's net financial assets-to-GDP: increased from –24.9 percent in 2021 to –10.3 percent in 2022. - External sector and reserves - Current account: surplus of 5.0 percent of GDP in 2022 (first current account surplus since 2014). - Non-hydrocarbon exports: more than doubled from 2019 levels; about one-third of total exports in 2022. - CBO reserves: $17.6 billion in 2022 (covering 4.5 months of imports and 64 percent of the ARA metric). - Overall reserves including OIA’s liquid foreign assets: $35.7 billion and 106 percent of the ARA metric in 2022. - Staff assessment: external position broadly in line with fundamentals and desirable policies. - Banking sector and markets - Banking sector resilient: profitability recovered to pre-pandemic levels; capital and liquidity ratios above regulatory requirements. - NPLs: 4.4 percent in June 2023 with loan-loss provisioning around 69 percent. - Banks’ foreign liabilities: around 10 percent of total liabilities at end-June 2023; net FX open position to capital ratio around 13 percent. - Sovereign spreads: downward trajectory, nearly at par with GCC average and below emerging market average. - Credit rating: upgraded to one notch below investment grade with stable outlook. ### Key Recent Statistics (selected) - Employment growth (2022): 16.2 percent; Omani employment growth (2022): 3.6 percent. - Inflation: 1.5 percent (2021); 2.8 percent (2022); 1.2 percent (Jan–Sep 2023). - Repo rate: raised by 550 bps since 2022. - Credit growth: 4.3 percent (2022); 6.0 percent (end-Sep 2023). - Fiscal balance: 10.1 percent of GDP surplus (2022); –3.1 percent of GDP deficit (2021). - Central government debt: 39.9 percent of GDP (2022); 61.3 percent of GDP (2021). - SOE debt: 29.9 percent of GDP (2022); 40.7 percent of GDP (2021). - Net financial assets-to-GDP: –10.3 percent (2022); –24.9 percent (2021). - CBO reserves: $17.6 billion (2022); overall reserves $35.7 billion (2022). - NPLs: 4.4 percent (June 2023); provisioning ~69 percent. ### Authorities’ Assessment - Authorities broadly agreed with staff’s assessment and are committed to sustaining reform momentum to mitigate risks, enhance resilience, and further diversify the economy. --- ### Outlook and Risks - Growth projections - Real GDP: estimated 1.3 percent in 2023 (from 4.3 percent in 2022); projected 1.4 percent in 2024. - Non-hydrocarbon growth: projected 2.5 percent in 2024; set to gradually increase to 4 percent over the medium term. - Duqm refinery: expected full capacity in 2024 at 230 thousand barrels per day; expected to contribute 0.3 percentage point to GDP growth in 2024. - Inflation outlook - Inflation: 1.2 percent in 2023; projected to converge to 2 percent over the medium term in line with the currency peg to the U.S. dollar. - Fiscal and external outlook - Overall fiscal balance: estimated surplus of 5.5 percent of GDP in 2023; projected 3.7 percent of GDP in 2024 (driven by higher social spending); projected to remain in surplus and decline to 3.3 percent of GDP by 2028. - Central government debt: estimated 37.7 percent of GDP in 2023; projected around 30 percent of GDP by 2028. - Current account balance: projected 2.8 percent of GDP in 2023–2024; projected to trend down to 1.8 percent of GDP by 2028. - CBO reserves: projected to increase to about $28 billion by 2028 (covering 6 months of imports). - Diversification outcomes by end of projection period - Share of non-hydrocarbon GDP: expected to rise by 13 percentage points (57 percent in 2022). - Share of non-hydrocarbon fiscal revenues: expected to rise by 12 percentage points (19 percent in 2022). - Share of non-hydrocarbon exports: expected to rise by 12 percentage points (35 percent in 2022). - Risk assessment - Risks balanced (Annex IV). - Upside risks: higher oil prices, acceleration of Oman Vision 2040 reforms, increased regional investment, faster global disinflation. - Downside risks: sharp decline in oil prices (including from China slowdown), slowdown in reform implementation due to social pressures, spillovers from conflict in Gaza and Israel. --- ### Policy Discussions and Recommendations - Overarching focus: maintain fiscal discipline and institutionalize fiscal frameworks; strengthen monetary policy frameworks; enhance financial sector development while safeguarding stability; and boost non-hydrocarbon private sector-led growth. - Fiscal policy and institutions - Mobilize non-hydrocarbon revenues and accelerate the phase-out of untargeted subsidies. - Adopt binding fiscal targets. - Institutionalize a full-fledged medium-term fiscal framework. - Further enhance fiscal transparency. - Develop a sovereign asset and liability management framework. - Monetary and financial policies - Enhance liquidity management. - Further strengthen regulatory and supervisory frameworks. - Foster financial sector development. - Structural policies to support diversification and inclusion - Accelerate diversification efforts and sustain progress on SOE reforms. - Implement new social protection and labor laws. - Further improve the business environment. - Advance strategy for an orderly transition to net zero emissions. - Recent fiscal actions and outlook - 2023 fiscal performance: non-hydrocarbon primary deficit improved by 3.4 percent of non-hydrocarbon GDP driven by subsidy reduction (1.8 percent) and decline in capital expenditures (1 percent). - 2023 fiscal actions included successful buyback of Eurobonds, one sukuk, and prepayment of syndicated loans; central government debt reduced by about $5 billion to 37.7 percent of GDP in 2023. - New social protection law effective January 2024; expected to add 1.6 percent of non-hydrocarbon GDP to social spending envelope. - 2024 budget: primary expenditures projected to increase by 0.9 percent of non-hydrocarbon GDP relative to 2023, with efforts to contain the wage bill; projected non-hydrocarbon primary deficit to increase to 29 percent of non-hydrocarbon GDP in 2024 from 28.2 percent in 2023. *Source: IMF staff report — "1. Recent Economic Developments" (Oman).* ### 2023. Supported by still favorable oil prices, the 2024 overall fiscal balance is expected at 3.7 percent ### 2023. Supported by still favorable oil prices, the 2024 overall fiscal balance is expected at 3.7 percent of GDP. ### Fiscal stance, anchors, and medium-term outlook - Staff estimate that a central government debt-to-GDP ratio of 30 percent would provide sufficient buffers so that the authorities’ debt ceiling (60 percent of GDP) is not breached under large shocks over the medium term. - Permanent Income Hypothesis (PIH) implication: the non-hydrocarbon primary deficit should decline to 19 percent of non-hydrocarbon GDP to ensure intergenerational equity (keeping sovereign wealth constant in real per capita terms). - Under current plans, the non-hydrocarbon primary deficit is expected to decline to 21.8 percent of non-hydrocarbon GDP by 2028 (a 7-percentage-point improvement between 2024 and 2028). - Sources of the planned 7-percentage-point improvement by 2028: - Savings of 1.6 percent of non-hydrocarbon GDP from further rationalizing the wage bill (supported by forthcoming public employment law). - Savings of 1.8 percent of non-hydrocarbon GDP from phasing out energy subsidies through 2030. - Savings of 4 percent of non-hydrocarbon GDP from limiting other public spending growth in real terms. - Additional measures needed to reach the PIH anchor: 2.8 percent of non-hydrocarbon GDP, primarily via reducing the tax gap and accelerating subsidy phase-out. ### Non-hydrocarbon revenues and tax reform - Tax revenues increased by 2 percent of non-hydrocarbon GDP between 2015 and 2022. - VAT C-efficiency ratio is about 40 percent, indicating a large tax gap. - Tax administration reform (four-year plan) priorities: - Improve filing and payment compliance of registered taxpayers; adoption of VAT e-invoicing. - Expand the taxpayer registry for all taxes by detecting unregistered businesses. - Reduce compliance costs by simplifying reporting and record keeping for SMEs. - Assess and monitor tax expenditures, including fiscal costs of tax incentives in special economic zones. - Conduct a TADAT assessment to identify tax administration gaps. - Personal income tax (PIT): - Enacting the PIT law on high-income earners would generate additional tax revenues of about 0.4 percent of non-hydrocarbon GDP. - The tax authority foresees starting to test the related IT system in the near future. ### Subsidy reform and social spending efficiency - Subsidy estimates (2023): - Electricity subsidies: 2 percent of non-hydrocarbon GDP (planned phase-out by 2030). - Petroleum subsidies: 1.4 percent of non-hydrocarbon GDP. - Other subsidies (support of SOEs and water sector): about 1 percent of non-hydrocarbon GDP. - Policy guidance: - Lift the price cap on petroleum products and accelerate withdrawal of untargeted electricity subsidies. - Strengthen social safety net to protect vulnerable groups while phasing out subsidies. - Social spending performance: - Staff analysis suggests potential pockets of inefficiency in education and health spending; performance outcomes remain below peers with similar levels of spending. - Identified reform areas: reducing redundancies in medical procedures, harmonizing prescription practices, enhancing operations management and financing of the school system, restructuring scholarship and vocational training programs, and rolling out digital systems to enhance spending efficiency. ### Institutional fiscal frameworks and rules - Medium-term fiscal and budget frameworks (MTFF/MTFP) recommendations: - Include clear fiscal targets and measures/reforms to achieve them. - Produce realistic revenue projections. - Use fiscal targets as basis for setting near- and medium-term aggregate expenditure ceilings. - Ensure aggregate expenditure ceiling determines line ministry expenditure ceilings. - Establish a legally-mandated MTFF with a transparent preparation and approval process at the Council of Ministers. - Strengthen and institutionalize MTFF through upcoming revisions to the Finance Law. - Fiscal rule guidance: - Preconditions: institutionalized MTFF, strengthened budget preparation, enhanced fiscal transparency, management and disclosure of fiscal risks (including publication of a fiscal risk statement), and expanded fiscal coverage to the broader public sector. - Suggested rule design: based on the non-hydrocarbon primary balance supplemented by a central government debt anchor. ### Public financial management (PFM), transparency, governance, and asset-liability management - Treasury Single Account (TSA): - Inventory of government bank accounts completed; TSA structure designed; pilot implementation rolled out for Ministries of Education, Health, Labor, and Tax Authority. - Coordination with CBO critical, including sharing treasury cash flow projections to support liquidity forecasting. - Gradual TSA rollout recommended to allow banks to adjust to changes in deposit base. - PFM and procurement digitalization: - Adoption of e-tendering for all government procurement and extension of participation to SMEs. - Transparency and SOE reporting: - Rest of public sector public investment estimated at about 8 percent of GDP in 2023 for SOEs under OIA’s management and EDO. - Staff welcomed OIA’s and EDO’s disclosure of operations but called for publishing audited financial statements of all SOEs and more granular reporting in the Ministry of Finance’s monthly fiscal performance bulletin. - Governance and risk mitigation: - OIA’s Rawabet program: established a Code of Governance for SOEs, audited performance assessments, and risk registries with mitigation plans. - Accelerate adoption of digital solutions per the Roadmap for Government Digital Transformation (2021-2025). - Sovereign asset-liability management (SALM) efforts: - Expanded mandate of the Debt Management Committee to sovereign asset and liability oversight. - Debt Management Office coordination and approval of SOE borrowing. - Establishing the National Asset Registry. - OIA’s oversight of SOE asset and liability management. ### Debt management and local currency bond market development - Debt management strategy objectives: - Lengthen debt maturities, lower borrowing costs and refinancing risks, and develop the local currency government bond market (LCBM) while preserving presence in international capital markets. - Staff recommendations: - Publish Medium-term Debt Management Strategy, annual borrowing plans, and quarterly debt bulletins. - Enhance bond market liquidity by concentrating offers in few issues and key tenors to establish benchmarks. - Identify market makers to establish a primary dealer system as prerequisites to develop the LCBM. - Passage of the public debt law welcomed. ### Authorities’ fiscal views (summarized) - Balanced approach: fiscal discipline while strengthening social protection. - Non-hydrocarbon revenue efforts focused on tax administration reform and developing PIT IT system. - Energy subsidy reduction measures under assessment; initiatives to reduce electricity subsidies include lowering operational costs (interconnection of grids, restructuring distribution and supply companies), enhancing energy efficiency through smart metering, and accelerating procurement of renewable electricity. - Commitment to strengthen MTFF with fiscal targets, binding aggregate expenditure ceilings, and high-level endorsement for the 2025 budget. - Ongoing progress on SALM (with Fund TA), gradual TSA rollout, and enhanced fiscal transparency. ### Monetary policy framework and central bank toolkit - Exchange rate peg: - Peg remains a credible monetary anchor; monetary policy should continue to follow the Fed to support the peg. - Monetary Policy Enhancement Project (MPEP) priorities: - Address very limited passthrough from policy rates to effective lending rates due to persistent excess liquidity, sizable unremunerated deposits, and an interest rate cap on personal loans. - Develop an interest rate corridor, prepare initiation of open market operations (OMOs), and build CBO capacity for liquidity forecasting. - Gradually remove eligibility of government bonds for reserve requirements and consider renewed issuance of certificates of deposits to support OMOs. - TSA rollout and liquidity implications: - TSA rollout should be well calibrated to safeguard financial stability; coordination required to ensure banking system liquidity remains adequate while mopping up excess liquidity. - Gradual TSA adoption recommended to allow banks to adjust deposit base. - Authorities’ views on monetary policy: - Reviewing reserve requirement framework and assessing merits of resuming issuance of certificates of deposit. - Foresee a slow decline in government deposits following full TSA implementation, potentially compensated by additional liquidity provision through OMOs or increased interbank market activity. ### Financial sector supervision, stability, and development - Stress testing and resilience: - CBO revamped stress testing to a multi-year forward-looking framework with Fund TA in 2023. - CBO 2023 Financial Stability Report findings: under the most severe stress scenario of NPLs rising to 14.4 percent of gross loans by end-2025, only one bank would become undercapitalized (since 2006, NPLs have not exceeded 7 percent). - Under a system-wide liquidity shock, the Omani banking system could withstand an overall cash outflow amounting to 17 percent of its total liabilities over six months. - Staff recommends further strengthening stress testing by simulating simultaneous liquidity and solvency stress. - Regulatory enhancements: - Re-assess list of domestic systemically important institutions amid bank merger activity. - Expand residential real estate index to include commercial real estate prices to better monitor construction-related NPL risks. - Consider removing the temporary reduction in the capital conservation buffer (from 2.5 to 1.25 percent) and consider activating the countercyclical capital buffer if credit growth continues and the credit gap turns positive. - Emergency response frameworks: - Fund TA supporting CBO to finalize Emergency Liquidity Assistance (ELA) framework. - Plans for CBO's Emergency Readiness, Management and Response Framework should be consistent with ELA and include clear transparency arrangements. - Interest rate cap on personal loans: - Lending rates on personal loans are capped at 6 percent (equal to current policy rate). - CBO should consider lifting the cap to allow banks to reflect credit risk, broaden access to credit, and maintain margins amid elevated funding costs. - Persisting cap risks: banks increasing lending margins for other sectors, exacerbating vulnerabilities, higher NPLs, and hampered credit growth in productive sectors. - Financial sector development sequencing: - First phase: develop government bond and money markets to establish the yield curve and benchmark for pricing riskier assets. - Second phase: develop corporate bond market and equity markets by improving liquidity and broadening investor base. - Complementary measures: grow FinTech sector, increase usage of the credit registry (Mala’a), and facilitate easier capital market access for large firms to reallocate bank funding toward SMEs. - Ongoing “Estidamah” program aims to increase SME access to finance, targeted sector finance, sustainable financing, domestic capital formation, and foreign investment participation. - Caution: new financing tools require mindful design to manage potential financial stability implications. *Source: IMF staff assessment and analysis as presented in the provided content.* ### 32. Leveraging digitalization while managing its risks is key to promote financial ### 32. Leveraging digitalization while managing its risks is key to promote financial development and inclusion. ### Digitalization, payments, and FinTech - The CBO launched a new advanced national Real Time Gross Settlement System (RTGS) to facilitate broader integration and digitalization of payment systems. - The CBO’s FinTech regulatory sandbox has graduated three cohorts in: digital wallets, blockchain technology for trade finance, and alternative financing methods. - Staff view: more investment is required in digital infrastructure, including cybersecurity and human capital, while monitoring risks to financial stability and financial integrity from new technologies and innovative FinTech business models. ### Anti–Money Laundering/Combating the Financing of Terrorism (AML/CFT) - Oman is implementing a 2023-2025 enhanced AML/CFT national strategy to align rules and regulations with FATF standards, including those associated with digitalization and FinTech. - The CBO has developed its recently established AML/CFT department through staffing and training. - Oman is undergoing the mutual evaluation process by the Middle East and North Africa Financial Action Task Force (MENAFATF) in 2023-2024. - The Fund assisted authorities on beneficial ownership transparency, use of financial intelligence, and implementation of targeted financial sanctions. ### Financial stability, supervision, and regulatory settings - Authorities’ stance: - The interest rate cap is seen as facilitating affordable financing pending a fully operative credit registry. - Consideration of a gradual lifting of the interest rate cap depends on more effective use of the credit registry. - Authorities do not consider raising the countercyclical capital buffer above its current level (0 percent) before the capital conservation buffer is returned to its pre-pandemic level, which they are considering implementing in 2024. - Commitment to continue improving the CBO’s stress testing framework and maintaining adequate supervision, including reviewing the DSIB list. - Commitment to financial sector development to expand financing opportunities, particularly for SMEs and non-hydrocarbon activities. - Staff recommendations: - Return the capital conservation buffer to pre-pandemic levels and reassess the list of domestic systemically important institutions. - Gradually adopt the Treasury Single Account (TSA) to allow banks to adjust to expected deposit base changes. - Relax the interest rate cap on personal loans while operationalizing the credit registry so banks can reflect credit risk and maintain margins amid elevated funding costs. - Monitor financial stability and financial integrity risks from digitalization and FinTech expansion. ### Boosting non-hydrocarbon private sector-led growth and institutional reforms - Oman Vision 2040 and diversification strategy components: - Catalyzing private investment through OIA’s investments (including Oman’s Future Fund) and ongoing SOE divestments. - Leveraging natural advantages for renewable generation. - Attracting FDI in strategic industrial clusters in special economic zones with a multimodal logistics system. - Enhancing funding diversification via the financial development program under “Estidamah” (Annex VII). - Coordination: staff urge strengthened cooperation among government agencies responsible for the diversification agenda. - Business environment: - Launch of Invest Oman and the Investment Services Center to streamline procedures. - Further scope to improve coordination among government agencies and leverage digitalization to expedite government procedures (e.g., digitizing issuance of work permits). ### Labor market, social protection, and pension reforms - Social protection law: - Enacts non-contributory benefits: universal child, disability, and senior citizen benefits, family support for low-income households (Annex VIII), job-seeker allowances, and maternity benefits. - Transforms 11 fragmented pension funds into a single unified pension scheme. - The pension system is projected to be sustainable at current contribution rates for a period of 100 years without government financing. - New labor law and related initiatives: - Introduces a remote work model and allows terminating non-productive workers for the first time in Oman. - Supports Omanization through employer annual plans for hiring/replacement of expatriates and increased penalties for non-compliance. - Wage Protection System (WPS) became effective in July 2023; WPS is a joint electronic system between the Ministry of Labor and CBO that requires private sector employers to transfer workers’ wages to domestic licensed banks within a maximum of 7 days from their due date. - Staff reform priorities: - Further enhance labor market flexibility, including relaxing restrictions on foreign workers’ mobility. - Contain public sector wages to reduce the public-private wage premium and make private jobs more attractive. - Improve education quality and expand vocational training, including adopting a dual education system with onsite training. - Expand women’s contribution: align maternity leave to international standards, require nursing-break areas, institutionalize flexible work arrangements, promote women to senior positions, and support female entrepreneurs. ### Climate, energy, and green investment - National commitments: - National Strategy for Adaptation and Mitigation to Climate Change (2020-2040). - Committed to achieving net zero emissions by 2050 through the National Strategy for an Orderly Transition to Net Zero. - National Energy Strategy target: secure 20 percent of total energy generation from renewable sources by 2030. - Progress and projects: - Renewables share in power generation increased from null in 2015 to 4 percent in 2022. - EDO established Hydrom to facilitate private sector-led green hydrogen investments expected to start from 2030. - Hydrom has signed 5 contracts with international partners, with committed investments at $30 billion (33 percent of GDP). - Hydrom projects will be entirely financed by developers and international partners; Hydrom grants land and collects land fees at discounted rates during development and paid in full during production; government will collect income taxes per Omani law. - Staff advice: accelerate reforms to phase out fossil fuel energy subsidies and replace them with targeted support to vulnerable households while promoting green investments. ### Data, statistics, and transparency - Improvements noted but gaps remain: - NCSI publishes quarterly real GDP by economic sectors, but quarterly real GDP from the expenditure side is not yet produced. - Coverage and consistency between annual and high-frequency labor market data need improvement. - Timelines and sectoral coverage of inward and outward FDI surveys need enhancement. - Room to extend granularity of central government data and fiscal coverage to the broader public sector, including public sector assets and liabilities. - CBO progress on external sector statistics is notable; further improvements needed in classification of trade activity in free trade zones and publication of quarterly BOP and IIP data. - Publish data on financial soundness indicators and real estate price indices. ### Staff appraisal and macro-fiscal outlook - Outlook: - Supported by favorable oil prices and sustained reforms, Oman’s economic outlook remains favorable. - Non-hydrocarbon growth is set to continue strengthening over the medium term supported by global demand recovery, continued structural reforms, and robust private investment shifting toward non-hydrocarbon sectors. - Fiscal and external balances expected to remain in comfortable positions, supported by hydrocarbon revenues and fiscal discipline. - Risks are balanced but uncertainty is exacerbated by potential indirect spillovers from the ongoing conflict in Gaza and Israel. - Fiscal policy and institutions: - 2024 budget preserves fiscal discipline and provides space to roll out the new social protection law. - To entrench fiscal sustainability and intergenerational equity, sustain fiscal reforms: comprehensive tax administration reform and passage of the personal income tax law on high-income earners are key to reduce the tax gap and expand the tax base. - Accelerate phase-out of untargeted subsidies while leveraging the revamped social safety net to protect the vulnerable. - Institutionalizing the medium-term fiscal framework (MTFF) with clear fiscal targets and binding aggregate expenditure ceilings is recommended to entrench fiscal discipline and credibility and lay the foundation for a future fiscal rule. - Steps toward establishing the Treasury Single Account (TSA) and the National Asset Registry are welcome; OIA’s Rawabet program has improved SOE governance, performance, and risk management. - Monetary policy and markets: - The exchange rate peg continues to serve Oman well as a credible monetary anchor and has helped deliver low and stable inflation. - Continue measures to strengthen the monetary transmission mechanism by deepening the money and capital markets. - Sustain progress on developing an interest rate corridor, open market operations, and building capacity at the CBO to strengthen liquidity forecasting under the Monetary Policy Enhancement Project. - Financial sector development: - Prioritize development of government bond and money markets to establish a yield curve and provide a benchmark for pricing riskier assets. - Diversify financing products, leverage digitalization, grow the FinTech sector, and increase usage of the credit registry to support financial inclusion, while monitoring associated financial stability and integrity risks. *Source: IMF staff report excerpt (Content unit: 1omnea2024001 - 32).* ### 49. Staff proposes that the next Article IV consultation with Oman follow the standard 12- ### 1omnea2024001 - 49. Staff proposes that the next Article IV consultation with Oman follow the standard 12-month cycle. ### Recommendation on Article IV cycle - Staff proposes that the next Article IV consultation with Oman follow the standard 12-month cycle. ### Recent economic and sectoral developments - Figures and tables provided on recent economic developments, fiscal sector developments, monetary and financial developments, external sector developments, and banking sector soundness indicators (Figures 1–5; Tables 1–5). - Table coverage includes: Selected Economic Indicators, Government Finances (Tables 2a and 2b), Monetary Survey (Table 3), Balance of Payments Summary (Table 4), Financial Soundness Indicators of the Banking Sector (Table 5). ### Fiscal sector findings and policy progress (Annex I) - Fiscal adjustment of about 1 percentage point of non-hydrocarbon GDP in the non-hydrocarbon structural primary balance was achieved in 2022. - Efforts to strengthen tax administration include opening regional branches and increasing the number of VAT taxpayers; a five-year tax administration reform plan has been initiated. - The MTFP was updated to guide the 2023 budget process, but it was not published. - Authorities received an FAD TA mission to strengthen the MTFF, budget preparation and execution; UK support provided on designing a fiscal rule. - Ministry of Health and Education were included in the rollout of the TSA. - OIA’s 2022 annual report and EDO’s 2023 Global Medium Term Note Program disclose performance, assets under management, debt, and reforms. - Oversight of Debt Management Committee expanded to cover asset-liability management; the public debt law was issued in 2023. Medium-Term Debt Strategy to be released following the MTFP update. ### Monetary and financial sector findings (Annex I) - Progress on Monetary Policy Enhancement Project: liquidity forecasting, Collaterals and Emergency Liquidity Assistance frameworks. - CBO is coordinating with MoF on gradual transition towards the TSA. - Loan deferral program expired end-September 2022; some relaxation of prudential measures remain in place. ### Structural reforms (Annex I) - New labor law modernizes labor market regulations. - New social protection law strengthens social safety nets and allows greater labor mobility while supporting female labor force participation. - Invest Oman and the Investment Services Center launched to streamline investment procedures. - Progress on SOE reforms: unified governance framework development and ongoing privatization/divestment efforts. ### External sector assessment (Annex II) — Overall assessment and drivers - Overall assessment: Oman’s external position in 2022 was assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies. - Principal drivers of improvement: high hydrocarbon prices, expansion of non-hydrocarbon activities, and continued fiscal consolidation efforts. - Potential policy responses: continue fiscal adjustment and structural reforms; expand non-hydrocarbon revenue base; avoid procyclical fiscal stance; steadfast implementation of structural reforms to attract more FDI to non-hydrocarbon sectors. ### Foreign assets and liabilities: position and trajectory - NIIP improved to an estimated -22.6 percent of GDP at end-2022 from -36.2 percent of GDP at end-2021. - External assets grew by 2.8 percent at end-2022 reaching $ 98.6 billion, versus $95.5 billion at end-2021. - External liabilities contracted by 2 percent at end-2022 reaching $ 124.5 billion, versus $127.9 billion at end-2021. - Assessment: NIIP reversal projected to sustain as government prudential stance continues and non-hydrocarbon exports expand. ### Current account and REER assessments - Current Account (CA) posted a 5.0 percent of GDP surplus in 2022, improving from a 5.4 percent of GDP deficit in 2021; first CA surplus since 2014. - CA outlook: favorable and expected to remain at a comfortable position albeit on a declining trend through the forecast horizon; subject to commodity price volatility. - EBA-lite CA model estimates a 2022 CA gap of -0.6 percent of GDP, improving from -4.0 percent of GDP in 2021. - Cyclically adjusted fiscal balance for Oman was 2.1 percent of GDP higher than the level implied by the desired policy in 2022. - Estimated REER overvaluation of approximately 1.7 percent (using estimated -0.3 elasticity for Oman) from EBA-lite analysis. - Constant annuity model CA gap: -0.8 percent of GDP; Constant real per capita annuity approach CA gap: -4.8 percent of GDP. - Current account estimated to have registered a 2.8 percent of GDP surplus in 2023. ### Real exchange rate dynamics - Omani rial peg to the US dollar at a rate of 0.3845 has been maintained since 1986. - REER appreciated by 2.5 percent in 2022; NEER appreciated by 6.0 percent in 2022. - REER in 2022 was 0.9 percent over the 10-year average. - Staff assess the REER gap to be -2.4 percent (EBA-lite CA model); EBA-lite REER model estimates REER gap of 2.5 percent (undervaluation). - Estimated REER gap range: -7.3 percent to 16 percent, averaging around 3.0 percent. ### Capital and financial accounts - Financial account registered its highest net acquisition of foreign assets in 2022 despite large FDI inflows to the hydrocarbon sector. - Net acquisition of FDI liabilities increased by $5.5 billion mainly owing to continued FDI inflows to the hydrocarbon sector. - Assessment: Continued repayment of public external debt projected to further improve external position and reduce vulnerabilities; projection of increased net acquisition of liabilities over the medium term as global financial conditions normalize and reforms advance. ### FX intervention and reserves - International reserves declined by $2.1 billion in 2022. - Reserves declined to $17.6 billion at end-2022 (4.5 months of prospective imports and 33 percent of broad money). - Reserves coverage: 64.4 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric at end-2022, down from 71.4 percent at end-2021; below suggested adequate range of 100‑150 percent. - Continued repayments of external public debt in 2023 estimated to have reduced CBO reserves to $17.5 billion. - Including OIA’s liquid external assets places reserve coverage at 105.8 percent of the IMF’s ARA metric in 2022. - Under current trajectory and reforms, CBO foreign reserves expected to reach 98.8 percent of the ARA metric in 2028. - Note: OIA’s liquid assets—cash deposits and marketable securities—were used during the 2015-19 period for stabilization purposes. ### Sovereign risk and debt sustainability (Annex III) - Public debt trajectory (Table 3, baseline scenario): Public debt reported as 39.9 in 2022 and projected to follow a downward trajectory before stabilizing in the long-run. - Selected figures from Baseline Scenario (percent of GDP unless indicated otherwise): - Public debt: 39.9 (2022), 37.7 (2023), 35.7 (2024), 33.7 (2025), 31.9 (2026), 30.5 (2027), 29.4 (2028), 29.3 (2029), 28.1 (2030), 27.8 (2031), 27.3 (2032). - Change in public debt: -21.3 (2022), -2.2 (2023), -2.0 (2024), -2.0 (2025), -1.8 (2026), -1.4 (2027), -1.0 (2028), -0.2 (2029), -1.2 (2030), -0.3 (2031), -0.5 (2032). - Primary deficit: -10.7 (2022), -6.1 (2023), -4.4 (2024), -4.8 (2025), -5.0 (2026), -4.3 (2027), -3.8 (2028), -3.7 (2029), -3.8 (2030), -3.8 (2031), -3.7 (2032). - Noninterest revenues: 37.8 (2022), 29.8 (2023), 29.0 (2024), 28.5 (2025), 27.8 (2026), 26.7 (2027), 25.7 (2028), 25.6 (2029), 25.2 (2030), 24.9 (2031), 24.5 (2032). - Noninterest expenditures: 27.2 (2022), 23.7 (2023), 24.6 (2024), 23.7 (2025), 22.8 (2026), 22.4 (2027), 21.9 (2028), 21.8 (2029), 21.4 (2030), 21.0 (2031), 20.8 (2032). - Gross financing needs: 1.2 (2022), -2.8 (2023), 0.2 (2024), 0.7 (2025), 0.2 (2026), 1.0 (2027), 1.2 (2028), 1.5 (2029), 1.3 (2030), 0.7 (2031), 0.6 (2032). - Debt service: 13.7 (2022), 5.2 (2023), 6.5 (2024), 7.3 (2025), 7.0 (2026), 7.0 (2027), 6.6 (2028), 8.6 (2029), 6.7 (2030), 6.1 (2031), 5.8 (2032). - Memo: Real GDP growth (percent): 4.3 (2022), 1.3 (2023), 1.4 (2024), 2.9 (2025), 3.5 (2026), 3.2 (2027), 3.1 (2028), 3.2 (2029), 2.8 (2030), 2.8 (2031), 2.8 (2032). - Memo: Inflation (GDP deflator; percent): 24.6 (2022), -6.8 (2023), 1.3 (2024), -0.7 (2025), -0.4 (2026), -0.1 (2027), 0.3 (2028), -0.4 (2029), 0.0 (2030), 0.0 (2031), 0.0 (2032). - Memo: Nominal GDP growth (percent): 30.0 (2022), -5.6 (2023), 2.6 (2024), 2.2 (2025), 3.1 (2026), 3.1 (2027), 3.4 (2028), 2.8 (2029), 2.8 (2030), 2.8 (2031), 2.9 (2032). - Effective interest rate (percent): 4.4 (2022), 5.5 (2023), 7.3 (2024), 8.2 (2025), 9.2 (2026), 9.9 (2027), 11.0 (2028), 11.6 (2029), 11.5 (2030), 12.1 (2031), 12.2 (2032). ### Projections and risks - Commentary: Public debt is projected to be on a downward trajectory before stabilizing in the long-run, reflecting projected primary surplus, stable macroeconomic conditions, and an active policy of debt repayments over the medium term. - Figures on realism of baseline assumptions, medium-term risk assessment, and long-term risk assessment are provided (Figures 2–4). *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1omnea2024001.pdf* ### Annex IV. Risk Assessment Matrix ### Annex IV. Risk Assessment Matrix ### Global Risks (Conjunctural) - Commodity price volatility. - Likelihood: High - Expected Impact on the Economy if Risk is Realized: Medium - Key effects: - "A decrease in the global price of oil and gas would reduce export revenues and put a drag on fiscal and external accounts and growth." - "A prolonged period of low oil and gas prices could deplete the fiscal and external buffers that have recently been rebuilt and result in another cycle of indebtedness." - Policy Response: - "Accelerate the momentum of fiscal reforms to mobilize non-hydrocarbon revenues and rationalize non-priority spending—particularly advancing energy price reforms—underpinned by a credible medium-term fiscal strategy and framework." - "Accelerate structural reforms to enhance competitiveness, diversify the economy, and reduce the impact of oil price fluctuations." - Abrupt global slowdown or recession. - Likelihood: Medium - Expected Impact on the Economy if Risk is Realized: Medium - Key effects: - "The main impact would be through lower global prices of oil and gas and reduced demand for Oman exports." - "A deeper than expected deceleration in China, in particular, would severely weigh on Oman’s economic performance, as it is Oman’s largest crude oil importer." - "Non-hydrocarbon exports, such as tourism, would also be adversely affected. This would put a dent in growth and a drag on fiscal and external accounts." - Policy Response: - "Existing buffers together with external borrowing could be used to smooth the fiscal adjustment in the short term in the event of a large shock, such as an abrupt growth slowdown that would significantly affect oil and gas prices and China’s demand for Oman’s oil exports." - "There should also be close monitoring of disruptions to banking system liquidity and signs of banking stress." - "Structural reforms should be accelerated to diversify the economy and reduce its sensitivity to hydrocarbon prices." - Systemic financial instability. - Likelihood: Medium - Expected Impact on the Economy if Risk is Realized: Low - Key effects: - "The main channel would be through higher external borrowing costs." - "However, Oman has a relatively comfortable debt position and recently improved credit ratings, which would limit the increase in its external sovereign spreads." - "Banks’ balance sheets are strong, which together with prudent oversight of the CBO and banks’ domestic oriented business model, reduces vulnerabilities to increases in global interest rates." - Policy Response: - "Continue with prudent financial oversight and closely monitor developments in the banking sector and financial markets." - "Continue with sound public finance and debt management to strengthen the sovereign credit ratings, to further reduce borrowing costs." ### Global Risks (Structural) - Deepening geoeconomic fragmentation. - Likelihood: High - Expected Impact on the Economy if Risk is Realized: Medium - Key effects: - "Supply chain disruptions and rising input costs would lead to higher domestic inflation." - "Foreign direct investment could slow down, impairing economic diversification and growth." - Policy Response: - "Accelerate structural reforms to foster potential non-hydrocarbon growth, including by expanding the non-hydrocarbon export base." - "Further strengthen fundamentals and enhance the business environment to attract more FDI." - "Diversify Oman’s export market base." - "Provide targeted support to shield the most vulnerable in case of rising domestic inflation." - Disorderly energy transition. - Likelihood: Medium - Expected Impact on the Economy if Risk is Realized: High - Key effects: - "An acceleration of the global energy transition due to technological breakthroughs or stronger commitment to reducing carbon emissions would dampen international oil prices and lower demand for Oman’s oil and gas exports." - "This would have a negative impact on growth and cause a structural decline in hydrocarbon export and fiscal revenues, with adverse implications for the external and fiscal positions." - Policy Response: - "Expedite the pace of fiscal reforms, including strengthening fiscal frameworks to entrench fiscal discipline and sustainability." - "Accelerate the pace of structural reforms that would support economic diversification and unlock the growth potential of the non-hydrocarbon economy." - "Scale up investments in the production of green energy." ### Domestic Risks - Slowdown in the reform agenda. - Likelihood: Medium - Expected Impact on the Economy if Risk is Realized: Medium - Key effects: - "The slowdown or reversal on the sustained reform momentum seen thus far would adversely affect growth and employment prospects." - "Fiscal and external vulnerabilities would re-emerge, which would be exacerbated if oil prices recede, and investor confidence could deteriorate, resulting in rising external borrowing costs." - "The failure to turn reforms into jobs for Omanis in the private sector will lead to pressures to increase public employment, with negative implications for fiscal sustainability." - Policy Response: - "Adopt a fiscal strategy anchored by a credible and binding medium-term fiscal framework, endorsed at the highest level of policymaking." - "Sustain reform implementation to boost non-oil growth and labor market reforms to increase the competitiveness of Omani nationals in the private sector." - Extreme climate events. - Likelihood: Medium - Expected Impact on the Economy if Risk is Realized: Low - Key effects: - "While extreme climate events, such as cyclones, flooding, and dust-storms, have become more frequent in Oman, their impact on the economy remains limited and manageable." - "Yet, adaptation costs are likely to increase rapidly, adding to government spending." - Policy Response: - "Make progress with the climate agenda, particularly by rolling out the adaptation actions of the National Strategy for Adaptation and Mitigation to Climate Change (2020-2040)." ### Quantitative Stress-Testing and Vulnerability Notes - "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path." - The staff’s likelihood definitions: "low" indicates a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent. - Banking-sector stress-testing (from subsequent annex reference): - "As of end of 2022 (Central Bank of Oman, 2023), authorities estimated that banks could absorb an 8.5 percent deterioration of current performing loans before breaching regulatory capital requirements, with some heterogeneity across banks." - "In an LCR-based liquidity stress test, up to 4 domestic banks would fall below an LCR of 1 under severe liquidity stress." *Annex IV. Risk Assessment Matrix — IMF staff assessment as presented in the source content.* ### 2. To complement the analysis, staff estimated a stress test including joint stress ### 2. To complement the analysis, staff estimated a stress test including joint stress ### Stress test design and scenarios - Four banking sector stress scenarios simulated amid a higher-for-longer interest rate environment using the methodology from IMF (2023): - Scenario 1: Liquidity shock through deposit outflows that could force banks to realize capital losses on hold-to-maturity securities. - Scenario 2: Scenario 1 plus a 200-basis-point increase in interest rates. - Scenario 3: Corporate sector stress through a shock to profitability amid higher-for-longer interest rates, with spillovers to banks via higher provisioning as corporate probabilities of default rise. - Scenario 4 (Combined): Confluence of higher interest rates, corporate sector stress, and a liquidity shock. ### Key stress test results and vulnerabilities - Individual liquidity and corporate sector stress scenarios: - Excess losses are below 10 percent of capital (with one exception). - Tier-1 regulatory capital ratios would decline by less than 2 percentage points (with one exception). - Combined corporate and liquidity stress amid higher interest rates: - Losses could range up to 40 percent of regulatory capital. - One bank (bank 3) would breach the CBO’s minimum capital requirements, with its Tier-1 capital ratio dropping to below 10 percent. - Banks identified as more vulnerable: - Bank 3: weak ex-ante profitability. - Banks 2 and 4: relatively low holdings of liquid assets, proxied by cash and bonds. ### Observations relative to other analyses - Staff estimates are broadly in line with CBO results but highlight greater vulnerability of Omani banks to joint liquidity and corporate sector stress. ### Recommendations to strengthen stress testing - Replace economy-wide default rate estimation with sector- and loan-class-specific satellite models to capture heterogeneity in cyclical sensitivities of default rates across sectors. - Parameterize models for default-rate sensitivity to macroeconomic variables more flexibly using techniques from IMF (2022) and the Gross and Población (2019) method for flexible model selection. - Consider richer scenarios including joint liquidity, market, and solvency stress rather than treating solvency and liquidity in isolation. - Include scenarios of higher interest rates in stress testing frameworks to capture capital losses on fixed income securities and increased borrower defaults, noting heightened vulnerability of Islamic banks to higher nominal cost of capital (Jobst and Sole, 2020). ### Financial system policy and supervisory reforms - Implement an emergency liquidity assistance (ELA) framework: - CBO currently lacks explicit authority to provide ELA; authorities should prioritize establishing a clear framework for liquidity distress. - Broaden liquidity tools for Islamic banks to improve liquidity management in that segment. - Review the domestic systemically important banks (DSIB) framework: - Banking sector consolidation (one approved merger and two being discussed) likely to increase sectoral concentration. - Consider designating additional DSIBs in addition to Bank Muscat. - Consider activating the countercyclical capital buffer introduced in 2014 when warranted by the credit cycle. --- ### Annex VII — Accelerating Economic Diversification in Oman: summary of findings and targets - Diversification progress and strategic objective: - Diversification towards less productive sectors has limitations; moving up the quality ladder in sectors of comparative advantage is required to accelerate economic diversification. - Oman Vision 2040 targets: - Share of Non-hydrocarbon GDP: 61 percent in 2017; 84 percent in 2030; 92 percent by 2040. - Economic Complexity Index: Ranked 62 in 2016; Top 20 by 2030; Top 10 by 2040. - Global Competitiveness Index: Ranked 47 in 2018; Top 30 by 2030; Top 20 by 2040. - Target for FDI inflows: rise up to 10 percent of GDP by 2040 (from the 10-year historical average of 2.5 percent of GDP). ### Priority sectors and institutional arrangements - Strategic sectors prioritized: pharmaceuticals, solar and wind energy, food, electromechanical, metals and minerals, tourism, logistics. - Key implementing agencies and initiatives: - Ministry of Commerce, Industry, and Investment Promotion (MOCIIP) - Ministry of Economy - Oman Investment Authority (OIA) - National Program for Fiscal Sustainability and Financial Sector Development (Estidamah) - Public Authority for Special Economic Zones And Free Zones (OPAZ) - Public Authority for Small and Medium Enterprises Development (Ryada) - Energy Development Oman (EDO) and Hydrom - OIA structure and mandates: - Established in June 2020; structured into three sub-funds: Future Generation Fund (FGF), National Development Fund (NDF), and Oman Future Fund (OFF). - OIA role: attract FDI, improve SOE performance and governance, facilitate strategic divestments, support SME and venture capital development. - Hydrom: - Mandated to facilitate green hydrogen investment; target to start hydrogen production in 2030. - 5 contracts have already been signed with international investors, with a committed investment of $30 billion. ### Tourism and logistics potential and constraints - Tourism: - Contribution to output: 6.9 percent of GDP in 2019. - Contribution to employment: 7.2 percent of total employment in 2019. - Contribution to exports of goods and services: 4.2 percent in 2019. - Constraints: low flight connectivity, limited hotel stock, moderate service quality, skills and mobility gaps. - Policy measures: expand infrastructure capacity via Omran, strengthen intra-regional collaboration, enhance marketing and branding, improve labor quality and flexibility, newly issued tourism law to facilitate site establishment and attract FDIs. - Logistics: - Contribution measured through transportation and storage: 5.3 percent of GDP in 2022. - Vision 2040 target: become among the top 10 global integrated logistics service providers through Asyad. - Constraints and reforms: improve customs clearance efficiency, trade- and transport-related infrastructure, competitiveness of international shipments, quality of logistics services, and increase private sector role. ### Recent policy reforms and institutions established since 2019 - Regulatory reforms enacted in 2019 and later: - Commercial Companies Law (CCL), Privatization Law, Public-Private Partnership Law, Foreign Capital Investment Law (FCIL), Bankruptcy Law (all in 2019); Security Law (2022); Social Protection Law and Labor Law (2023). - CMA regulations on shareholders and board directors (2019); executive regulations of the CCL (2021). - Under FCIL, full ownership by non-citizens and single-shareholder companies allowed for most sectors. - Key institutions and initiatives: - Oman Investment Authority (OIA) established June 2020. - OPAZ (Public Authority for Special Economic Zones and Free Zones) established 2020 to unify and enhance SEZ regulatory frameworks. - MOCIIP restructured August 2020 to include investment promotion; implementing entity for Nazdaher and Invest Oman. - Ministry of Finance implementing Estidamah launched January 2023 to entrench fiscal sustainability and develop the financial sector. - Hydrom (by Energy Development Oman) and green hydrogen investments: target hydrogen production start in 2030; 5 contracts; committed investment of $30 billion. ### Special Economic Zones (SEZs) and incentives - SEZs role: enable economic diversification via industrial clusters and targeted investments (medical supplies and pharmaceuticals in Salalah; petrochemical and plastic products in Sohar and Duqm; fishery and food in Duqm; renewable energy, green hydrogen, green ammonia, and green steel in Duqm and Salalah). - OPAZ mandate: streamline, standardize, and enhance SEZ regulatory environment; progress on One Stop Shop (OSS) portal; reduce registration fees from OMR 1,500 to OMR 250. - Incentives summary: - Tax and customs rate: Tax and customs exemptions for up to 30 years. - Profit repatriation: 100 percent repatriation of capital and profits are permitted. - Customs duties: 0 percent deferral for goods coming into the SEZs. - Omanization: 10 to 20 percent, with a review of the quotas every 3 to 5 years. - Foreign ownership: 100 percent foreign ownership is allowed inside SEZs. - Work Permits: Expedited process conducted through a single entity. - Capital requirement: No/small capital requirements. - Market incentives: Access to the wider GCC market with the GCC customs union and access to US markets through the 2009 USFTA. - Business registration: Single window registration. - Recent infrastructure and regional integration deals: - $3-billion agreement with the UAE to build a railway network connecting Sohar FTZ with the UAE. - 320-million-dollar infrastructure project signed with the Saudi Fund for Development. ### Export base, composition, and remaining challenges - Export composition shifts: - Share of crude oil exports: from about 78 (80) percent in 2000 to about 45 (61) percent in 2019. - Petroleum and natural gas products expanded from 6 percent in 2000 to 16 percent in 2019. - Drivers of export diversification: expansion of chemicals, minerals, metals, logistics, tourism, financial services, agricultural products, and vehicles. - Remaining gaps: - Small share of knowledge-intensive exports implies scope for moving up the quality ladder and integrating into global value chains. - Constraints include regulatory burden, high state footprint in some sectors, underdeveloped infrastructure, low human capital, and weak integration into global value chains. *Prepared by Thomas Kroen and Haytem Troug.* ### 8. Oman’s diversification efforts should ### 8. Oman’s diversification efforts should ### Diversification and product complexity - Objective: target the production of more complex products to boost active learning, the quality ladder, investment productivity, labor productivity, and overall productivity. - Diagnostic tool: Harvard Kennedy School’s Growth Lab’s Atlas of Economic Complexity maps potential export products by complexity and distance from Oman’s current capabilities. - Current benchmark: Oman’s current production complexity level is an economic complexity index of -0.17. - Interpretation of the product-space mapping: - Y-axis: product’s degree of complexity (advanced level of knowhow and resources). - X-axis: distance between Oman’s current production capabilities/resources and those required to produce each product. - Dotted horizontal line: Oman’s current production complexity level (-0.17). Products above this line yield complexity and productivity gains; products below contribute negatively to Oman’s complexity level. - Sectors with potential to yield higher complexity, productivity, and growth gains: - vehicles - pharmaceuticals - machinery - agriculture - manufacturing - Constraints noted: Oman’s value-added contribution to supply chains is still limited; knowhow and resource gaps are substantial. ### Policy recommendations for diversification - Orient the diversification agenda toward branching into more complex products in global value chains. - Build capacity by: - enhancing the regulatory environment; - attracting talent; - incentivizing more investment in research and development to boost innovation. - Complement sectoral targeted policies with: - macroeconomic stability; - boosting human capital to meet evolving economic needs; - high-quality infrastructure and logistics; - developed financial markets. - Strengthen inter-agency cooperation and coordination for the diversification agenda. - Enforce competition and level the playing field across sectors to encourage private sector participation. - Align financial support programs (for example, the “Estidamah” program) to be viability-based and complementary to other agencies’ diversification efforts. - Unify the regulatory framework of Special Economic Zones (SEZs) to eliminate uncertainties and encourage more FDI and competition across SEZs. - Strengthen backward and forward linkages of SEZs—particularly with SMEs—through clustering, supplier support, and human-capital development to integrate the Omani economy into global value chains and potentially offset fiscal revenue losses from tax and custom exemptions in free trade zones. ### New social protection and labor laws — main reforms - Social protection law (royal decree promulgated July 19, 2023): - Integrates government-financed social protection schemes with a social insurance system under a single institution (Social Protection Fund). - Provides non-contributory benefits: family support for low-income households, and universal child, disability, and senior citizen benefits. - Integrates 11 pension funds into a single scheme managed by the Social Protection Fund. - Replaces costly final-salary pension formula with a full career average–based formula. - Introduces an actuarially fair reduction for early retirement and dynamic adjustment mechanisms for demographic and economic conditions. - Projection: the pension system is projected to be sustainable at current contribution rates for a period of 100 years without government financing. - Extends social insurance coverage to foreign workers, including maternity/paternity leave, sickness leave, and employment injury insurance benefits on terms comparable to national workers. - Replaces end-of-service indemnities with a national provident fund administered by the new institution, extending coverage for retirement, disability, death, and return to home country. - Labor law (royal decree issued one week after social protection law): - Introduces remote work modalities and prohibits passport confiscation by employers. - Grants employers greater flexibility to dismiss non-productive workers, subject to notification and at least six months to address underperformance. - Strengthens Omanization measures: requires employers to prepare annual plans for hiring and replacing expatriate workers and increases penalties for non-compliance. - Extends maternity leave from 50 days to 98 days. - Introduces a 7-day paid paternity leave. - Requires employers to provide women-dedicated nursing areas in establishments with a significant female workforce and allows unpaid leave for up to a year for childcare upon request. - Improves gratuity and end-of-service benefits for expatriates: from 15 days’ salary for each of the first 3 years to a full month’s salary for each year. ### Expected labor-market, fiscal, and inclusion effects - Labor market flexibility and mobility: - Harmonized social insurance framework equalizes pension entitlements across public and private sectors, addressing pension fragmentation and distortionary incentives that undermined labor mobility. - Combined reforms increase labor market flexibility while ensuring broader protection of workers’ rights. - Fiscal sustainability and intergenerational equity: - Integration and administrative streamlining of pension schemes aim to improve efficiency and sustainability. - Full career average pension formula and actuarially fair early-retirement reductions strengthen long-term fiscal sustainability. - Expansion of government-financed social programs is intended to support public buy-in for fiscal reforms (for example, phasing out subsidies). - Increased private-sector employment among nationals is expected to help contain the public wage bill and ease budgetary pressures. - Gender and inclusion: - Reforms strengthen protections for women and introduce benefits supporting gender equality (survivors’ benefits, universal old-age pension independent of prior employment), supporting higher female labor force participation from current low levels. - Coverage and benefit improvements for expatriates mark Oman as among the most progressive countries in the region on advancing social insurance for foreign workers. ### Implementation and operational risks - Fiscal and administrative risks: - Relatively large universal benefits of some non-contributory programs could increase fiscal burden, particularly during transition where benefits are grandfathered from the old system. - Integrating 11 fragmented pension schemes into a unified system under a single institution entails coordination challenges and logistical issues (integrating databases and identifying targeted beneficiaries). - Private sector and labor market risks: - Stricter Omanization measures could impose higher compliance and operational costs on private employers, including increased training requirements. - Potential wage pressures from elevated demand for high-skilled nationals to meet nationalization requirements. ### Selected numerical and institutional facts (preserved exactly as in source) - Economic complexity index: -0.17. - Pension sustainability projection: 100 years at current contribution rates without government financing. - Maternity leave extended from 50 days to 98 days. - Paternity leave: 7-day paid paternity leave. - Expatriate end-of-service improvement: from 15 days salary for each of the first 3 years to a full month’s salary for each year. - IMF and financial data excerpts: - Quota: 544.40. - IMF's holdings of currency: 404.74 74.35. - Reserve tranche position: 139.70 25.66. - Oman contribution to RST: $52 million (about SDR 39 million) effective April 20, 2023. - PRGT subsidy contribution pledged: SDR 18 million (in end-2020 NPV terms) from net investment earnings on an investment of SDR 29 million. - Exchange-rate peg: RO 1 = $2.6008; central bank fixed buying/selling rates RO 1 = $2.5974/2.6042. *Source: IMF staff compilation from the chapter "8. Oman’s diversification efforts should" including associated annex text.* ### 2013. The published data do not provide comprehensive coverage of the public sector, not covering state-owned ### 1omnea2024001 - 2013. The published data do not provide comprehensive coverage of the public sector, not covering state-owned ### Data coverage, standards, and quality - Published data do not provide comprehensive coverage of the public sector, not covering state-owned enterprises (SOEs), pension funds, the Oman Investment Authority (OIA), Energy Development Oman (EDO), and the newly created Integrated Gas Company (IGC). - Authorities provide Article IV consultation missions with a more comprehensive analytical presentation of the budget and fiscal performance as well as information on government debt, OIA assets, and SOEs performance and 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 do so. - Balance of payments and external sector statistics: - Data for most balance of payment entries are adequate. - CBO continues to map International Transactions Reporting System (ITRS) data to BoP data; priorities include enhancing quality of BoP data, improving timeliness and coverage of quarterly foreign investment surveys, enhancing coverage for non-financial institutions, and further developing cooperation with other government and non-government entities. - 2022 TA mission worked to improve compilation and dissemination of external sector statistics (ESS) and adapt to BPM6. - Authorities do not currently publish the Reserve Template, external debt, and do not participate in the Coordinated Direct Investment Survey. - Treatment of free economic zones, remittances, transactions related to production sharing agreements and direct investment assets needs updating; a breakdown accounting on financial flows is needed. - Data dissemination and standards: - 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 November 15, 2023) — Selected entries and reporting frequencies (dates preserved exactly as in source): - 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: Sep 2023; Date Received: Nov 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Reserve/base money: Sep 2023; Nov 2023; M; M; M. - Broad money: Sep 2023; Nov 2023; M; M; M. - Central bank balance sheet: Sep 2023; Nov 2023; M; M; M. - Consolidated balance sheet of the banking system: Sep 2023; Nov 2023; M; M; M. - Interest rates: Sep 2023; Nov 2023; M; M; M. - Consumer price index: Sep 2023; Oct 2023; M; M; M. - Revenue, expenditure, balance and composition of financing – central government: 2023Q3; Oct 2023; Q; Q; Q. - Stocks of central government and central government-guaranteed debt: 2023Q3; Oct 2023; Q; Q; Q. - External current account balance: 2022; Oct 2023; A; A; A. - Exports and imports of goods and services: 2022; Oct 2023; M; M; M. - GDP/GNP: 2023Q2; Oct 2023; Q; Q; Q. - Gross external debt: 2022; Oct 2023; A; I; NA. - International investment position: 2022; Oct 2023; A; I; NA. ### Fiscal performance and public finance reforms - Recent fiscal outcomes and debt: - Transformation of fiscal balance into a surplus of 10.1 percent of GDP in 2022. - Non-hydrocarbon primary adjustment of nearly 6 percentage points of non-hydrocarbon GDP during 2021-2022. - Reduction of central government debt from about 67.9 percent of GDP in 2020 to 39.9 percent in 2022. - 2023 outcomes and operations: - Non-hydrocarbon growth projected at 2.1 percent in 2023 (projected acceleration supported by recovering agricultural and construction activities and robust services). - Non-hydrocarbon primary outturn aligned closely with the 2023 budget; 2023 non-hydrocarbon primary deficit and overall fiscal surplus estimated at 5.5 percent of GDP. - Further reduction of central government debt to 36.7 percent of GDP in 2023. - Prepayment of USD 1.01 billion of a syndicate loan in December 2023. - Net debt reduction of USD 6.1 billion by the end of 2023. - Government liquid foreign assets totaling $35.7 billion, covering 106 percent of the ARA metric. - External position: first current account surplus of 5.0 percent of GDP since 2014. - Non-hydrocarbon exports have more than doubled since 2019, now constituting about one-third of total exports. - 2024 fiscal plans and medium-term stance: - Anticipated overall fiscal balance for 2024 stands at a surplus of 3.7 percent of GDP. - Primary expenditures projected to increase by only 0.9 percent of non-hydrocarbon GDP relative to 2023. - State’s General Budget for the Fiscal Year 2024 aims to continue placing debt on a downward trajectory while maintaining spending on education, health, and housing. - Social protection: implementation of new social protection law effective from January 2024; Social Protection Fund to be bolstered. - Authorities concur with staff that a central government debt-to-GDP ratio of 30 percent would provide a robust safety net and prevent breach against their 60 percent of GDP debt ceiling target. - Plans to institutionalize a Medium-Term Fiscal Framework (MTFF) and adopt a fiscal rule based on the non-hydrocarbon primary balance and a central government debt anchor. - Actions to enhance tax administration, including adoption of VAT e-invoicing, aimed at reducing the tax gap by improving taxpayer compliance. - Public financial management and debt strategy: - Establishment of a Treasury Single Account (TSA) is ongoing. - Progress in digitalizing financial management and procurement processes. - Development of a sovereign asset-liability management framework. - Sound and agile debt management strategy focused on lengthening debt maturities, reducing borrowing costs, and developing the local currency government bond market. - Passage of the public debt law noted as an important milestone. ### Monetary and financial policy, supervision, and infrastructure - Monetary regime and policy framework: - Pegged exchange rate regime aligned with the Federal Reserve's policy actions serving as a monetary anchor. - Monetary Policy Enhancement Project (MPEP) is developing a more robust monetary policy toolkit and enhancing the CBO’s liquidity management framework and policy transmission. - Initiatives underway to develop an interest rate corridor, prepare groundwork for open market operations, and strengthen liquidity forecasting capacity. - CBO in final stages of developing the Oman Lending Rate Reference (OLRR) for corporate loans to enhance transparency in loan pricing and improve pass-through of policy rates to retail rates. - Banking sector soundness and supervision: - Banking sector exhibits robust capital and liquidity positions, healthy profit margins, and well-provisioned expected credit losses. - Continued monitoring of risks, including those from the real estate sector and increasing digitization of finance. - CBO refining regulatory frameworks, enhancing risk-based supervisory capacity, and implementing Basel III reforms and IFRS 9. - Payment systems and digitalization: - Launch of a new and improved Real-Time Gross Settlement System (RTGS) supporting continuous settlement for retail payments and arrangements for the TSA. - Financial Sector Development Program initiatives to reinforce Oman as a hub for financial technology and innovation. - Enhanced fintech ecosystem: regulatory sandbox incubated digital wallets, blockchain applications, and alternative financing methods; increased credit registry usage and access to finance for SMEs. - CBO issued a comprehensive regulatory framework for cybersecurity and resilience addressing governance, compliance, audit, technology and operations, third-party supply chain management, online financial services, and risk management. - AML/CFT: - 2023-2025 enhanced AML/CFT strategy aligns with Financial Action Task Force standards. - CBO strengthening AML/CFT staffing and training; ongoing mutual evaluation process by MENAFATF. ### Structural reforms, diversification, and climate initiatives - Oman Vision 2040 and structural priorities: - Focus on diversifying the economy, building buffers, enhancing business environment, improving institutional quality, and reducing state footprint. - Labor and social protection laws intended to increase labor market flexibility and inclusivity, improve female labor force participation, align maternity leave with international standards, and introduce nursing areas for women. - Educational reforms and expanded vocational training to address skills mismatches. - SOE reform, privatization, and investment facilitation: - Since 2020, 16 state-owned enterprises privatized and 5 partially divested. - 2023 divestment involved 8 companies through 3 IPOs and 5 trade sales. - OIA’s participation in new projects is capped at 40 percent. - Code of Governance for SOEs adopted to promote financial transparency and efficient utilization of resources. - Strengthening role of the Competition Protection and Monopoly Prevention Centre; confining SOEs to strategic industries. - Invest Oman and the Investment Services Center launched to streamline procedures; legislative changes include the Foreign Capital Investment Law (facilitates 100 percent foreign-owned and single shareholder companies) and the Commercial Companies Law. - Social protection and pensions: - Comprehensive social protection law effective January 1, 2024. - Child Benefit: monthly financial support to Omani children up to 18 years. - Old Age Benefit: monthly assistance to Omanis aged 60 and above. - Disability Benefit: monthly support for Omanis with disabilities. - Family support for low-income households included. - Pension system transformed into a unified scheme; projected to remain viable for a century, without government financing. - Climate and energy transition: - National Strategy for Adaptation and Mitigation to Climate Change (2020-2040); commitment to net-zero emissions by 2050. - Establishment of Hydrom (Hydrogen Oman SPC), fully-owned subsidiary of Energy Development Oman, as master planner for green hydrogen. - Hydrom efforts include securing $30 billion in MOUs and targeting production of 1 million tons of green hydrogen annually by 2030. - Carbon Neutrality Program and the Sustainability Center noted as part of environmental agenda. ### Key statistics and metrics (preserved exactly as reported) - Real growth rate in 2022: 4.3 percent. - Non-hydrocarbon growth projected at 2.1 percent in 2023. - Non-hydrocarbon growth projected at 4 percent over the medium-term. - Fiscal surplus in 2022: 10.1 percent of GDP. - Non-hydrocarbon primary adjustment during 2021-2022: nearly 6 percentage points of non-hydrocarbon GDP. - Central government debt: about 67.9 percent of GDP in 2020; 39.9 percent in 2022; 36.7 percent in 2023. - Overall fiscal surplus estimated for 2023: 5.5 percent of GDP. - Prepayment of syndicate loan: USD 1.01 billion in December (2023). - Net debt reduction by end-2023: USD 6.1 billion. - Liquid foreign assets: $35.7 billion; coverage: 106 percent of the ARA metric. - First current account surplus since 2014: 5.0 percent of GDP. - Non-hydrocarbon exports now constitute about one-third of total exports. - Anticipated overall fiscal balance for 2024: surplus of 3.7 percent of GDP. - Primary expenditures projected to increase by 0.9 percent of non-hydrocarbon GDP relative to 2023. - OIA participation cap in new projects: 40 percent. - Hydrom MOUs secured: $30 billion. - Hydrom production target: 1 million tons of green hydrogen annually by 2030. - Pension fund projected viability: for a century. *Source: IMF Article IV consultation material (1omnea2024001).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1omnea2024001.pdf_