## 1omnea2024002

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### A. Context and fiscal risk framing
- Hydrocarbons represent about 40 percent of GDP, nearly 80 percent of total fiscal revenue, and 65 percent of total export of goods (as of end of 2022).
- Fiscal risks are potential shocks to government revenues, expenditures, assets, or liabilities not reflected in government fiscal forecasts.
- Two broad categories of fiscal risk:
  - Macroeconomic risks (oil prices, GDP, inflation, borrowing costs).
  - Specific fiscal risks (contingent liabilities or uncertain events related to SOEs, PPPs, PPAs, natural disasters).
- Oman’s General Budget (2023) identified key potential fiscal and economic risks: oil price volatility, tighter global financial conditions, global inflationary pressures, climate change and natural disasters, and geopolitical tensions.
- The authorities are developing an early warning system to mitigate macroeconomic risks. The Ministry of Finance outlined key fiscal risks for the first time in 2023.

### B. Oil price volatility — exposure, scenario, and policy response
Findings and historical impacts
- Volatility of oil prices is the major fiscal risk for Oman.
- Sharp declines in oil prices over the past decade resulted in sizable fiscal deficits of 20 percent and 16 percent of GDP in 2016 and 2020, respectively.
- Public sector indebtedness (central government and SOEs) surged by close to 80 percent of GDP during 2015-2020.

Downside oil price scenario (IMF staff calculation)
- Scenario: one standard deviation decline in oil prices relative to current IMF World Economic Outlook assumptions, from 2023 to 2028, with no change in government spending, non-hydrocarbon revenue collections, or external borrowing relative to the baseline.
- Under the downside scenario:
  - Government Gross Debt (Percent of GDP): charted for 2020–2028 comparing Downside Scenario (-1 SD) and Baseline (time series preserved in source figures).
  - Fiscal Balance (Percent of GDP): charted for 2020–2027 showing moves into persistent deficits under the downside scenario.
- A one-standard-deviation decline in oil prices would turn overall fiscal balances from surpluses under the baseline to persistent deficits and revert gains achieved in rebuilding fiscal buffers.

Policy actions and mitigants pursued by authorities
- Fiscal adjustment measures:
  - Rationalizing expenditure and mobilizing non-hydrocarbon revenue, including introduction of excises in 2019 and VAT in 2021.
  - Additional measures required: comprehensive tax administration reform, introduction of PIT, and phasing out untargeted energy subsidies.
- Medium-term Fiscal Framework (MTFP):
  - 2023 budget used a conservative oil price assumption of $55 per barrel.
  - Authorities working with IMF technical assistance to adopt a full-fledged and legally binding MTF with quantifiable fiscal targets and near- and medium-term aggregate expenditure ceilings.
- Fiscal buffers:
  - Annual transfers to the Petroleum Reserve Fund (PRF): oil revenue equivalent to the value of 20,000 barrels per day, on average, are transferred to the PRF each year.
  - As of end of 2022: central government deposits with domestic commercial banks = 14.4 percent of GDP; deposits with the Central Bank of Oman = 3.5 percent of GDP.
  - Oman Investment Authority (OIA) holds liquid assets amounting to about 10 percent of GDP.

### C. State-Owned Enterprises (SOEs) — exposure, metrics, and risks
Findings and exposure
- Contingent liabilities from SOEs can be explicit (government loan guarantees) or implicit (expectation of support).
- SOE debt evolution:
  - SOE debt increased from 16 percent in 2015 to 41 percent of GDP in 2021, before declining to 30 percent in 2022.
- Explicit government guarantees to SOEs reached 8 percent of GDP in 2022. Guarantees are extended to the development phase of SOE projects until the start of operations. To date, no guarantee has been called.
- Example of implicit fiscal support: temporary support to Oman Air amounted to 0.3 percent of GDP in 2022; restructuring and refinancing operations were initiated.

Box 1 — Overview of SOEs (key figures and features)
- Institutional changes:
  - Oman Investment Authority (OIA) established in 2020 to manage sovereign financial assets and most state-owned companies; Energy Development Oman (EDO) established in 2020 to manage oil and gas exploration and renewable energy projects.
  - Government ownership in all non-financial SOEs previously overseen by the Ministry of Finance was transferred to OIA except for EDO.
  - OIA launched the Rawabet program to enhance SOE governance, efficiency, strategic priorities, and evaluation frameworks.
- SOE activity and spending:
  - Capital spending by SOEs (OIA-affiliated and EDO): 13.6 percent of GDP in 2021; 9.3 percent of GDP in 2022; projected at 8.2 percent of GDP in 2023.
  - Central government capital expenditure averaged 3 percent of GDP over the same period.
  - OIA’s strategy: OIA’s share in new projects limited to 40 percent; planned divestment of a few SOEs contributes to lower capital spending in 2023.
  - Capital spending concentrated in energy and services sectors, accounting for approximately 90 percent of total capital spending during 2021-2023.
- SOE assets and liabilities (end of 2022):
  - SOE assets = about 31.4 percent of GDP.
  - SOE liabilities = 29.9 percent of GDP.
  - SOE debt concentrated in a few entities: OQ (Oman Oil Company), Energy Development Oman, NAMA (Electricity Holding Company), Oman Air, Asyad’s Group, and Omantel — these represented 90 percent of total SOE debt in 2022.
  - Most SOE indebtedness is project-based financing.
  - Explicit government guarantees to SOEs = 8 percent of GDP in 2022.
- Financial performance:
  - For five out of the six SOEs representing 90 percent of total SOE debt in 2022, financial performance improved from 2021 to 2022, except for Oman Air.
  - These SOEs have relatively high leverage which declined in 2022; profitability and interest coverage ratios are strong; liquidity ratios (current assets/current liabilities) are relatively healthy.
  - Oman Air experienced major COVID-19 impacts and underwent a restructuring process led by OIA, including a recently completed refinancing operation.

### D. OIA Rawabet program — governance, accountability, deleveraging, and divestment
Key actions under Rawabet mitigating SOE risks
- Governance enhancements:
  - Restructuring SOE boards of directors and setting a cap of two terms for board membership.
  - Issuing a Code of Governance to improve performance and efficiency and align SOE objectives with sustainable development and Vision 2040.
- Accountability:
  - Boards’ KPIs covering financial sustainability, governance, in-country value, divestments, and other strategic initiatives; KPIs assessed by a certified external auditor appointed by OIA and approved by the Capital Market Authority.
- Risk management:
  - Quarterly risk-based monitoring of SOEs.
  - Annual risk assessments of SOE business plans and submission of risk registries with detailed assessments and mitigation plans.
  - Annual borrowing plans submitted to the Ministry of Finance’s Debt Management Office prior to any funding activity during the year.
- Deleveraging and divestment:
  - Deleveraging initiatives reduced SOE debt by about $10 billion during 2022-2023.
  - Divestment strategy aims to improve creditworthiness, foster operational efficiency, attract private strategic/financial partners, deepen the capital market, and contribute to the state budget.
  - Since 2020, 16 SOEs have been privatized and 5 partially divested.
  - The 2023 divestment plan approved by OIA Board consisted of divesting 8 companies through 3 IPOs and 5 trade sales.

### E. Public sector consolidated balance sheet (end of 2022; IMF staff estimate)
- Net assets (net financial assets) of 674 (-33) percent of GDP at end of 2022 (as estimated in source).
- Net present value of hydrocarbon assets represented about 500 percent of GDP.
- OIA’s assets (SOEs under management and liquid assets) accounted for about 40 percent of GDP.
- Liabilities of about 88 percent of GDP composed largely of central government and SOE debt.
- Oman’s sovereign asset pools include OIA, PRF, and deposits in banks; liabilities include central government and SOE debt.

### F. Institutional reforms for sovereign assets and liabilities
- OIA created to manage public enterprises and invest fiscal surplus from hydrocarbon windfall.
- An integrated central system is being developed to account for government assets (tangible assets, financial assets, oil and gas reserves, PPPs, real estate investments, and SOEs).
- Debt Management Committee established to coordinate sovereign debt issuance; scope expanded with oversight of sovereign assets and liabilities.
- Forthcoming Medium-Term Debt Strategy will help manage risk exposures arising from the government’s debt portfolio.
- Pension reform: unification of pension funds from 11 fragmented institutions into a unified entity to ensure medium- to long-term sustainability.

### G. Other fiscal risks — debt management, PPPs, climate, and monetary transmission
Debt and refinancing exposures
- About 12.5 percent of total debt matures in the next 12 months as of end-2023.
- 84 percent of the total debt portfolio have a fixed rate.
- Central government gross financing needs are projected below 1.0 percent of GDP on average over the period 2024-2028.
Liability management actions in 2022–2023
- Liability management operations used hydrocarbon windfall to repay, prepay, and buyback part of external debt amounting to 7.2 percent of GDP in 2022 and 4.6 percent of GDP in 2023.
- Debt provisions created since the 2021 budget, amounting to 0.5-0.8 percent of GDP annually to the Debt Reserve Account.

Public-Private Partnerships (PPPs)
- PPP Law adopted in 2019; PPP Unit (Ministry of Finance) preparing detailed policy measures to mitigate fiscal risks.
- Every new PPP initiative must be approved by the Ministry of Finance before tendering.
- Fiscal exposures, obligations and guarantees will be explicitly analyzed during project preparation.
- Government provides a comfort letter detailing budgeting approval process and budget allocations but does not provide any guarantees.

Climate-related fiscal risks
- Change in number and intensity of tropical cyclones with 14 events since 2002.
- Fiscal cost of cyclone Shaheen in 2021 was about 0.5 percent of GDP.
- National Fund for Emergency (NFE) established in 2022 with an initial contribution of 0.3 percent of GDP.
- Authorities have access to funding support from the Green Climate Fund (GCF) covering six areas: water resources, agriculture, marine and fisheries, urban areas, health, and energy efficiency.

Monetary policy transmission and financial conditions
- Since March 2022 Fed tightening cycle, CBO has followed Fed policy rate hikes closely to maintain the OMR-USD peg.
- Policy rates increased by 550 basis points since the beginning of the current Fed tightening cycle.
- Interest rate passthrough in Oman weaker than GCC peers:
  - Deposit and lending rates in Oman were almost flat year-on-year at end-2022.
  - By contrast deposit rates rose by about 55 basis points over the past year in both Saudi Arabia and the United Arab Emirates and lending rates rose by 65 and 90 basis points, respectively.
- FX lending accounts for about 15 percent of all loans; passthrough driven by FX lending.
- Econometric findings:
  - For other GCC countries excluding Oman, a 100 bps Fed tightening correlates with a 34 bps increase in deposit rates and a 43 bps increase in lending rates after one year.
  - In Oman, there is no statistically significant increase in deposit rates and the impact on lending rates is half as large as in other GCC countries.
  - Private sector credit growth in Oman stands at about 7 percent (y-o-y) by end of 2023H1.
  - Passthrough from higher policy rates into credit quantities in Oman is statistically indistinguishable from zero.
Structural contributors to weak transmission
- 6 percent interest rate cap on personal loans (personal loans are 40 percent of the market).
- Persistent excess liquidity and limited interbank market activity.
- Effective lending rate passthrough concentrated in FX lending (about one-eighth of the market).

### H. Liquidity management — shortcomings and operational recommendations
Liquidity management objectives
- Build on better liquidity forecasting; expand CBO toolkit to absorb excess liquidity.
- Put in place a full liquidity management framework to support effective liquidity allocation and encourage interbank market activity.

Specific instrument and operational recommendations
- Prepare the resumption of issuance of certificates of deposit which have not been used since 2015.
- Introduce further liquidity instruments for Islamic banks.
- Test the planned Call Money Market and Deposit Facility as initial steps toward a full liquidity management framework.
- Set the stage for the conduct of open market operations to better allocate liquidity and encourage interbank market activity.

Reserve requirements and eligible assets
- Modify the reserve maintenance period for required reserves to begin on a weekday.
- Remove the regulation that the reserve requirement can partially be met with sovereign bond (up to 2 percent).
- Reducing the number of reserve eligible assets would contribute towards tightening liquidity.

Monetary policy transmission and banking sector measures
- Relax the interest rate cap and maintain healthy banking competition.
- Relaxing the interest rate cap on personal loans would ensure banks can adequately reflect related credit risk and maintain margins.
- Amid banking sector consolidation, maintain competition to support increased passthrough and access to credit for riskier borrowers, including SMEs.
- Banks continue to miss the target of 5 percent of lending to SMEs.

### I. Fintech in Oman (Box 1)
Overview and prerequisites
- Oman has a young and digitally savvy population: "24 percent of the population are between 15 and 29 years old."
- High Internet and smartphone penetration support fintech development.

Fintech Regulatory Sandbox and cohorts
- CBO’s Fintech Regulatory Sandbox launched in December 2020.
- Three cohorts have started focusing on digital wallets, blockchain technology for trade finance, and alternative financing methods.
- The next cohort in 2024 will work on open banking solutions.
- Recommendation: dedicate one cohort to SME financing solutions.

Access to capital, human capital, and market development
- Recent education initiatives include a dedicated Fintech certificate in higher education.
- Industry figures: 11 venture capital deals for a total volume of $3.5 million for Oman in 2022 (relative figures for peers preserved in source).

Regulatory and supervisory considerations
- Ensure regulatory and supervisory frameworks to foster innovation, ensure customer protection, and safeguard financial stability.
- Successful Fintech development will hinge on private sector initiatives supported by government guardrails.

Role in SME financing and financial inclusion
- Fintech can complement measures to improve SME access to finance: equity-based crowdfunding, peer-to-peer business lending, and invoice lending.

### J. Structural reforms, productivity, and sequencing
Economic context and stylized facts
- Average GDP per capita:
  - $7,700 in the 1990s
  - $14,800 in the 2000s
  - $20,700 in the 2010s
- Hydrocarbon activity: more than 37 percent of total output in 2022.
- Hydrocarbon share of exports: about 65 percent.
- Productivity trends declining; wage differential between public and private sectors distorts incentives.
- Nonhydrocarbon real GDP growth strongly correlated with government spending; nonhydrocarbon growth exhibits high oil price-driven volatility.
- Gross capital investment has declined; FDI inflows surged in 2018 and have remained elevated since; more than half of total FDI was directed toward the oil and gas sector in 2021.

Analytical approach and quantitative reform impacts
- Potential nonhydrocarbon GDP estimation uses Cobb-Douglas production function and perpetual inventory method for capital.
- Empirical method: Local projections using panel data for 53 advanced and emerging market economies over 2000–19.
- Short-term impulse response estimates (cumulative impact on TFP from a one-percent increase in the structural indicator):
  - Institutional reforms: TFP increases by 0.8 percent two years after a one-percent improvement.
  - Reducing the state footprint: TFP increases by about 0.5 percent two years after a one-percent improvement.
  - Product market reforms: TFP increases by about 0.2 percent two years after a one-percent improvement.
  - Financial sector and labor market reforms: on average, appear elusive in the short and medium term under the baseline specification.
- Medium-term and scenario estimates:
  - If Oman reduces institutional, state footprint, and product market gaps relative to the advanced economy average by half, TFP would increase by 3.6 percent, on average, four years after reform efforts.
  - Implementing institutional reforms would lift productivity by more than 8.5 percent cumulatively over the medium term.
  - Packaging institutional quality, state footprint reduction, and product market reforms simultaneously to close gaps vis-à-vis advanced economies by 50 percent yields productivity gains of about 5 percent over the medium term.

Sequencing and policy guidance
- Baseline: labor market and financial sector reforms yield insignificant gains when implemented without prior progress in institutional quality, state footprint, and product markets.
- Conditioning on prior progress (above the 70th percentile of the sample): labor market and financial sector reforms yield higher and more significant TFP gains.
- Recommended sequencing:
  - Prioritize institutional quality, reduce state footprint, and implement product market reforms first.
  - After sufficient progress, implement labor market and financial sector reforms to secure larger and more durable productivity gains.

Structural indices and methodology highlights
- Five indices: State footprint, Institutions, Product market, Labor market, Financial sector.
- Estimation details:
  - LPs based on 53 economies over 2000–19; horizons h = 1, 2, ...5.
  - Sequencing threshold: above the 70th percentile.
  - Standard shock magnitude: 1 percent increase in structural reform indicator.
  - Robustness: Panel VAR results broadly in line with LP baseline results.

### K. Labor market reforms and financial market deepening
Labor market findings and recommendations
- Labor market fragmentation; recently approved social protection and labor laws expected to improve flexibility, competition, and mobility.
- Enhancing mobility-enabling policies for expatriate workers would facilitate sectoral reallocation and structural transformation.
- Quality of education and upskilling (technology and science majors) important to address skills mismatches.
- New labor and social protection laws include provisions supporting female labor force participation (aligning maternity leave with international standards and introducing paternity leave).
- Further measures to increase female participation: promote women to senior managerial positions; institutionalize flexible work arrangements.
- Ensure labor market flexibility reforms are complemented by measures to support affected workers during transition.

Financial markets and credit recommendations
- Deepen financial markets and enhance credit options, sequenced after key structural reforms.
- Credit currently concentrated on public sector employees and a limited number of large entities.
- Implement Estidamah agenda to strengthen financial institutions, develop financing products, and strengthen financial inclusion.
- Limit targeted financing schemes to viable SMEs.
- Fiscal consolidation and SOE divestment expected to reduce crowding out, boost banking liquidity, and enhance lending to private firms.

### L. Consolidated policy recommendations (selected)
- Press ahead with additional measures to mobilize non-hydrocarbon revenue and rationalize expenditure.
- Utilize hydrocarbon windfalls to increase buffers and reduce debt burden.
- Develop a full-fledged medium-term fiscal framework to entrench fiscal discipline and provide predictability of government expenditures.
- Develop a comprehensive fiscal risk statement including sensitivity analysis and alternative macroeconomic and fiscal forecast scenarios.
- Expand reporting coverage beyond central government to PPP and pension funds.
- Disclose guarantees, related beneficiaries, expected duration, and intended purpose in the annual budget; disclose government rights, obligations, and other exposure under PPP contracts.
- Enhance transparency of allocations for contingencies and publish criteria for charging expenditures to the contingency reserve.
- Develop a sovereign asset and liability framework consolidating public sector assets and liabilities; set financial objectives and procedures for managing cost/risk trade-offs.
- Continue OIA’s divestment process and disclose key financial performance metrics of SOEs.
- Develop strategies for management and mitigation of key fiscal risks and prioritize phased withdrawal of untargeted energy subsidies (including lifting the fuel cap and resuming reforms through the authorities’ targeted National Subsidy System).
- Develop a multilayer strategy for the use of additional revenue from high global oil prices: reducing public debt, accumulating fiscal buffers, or accelerating economic diversification.
- Incorporate long-term sustainability analysis into fiscal risk management and estimate value of natural resource assets.
- Identify and disclose main fiscal risks from climate-related events in qualitative and quantitative terms.
- Strengthen coordination of decision making between central government and other parts of the public sector; National Committee includes MoF, MoE, NCSI, CBO, and OIA representatives.

*Source: IMF staff note “Mitigating Fiscal Risks in Oman” (1. Overview of State-Owned Enterprises) and staff summary of Chapter 8 (1omnea2024002).*

### 1. Overview of State-Owned Enterprises ________________________________________________ 7

### 1. Overview of State-Owned Enterprises

### A. Context
- Fiscal risks in Oman are multifaceted and can significantly impact the fiscal position.
- Oil and gas remain major sources of export income and fiscal revenues: hydrocarbons represent about 40 percent of GDP, nearly 80 percent of total fiscal revenue, and 65 percent of total export of goods (as of end of 2022).
- Fiscal risks are defined as potential shocks to government revenues, expenditures, assets, or liabilities not reflected in government fiscal forecasts.
- Two broad categories of fiscal risk:
  - Macroeconomic risks: deviations from baseline forecasts for variables such as oil prices, GDP, inflation, and borrowing costs.
  - Specific fiscal risks: realization of contingent liabilities or uncertain events related to SOEs, PPPs, PPAs, and natural disasters.
- Oman’s General Budget (2023) identified key potential fiscal and economic risks: oil price volatility, tighter global financial conditions, global inflationary pressures, climate change and natural disasters, and geopolitical tensions.

### B. Fiscal Risk Management — Overview
- The note revisits Oman’s exposure to fiscal risks, focusing on oil price volatility and risks from SOEs, documenting actions taken and providing recommendations on fiscal risk disclosure and management.
- The authorities are developing an early warning system to mitigate macroeconomic risks.
- The Ministry of Finance outlined key fiscal risks for the first time in 2023.

### C. Key Fiscal Risks — Oil Price Volatility
Findings and historical impacts:
- Volatility of oil prices is the major fiscal risk for Oman.
- Sharp declines in oil prices over the past decade resulted in sizable fiscal deficits of 20 percent and 16 percent of GDP in 2016 and 2020, respectively.
- Public sector indebtedness (central government and SOEs) surged by close to 80 percent of GDP during 2015-2020.

Downside oil price scenario (IMF staff calculation):
- The scenario assumes a one standard deviation decline in oil prices relative to current IMF World Economic Outlook assumptions, from 2023 to 2028, with no change in government spending, non-hydrocarbon revenue collections, or external borrowing relative to the baseline.
- Under the downside scenario:
  - Government Gross Debt (Percent of GDP): charted for 2020–2028 comparing Downside Scenario (-1 SD) and Baseline (exact time series preserved in source figures).
  - Fiscal Balance (Percent of GDP): charted for 2020–2027 showing moves into persistent deficits under the downside scenario.
- A one-standard-deviation decline in oil prices would turn overall fiscal balances from surpluses under the baseline to persistent deficits and revert gains achieved in rebuilding fiscal buffers.

Policy actions and mitigants pursued by authorities:
- Fiscal adjustment measures:
  - Rationalizing expenditure and mobilizing non-hydrocarbon revenue, including introduction of excises in 2019 and VAT in 2021.
  - Additional measures required to achieve MTFP objectives: comprehensive tax administration reform, introduction of PIT, and phasing out untargeted energy subsidies.
- Medium-term Fiscal Framework (MTFP):
  - 2023 budget used a conservative oil price assumption of $55 per barrel.
  - Authorities are working with IMF technical assistance to adopt a full-fledged and legally binding MTF with quantifiable fiscal targets and near- and medium-term aggregate expenditure ceilings.
- Fiscal buffers:
  - Annual transfers to the Petroleum Reserve Fund (PRF): oil revenue equivalent to the value of 20,000 barrels per day, on average, are transferred to the PRF each year.
  - As of end of 2022, central government deposits with domestic commercial banks = 14.4 percent of GDP; deposits with the Central Bank of Oman = 3.5 percent of GDP.
  - Oman Investment Authority (OIA) holds liquid assets amounting to about 10 percent of GDP.

### D. Key Fiscal Risks — State-Owned Enterprises (SOEs)
Findings and exposure:
- Realization of contingent liabilities from SOEs can be an important source of fiscal risk; liabilities can be explicit (government loan guarantees) or implicit (expectation of support).
- SOE debt evolution:
  - SOE debt increased from 16 percent in 2015 to 41 percent of GDP in 2021, before declining to 30 percent in 2022.
- Explicit government guarantees to SOEs reached 8 percent of GDP in 2022. Guarantees are extended to the development phase of SOE projects until the start of operations. To date, no guarantee has been called.
- Example of implicit fiscal support: COVID-19 impact on aviation — temporary support to Oman Air amounted to 0.3 percent of GDP in 2022; restructuring and refinancing operations were initiated.

Box 1 — Overview of State-Owned Enterprises (summarized)
- Institutional changes:
  - Oman Investment Authority (OIA) established in 2020 to manage sovereign financial assets and most state-owned companies; Energy Development Oman (EDO) established in 2020 to manage oil and gas exploration and renewable energy projects.
  - Government ownership in all non-financial SOEs previously overseen by the Ministry of Finance was transferred to OIA except for EDO.
  - OIA launched the Rawabet program to enhance SOE governance, efficiency, strategic priorities, and evaluation frameworks.
- SOE activity and spending:
  - Capital spending by SOEs (OIA-affiliated and EDO): 13.6 percent of GDP in 2021; 9.3 percent of GDP in 2022; projected at 8.2 percent of GDP in 2023.
  - Central government capital expenditure averaged 3 percent of GDP over the same period.
  - OIA’s strategy: stimulate private sector participation with OIA’s share in new projects limited to 40 percent; planned divestment of a few SOEs contributes to lower capital spending in 2023.
  - Capital spending is concentrated in energy and services sectors, accounting for approximately 90 percent of total capital spending during 2021-2023.
- SOE assets and liabilities (end of 2022):
  - SOE assets = about 31.4 percent of GDP.
  - SOE liabilities = 29.9 percent of GDP.
  - SOE debt is concentrated in a few entities: OQ (Oman Oil Company), Energy Development Oman, NAMA (Electricity Holding Company), Oman Air, Asyad’s Group, and Omantel — these represented 90 percent of total SOE debt in 2022.
  - Most SOE indebtedness is project-based financing.
  - Explicit government guarantees to SOEs = 8 percent of GDP in 2022.
- Financial performance:
  - For five out of the six SOEs representing 90 percent of total SOE debt in 2022, financial performance improved from 2021 to 2022, except for Oman Air.
  - These SOEs have relatively high leverage which declined in 2022; profitability and interest coverage ratios are strong; liquidity ratios (current assets/current liabilities) are relatively healthy.
  - Oman Air experienced major COVID-19 impacts and underwent a restructuring process led by OIA, including a recently completed refinancing operation.

### E. OIA Rawabet Program and SOE Reforms
Key actions under Rawabet mitigating SOE risks:
- Governance enhancements:
  - Restructuring SOE boards of directors and setting a cap of two terms for board membership.
  - Issuing a Code of Governance to improve performance and efficiency and align SOE objectives with sustainable development and Vision 2040.
- Accountability:
  - Boards’ KPIs covering financial sustainability, governance, in-country value, divestments, and other strategic initiatives; KPIs assessed by a certified external auditor appointed by OIA and approved by the Capital Market Authority.
- Risk management:
  - Quarterly risk-based monitoring of SOEs.
  - Annual risk assessments of SOE business plans and submission of risk registries with detailed assessments and mitigation plans.
  - Annual borrowing plans submitted to the Ministry of Finance’s Debt Management Office prior to any funding activity during the year.
- Deleveraging and divestment:
  - Deleveraging initiatives reduced SOE debt by about $10 billion during 2022-2023.
  - Divestment strategy aims to improve creditworthiness, foster operational efficiency, attract private strategic/financial partners, deepen the capital market, and contribute to the state budget.
  - Since 2020, 16 SOEs have been privatized and 5 partially divested.
  - The 2023 divestment plan approved by OIA Board consisted of divesting 8 companies through 3 IPOs and 5 trade sales.

### F. Public Sector Balance Sheet — Consolidated Position and Mitigants
- Oman’s multiple sovereign asset pools: OIA, PRF, and deposits in banks; liabilities include central government and SOE debt.
- Consolidated public sector simplified balance sheet (end of 2022, percent of GDP, IMF staff estimate):
  - Net assets (net financial assets) of 674 (-33) percent of GDP at end of 2022 (as estimated in source).
  - Net present value of hydrocarbon assets represented about 500 percent of GDP.
  - OIA’s assets (SOEs under management and liquid assets) accounted for about 40 percent of GDP.
  - Liabilities of about 88 percent of GDP composed largely of central government and SOE debt.

*Source: IMF staff note “Mitigating Fiscal Risks in Oman” (1. Overview of State-Owned Enterprises).*

### 8.      The authorities have embarked on reforms to improve institutions entrusted with

### 8.      The authorities have embarked on reforms to improve institutions entrusted with managing sovereign assets and liabilities.

### Reforms to institutional management of sovereign assets and liabilities
- OIA created to manage efficiently public enterprises and support the government in investing the fiscal surplus achieved from the hydrocarbon windfall.
- An integrated central system is being developed to take full account of government assets to maximize returns and enhance transparency of sovereign assets (including tangible assets, financial assets, oil and gas reserves, PPPs, real estate investments, and SOEs).
- Debt Management Committee established to coordinate sovereign debt issuance; scope expanded with oversight of sovereign assets and liabilities.
- Forthcoming Medium-Term Debt Strategy will help manage risk exposures arising from the government’s debt portfolio.
- Pension reform: unification of pension funds from 11 fragmented institutions into a unified entity to ensure medium- to long-term sustainability and to help arrest potential fiscal burden from fragmented pension schemes.

### Other fiscal risks — Global financial conditions and debt management
- Near-term refinancing and interest rate exposures:
  - About 12.5 percent of total debt matures in the next 12 months as of end-2023.
  - 84 percent of the total debt portfolio have a fixed rate.
  - Central government gross financing needs are projected below 1.0 percent of GDP on average over the period 2024-2028.
- Liability management actions in 2022–2023:
  - Liability management operations used hydrocarbon windfall to repay, prepay, and buyback part of external debt amounting to 7.2 percent of GDP in 2022 and 4.6 percent of GDP in 2023 to reduce future debt service costs and gross financing needs.
  - Debt provisions created since the 2021 budget, amounting to 0.5-0.8 percent of GDP annually to the Debt Reserve Account to meet future borrowing requirements.

### Public-Private Partnerships (PPPs)
- PPPs at an incipient stage; Public Private Partnership Law adopted in 2019.
- Ministry of Finance undertook PPP projects expected to address delivery challenges, optimize life cycle costs, bring private sector knowledge, and enhance efficiency and value for money in education, health, transport, and port sectors.
- PPP Unit (Ministry of Finance) preparing detailed policy measures to mitigate potential fiscal risks, including rights, obligations, and exposures under PPP contracts.
  - Every new PPP initiative must be approved by the Ministry of Finance before tendering.
  - Fiscal exposures, obligations and guarantees will be explicitly analyzed during project preparation (detailed project feasibility studies).
  - Government provides a comfort letter detailing budgeting approval process and budget allocations but does not provide any guarantees.

### Climate-related fiscal risks
- Exposure and historical impacts:
  - Change in number and intensity of tropical cyclones with 14 events since 2002.
  - Fiscal cost of cyclone Shaheen in 2021 was about 0.5 percent of GDP.
- Funding and support mechanisms:
  - National Fund for Emergency (NFE) established in 2022 with an initial contribution of 0.3 percent of GDP to tackle aftermath of tropical cyclone Shaheen and similar natural disasters.
  - NFE supported annually from State’s General Budget and donations from companies, associations, and philanthropists.
  - Authorities have access to funding support from the Green Climate Fund (GCF) covering six areas: water resources, agriculture, marine and fisheries, urban areas, health, and energy efficiency.

### Monetary policy transmission and financial conditions (summary of related analysis)
- Exchange rate peg and policy rate co-movement:
  - Since March 2022 Fed tightening cycle, CBO has followed Fed policy rate hikes closely to maintain the OMR-USD peg.
  - Policy rates increased by 550 basis points since the beginning of the current Fed tightening cycle.
- Weak passthrough into domestic rates and credit:
  - Interest rate passthrough in Oman weaker than GCC peers despite similar monetary frameworks.
  - Deposit and lending rates in Oman were almost flat year-on-year at end-2022; by contrast deposit rates rose by about 55 basis points over the past year in both Saudi Arabia and the United Arab Emirates and lending rates rose by 65 and 90 basis points, respectively.
  - FX lending accounts for about 15 percent of all loans; passthrough is driven by FX lending, while domestic-currency lending rates have marginally declined.
- Econometric findings:
  - For other GCC countries excluding Oman, a 100 bps Fed tightening correlates with a 34 bps increase in deposit rates and a 43 bps increase in lending rates after one year.
  - In Oman, there is no statistically significant increase in deposit rates and the impact on lending rates is half as large as in other GCC countries.
  - Private sector credit growth in Oman stands at about 7 percent (y-o-y) by end of 2023H1.
  - Passthrough from higher policy rates into credit quantities in Oman is statistically indistinguishable from zero; higher policy rates are on average not affecting credit growth.
- Structural contributors to weak transmission:
  - 6 percent interest rate cap on personal loans (personal loans are 40 percent of the market) limits passthrough.
  - Persistent excess liquidity and limited interbank market activity in the banking sector.
  - Effective lending rate passthrough has been concentrated in FX lending (about one-eighth of the market).

### Policy implications and recommendations
- Fiscal policy and buffers:
  - Press ahead with additional measures to mobilize non-hydrocarbon revenue and rationalize expenditure.
  - Utilize hydrocarbon windfalls to increase buffers and reduce debt burden.
  - Develop a full-fledge medium-term fiscal framework to entrench fiscal discipline and provide predictability of government expenditures.
- Fiscal risk analysis, management, and reporting:
  - Develop a comprehensive fiscal risk statement building on the summary of fiscal risks published in the 2023 budget; include sensitivity analysis and alternative macroeconomic and fiscal forecast scenarios.
  - Expand reporting coverage beyond central government to PPP and pension funds to raise awareness among policymakers and the public.
  - Disclose guarantees, related beneficiaries, expected duration, and intended purpose in the annual budget; disclose government rights, obligations, and other exposure under PPP contracts.
  - Enhance transparency of allocations for contingencies by publishing criteria for charging expenditures to the contingency reserve and reporting on the use of contingency appropriations for the previous fiscal year.
- Sovereign asset and liability management:
  - Develop a sovereign asset and liability framework consolidating what the public sector owns and owes; framework should set financial objectives and procedures for managing cost/risk trade-offs.
  - Continue OIA’s divestment process and disclose key financial performance metrics of SOEs; OIA’s privatization efforts welcome to stimulate private sector participation.
- Risk mitigation strategies and prioritization:
  - Develop strategies for the management and mitigation of key fiscal risks (including budget allocations and limits on exposure to specific risk types).
  - Strike a balance between reducing exposure to risks and the probability and costs of mitigation; specify conditions under which government accepts risks and instruments to manage risks.
  - Prioritize phased withdrawal of untargeted energy subsidies, including lifting the fuel cap and resuming reforms through the authorities’ targeted National Subsidy System.
  - Develop a multilayer strategy for the use of additional revenue from high global oil prices: reducing public debt, accumulating fiscal buffers, or accelerating economic diversification.
- Long-term sustainability and resource valuation:
  - Incorporate long-term sustainability analysis into fiscal risk management given reliance on finite natural resources; estimate value of natural resource assets to assess public debt sustainability under different price scenarios.
- Climate-related fiscal risk management:
  - Identify and disclose main fiscal risks from climate-related events and Oman’s climate agenda in both qualitative and quantitative terms.
  - Account for direct impacts (repairing infrastructure, social transfers), indirect impacts (disruption of economic activity and tax revenue), contingent liabilities affecting SOEs and private institutions, and fiscal costs from implementing NDC adaptation and mitigation actions.
- Coordination:
  - Strengthen coordination of decision making between central government and other parts of the public sector; National Committee has nominated representatives from MoF, MoE, NCSI, CBO, and OIA to coordinate identification, analysis, monitoring, and mitigation of fiscal risks.

*Source: IMF staff summary of Chapter 8 (1omnea2024002).*

### 6. The authorities need to continue ongoing efforts to enhance liquidity management

### 6. The authorities need to continue ongoing efforts to enhance liquidity management

### Liquidity management shortcomings and objectives
- Building on better liquidity forecasting, the CBO toolkit to absorb excess liquidity needs to be expanded.
- Excess liquidity has persisted and "higher policy rates have not passed through into lending rates."
- Ongoing efforts should aim to put in place a full liquidity management framework to support effective liquidity allocation and encourage interbank market activity.

### Specific instrument and operational recommendations
- Prepare the resumption of issuance of certificates of deposit which have not been used since 2015.
- Introduce further liquidity instruments for Islamic banks.
- Test the planned Call Money Market and Deposit Facility as initial steps toward a full liquidity management framework.
- Set the stage for the conduct of open market operations to better allocate liquidity and encourage interbank market activity.

### Reserve requirements and eligible assets
- Modify the reserve maintenance period for required reserves to begin on a weekday to facilitate better liquidity management and pave the way towards conducting open market operations.
- Remove the current regulation that the reserve requirement can partially be met with sovereign bond (up to 2 percent).
- Reducing the number of reserve eligible assets would contribute towards tightening liquidity.

### Monetary policy transmission and banking sector measures
- Further measures to strengthen passthrough include relaxing the interest rate cap and maintaining healthy banking competition.
- Relaxing the interest rate cap on personal loans would ensure banks can adequately reflect related credit risk and maintain margins.
- Amid ongoing banking sector consolidation, it is crucial to maintain competition in the banking sector to support increased interest rate passthrough and access to credit for riskier borrowers, including SMEs.
- Banks continue to miss the target of 5 percent of lending to SMEs.

*Source: IMF — 6. The authorities need to continue ongoing efforts to enhance liquidity management (1omnea2024002).*

### Box 1. Fintech in Oman

### Box 1. Fintech in Oman

### Overview
- Fintech has been growing rapidly around the world, driven by increased connectivity, rapid advances in Internet penetration, and the rapidly declining cost of computing power (World Bank, 2022).
- Oman has a young and digitally savvy population: "24 percent of the population are between 15 and 29 years old."
- High Internet and smartphone penetration in Oman satisfy important prerequisites for developing fintech.

### Fintech Regulatory Sandbox
- The CBO’s Fintech Regulatory Sandbox launched in December 2020.
- Three cohorts have started with a focus on:
  - digital wallets,
  - blockchain technology for trade finance,
  - alternative financing methods.
- The next cohort in 2024 will work on open banking solutions.
- Recommendation: dedicating one cohort to SME financing solutions could foster innovation in a market segment that has been traditionally underserved by the domestic banking sector.

### Access to Capital, Human Capital, and Market Development
- Facilitating access to capital, setting regulatory frameworks, and fostering human capital will create conditions for Fintech growth and facilitate industry-led approaches.
- Recent education initiatives include the creation of a dedicated Fintech certificate in higher education; these initiatives "will need to continue to develop sector-specific human capital at the intersection of finance and computer science."
- Financial sector development supporting fintech:
  - More liquid equity markets with more IPOs will be important to provide exit options to fintech founders and their investors.
  - In combination with private initiatives and increased OIA funding for venture capital, this can contribute to growing Oman’s small venture capital sector.
- Industry figures report: a total of 11 venture capital deals for a total volume of $3.5 million for Oman in 2022 relative to $907 million in Saudi Arabia, $36 million in Qatar, and $26 million in Jordan.

### Regulatory and Supervisory Considerations
- Authorities need to ensure adequate regulatory and supervisory frameworks are in place to:
  - foster financial innovation,
  - ensure customer financial protection,
  - safeguard financial stability in the wake of potentially disruptive financial innovation.
- The government can provide guardrails (regulatory and legal frameworks), but successful Fintech development will ultimately hinge on private sector initiatives.

### Role in SME Financing and Financial Inclusion
- Fintech can complement other measures to improve SME access to finance by providing alternative financing solutions and enhancing financial inclusion for firms without access to the conventional banking system.
- Examples of Fintech solutions relevant for SME funding (from related discussion in the source): equity-based crowdfunding, peer-to-peer business lending, and invoice lending.

*Source: Box 1. Fintech in Oman, from the provided IMF content unit.*

### 1. Oman has made significant strides in advancing economic development and improving

### 1omnea2024002 - 1. Oman has made significant strides in advancing economic development and improving

### Economic context and stylized facts
- Average GDP per capita:
  - $7,700 in the 1990s
  - $14,800 in the 2000s
  - $20,700 in the 2010s
- Hydrocarbon sector:
  - Share of hydrocarbon exports in total exports: about 65 percent
  - Hydrocarbon activities constituted more than 37 percent of total output in 2022
- Productivity and labor market:
  - Productivity trends have been declining, reflecting a largely segmented labor market
  - Wage differential between public and private sectors distorts incentives, especially in mid- to low-skill jobs
  - Negative contributions of TFP to potential nonhydrocarbon growth
- Nonhydrocarbon growth drivers and volatility:
  - Nonhydrocarbon real GDP growth strongly correlated with government spending
  - Government investment supports nonhydrocarbon activities mainly through construction and infrastructure; wages and subsidies stimulate aggregate demand
  - Nonhydrocarbon growth exhibits high oil price-driven volatility
- Investment and FDI:
  - Gross capital investment has declined in recent years
  - FDI inflows surged in 2018 and have remained elevated since
  - More than half of total FDI was directed toward the oil and gas sector in 2021 (NCSI 2022)
  - Nonhydrocarbon investment is volatile and highly concentrated in non-tradable activities (construction and services)

### Analytical approach to potential growth and productivity
- Potential nonhydrocarbon GDP estimation:
  - Based on the Cobb-Douglas production function approach with constant labor share
  - Potential output decomposed into capital, labor, and total factor productivity (TFP)
  - Nonhydrocarbon capital estimated via the perpetual inventory method, with initial capital stock increasing with nonhydrocarbon capital formation while accounting for depreciation
- Empirical method for reform impact:
  - Local projections method using panel data for 53 advanced and emerging market economies over 2000–19
  - Analysis of individual reform impacts, packaging (simultaneous implementation), and sequencing (conditional implementation)

### Quantified impacts of structural reforms on TFP
- Short-term impulse response estimates (cumulative impact on TFP from a one-percent increase in the structural indicator):
  - Institutional reforms: TFP increases by 0.8 percent two years after a one-percent improvement in institutional quality
  - Reducing the state footprint: TFP increases by about 0.5 percent two years after a one-percent improvement
  - Product market reforms: TFP increases by about 0.2 percent two years after a one-percent improvement
  - Financial sector and labor market reforms: on average, appear elusive in the short and medium term under the baseline specification
- Medium-term and scenario estimates:
  - If Oman reduces institutional, state footprint, and product market gaps relative to the advanced economy average by half, TFP would increase by 3.6 percent, on average, four years after reform efforts
  - Implementing institutional reforms would lift productivity by more than 8.5 percent cumulatively over the medium term
  - Packaging institutional quality, state footprint reduction, and product market reforms simultaneously to close gaps vis-à-vis advanced economies by 50 percent yields productivity gains of about 5 percent over the medium term
- Sequencing effects:
  - Baseline: labor market and financial sector reforms yield insignificant gains when implemented without prior progress in institutional quality, state footprint, and product markets
  - Conditioning on prior progress (countries that have achieved higher scores than Oman in institutional quality, state footprint, and product markets): labor market and financial sector reforms yield higher and more significant TFP gains

### Key constraints and reform gaps
- Structural reform progress:
  - Limited progress over the past two decades; sizable reform gaps remain vis-à-vis peers and advanced economies
  - Improvements noted in product market and financial sector areas, largely via business deregulation and banking sector development
  - Worsening performance in labor markets and institutional quality, reflecting declines in labor market flexibility and government effectiveness
- Institutional shortfalls:
  - Oman lags peers on government effectiveness, control of corruption, and regulatory quality
  - Institutional weaknesses undermine ability to attract diversified FDI, improve productivity, and support nonhydrocarbon growth
- Sectoral composition and rent-seeking:
  - Nonhydrocarbon investment concentrated in labor-intensive, low-productivity sectors, reflecting rent-seeking dynamics in the labor market

### Policy recommendations and sequencing priorities
- Overarching strategy:
  - Strategically package and sequence structural reforms to maximize short-term and medium-term productivity gains
  - Prioritize reforms that enhance institutional quality, reduce the state footprint, and improve the business environment as prerequisites for broader reform success
- Institutional reforms (priority):
  - Strengthen regulatory quality and government effectiveness
  - Enhance transparency and improve management and implementation procedures of public procurement
  - Enforce transparency and accountability in public institutions
  - Reduce size of public sector and improve civil service skillsets
  - Leverage digitalization in public service delivery
- State footprint and public sector role:
  - Limit government involvement in the economy while supporting private sector-led growth
  - Improve efficiency of government spending and limit government size
  - Continue divestment efforts by the Oman Investment Authority (OIA) and efforts to attract private domestic and foreign investment
  - Expand private sector role to level the playing field between public and private sector wages and benefits
- Product market reforms:
  - Continue improvements in business environment and deregulation
  - Further enhance product market competition and streamline administrative and regulatory requirements, including export and import procedures
  - Promote investment in R&D to boost competitiveness and productivity in the nonhydrocarbon tradable sector
  - Bundle product market reforms with institutional and state footprint reforms to amplify impacts
- Sequencing guidance:
  - Implement institutional, state footprint, and product market reforms first to build capacity and confidence
  - After sufficient progress in those areas, implement labor market and financial sector reforms to secure larger and more durable productivity gains

*Prepared by Haytem Troug and Muayad Ismail — IMF staff analysis as presented in the chapter.*

### 18. Labor market reforms are crucial to lifting productivity and supporting Oman’s

### 18. Labor market reforms are crucial to lifting productivity and supporting Oman’s

### Labor market reforms: findings
- Oman’s labor market is fragmented across different dimensions, and reforms would unleash untapped potential in the Omani economy.
- Recently approved social protection and labor laws are expected to contribute to improving labor market flexibility, competition, and mobility.
- Enhancing mobility-enabling policies, particularly for expatriate workers, would facilitate sectoral reallocation that supports economic diversification and promotes structural transformation toward a knowledge-based economy.
- Improving labor mobility would:
  - Trigger market incentives (promotions and higher wages) across the labor market.
  - Improve competition between Omanis and expatriate workers.
  - Incentivize upskilling and attract more mid to high-skilled expatriate workers, leading to higher productivity gains.
- Continued efforts to improve the quality of education would help address skills mismatches and encourage young Omanis to pursue technology and science-related majors with positive implications for productivity.
- The new labor and social protection laws include provisions that support female labor force participation, such as aligning maternity leave with international standards and introducing paternity leave.
- Further measures to increase female labor force participation include:
  - Promoting more women to senior managerial positions.
  - Institutionalizing flexible work arrangements.

### Labor market: policy recommendations
- Strengthen mobility-enabling policies for expatriate workers to facilitate sectoral reallocation and structural transformation.
- Promote upskilling and education quality improvements, with emphasis on technology and science-related majors.
- Implement targeted policies to increase female labor force participation, including pathways to senior management and formal flexible work arrangements.
- Ensure that reforms to labor market flexibility are complemented by measures to support affected workers during transition.

### Financial markets and credit: findings
- Deepening financial markets and enhancing credit options would facilitate lifting productivity, particularly if preceded by other structural reforms.
- Credit in Oman is concentrated on public sector employees and a limited number of big entities.
- Implementing the Estidamah reform agenda—including strengthening the role of financial institutions, developing financing products, and strengthening financial inclusion—is expected to enhance credit for small and medium enterprises.
- Targeted financing schemes (such as Oman Development Bank financing) should be limited to viable small and medium enterprises.
- Fiscal consolidation efforts and state-owned enterprise divestment plans are expected to reduce the government’s crowding-out effects, thereby:
  - Boosting liquidity in the banking sector.
  - Enhancing lending opportunities for private firms.
- Ongoing efforts to develop financial markets are expected to promote alternative financing sources.

### Financial sector: policy recommendations
- Sequence financial sector deepening after key structural reforms to maximize productivity gains.
- Limit targeted financing schemes to viable small and medium enterprises.
- Pursue fiscal consolidation and state-owned enterprise divestments to reduce crowding out and increase private sector lending.
- Promote development of alternative financing sources and financial inclusion as part of the Estidamah reform agenda.

### Structural reform indicators: construction and components
- Five structural indices are constructed to identify main drivers of TFP and measure Oman’s position versus other economies over the period 2000–20.
- Indices and construction method:
  - For each dimension, standardize each sub-indicator to vary between zero and one, take their unweighted average, and scale the score to 100; a higher value shows favorable conditions for TFP.
  - Data sources: World Development Indicators, UNCTAD database, and the Fraser Institute’s database covering 2000–20.
- The five dimensions and their sub-indicators:
  - State footprint index:
    - (1) government consumption as percent of total consumption
    - (2) government investment as percent of total investment
    - (3) the size of state-owned enterprises in the economy
    - Interpretation: higher government involvement is assigned lower scores due to negative relationship with TFP.
  - Institutions index:
    - UNCTAD’s institution index incorporating the six Worldwide Governance Indicators: Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption.
    - Interpretation: higher institutional quality associated with higher TFP and investment.
  - Product market index:
    - (1) nontariff trade barriers
    - (2) administrative requirements
    - (3) regulatory burden
    - Interpretation: less cumbersome business environment correlates with higher TFP.
  - Labor market index:
    - Hiring/firing regulations
    - Centralized collective bargaining
    - Human capital
    - Interpretation: removing labor market rigidities and improving human capital increases TFP despite potential short-term losses.
  - Financial sector index:
    - (1) net credit to the private sector*
    - (2) stock market capitalization
    - (3) foreign bank assets among total assets
    - Interpretation: captures crowding out from government borrowing, availability of alternative financing sources, and competition in the banking sector.
- Footnote: Net credit to the private sector is defined as credit to the private sector net of credit to government.

### Estimation methodology: Local Projections and scenarios
- Empirical approach:
  - Use Local Projections (LP) following Jordà (2005) to accommodate panel structure and allow flexible impulse response functions.
  - Data: 53 advanced and emerging market developing economies over the period 2000–19.
  - Baseline specification: TFP_{i,t+h} = α_{i,h} + δ_h SSS_{i,t−1} + β X_{i,t−1} + ε_{i,t+h}, where:
    - TFP is in log form.
    - SSS represents structural reform indicators.
    - h = 1, 2, ...5.
    - X includes lagged private investment, total factor productivity, real GDP growth, and human capital index.
    - Country fixed effects α_{i,h} control for country-specific heterogeneity.
  - Impulse response functions (IRFs) are based on estimates of δ_h at each horizon.
  - Robust standard errors use the Huber-White sandwich estimator.
  - Shocks are presented in percentage terms; the standard shock reflects a 1 percent increase in SSS.
- Sequencing estimation:
  - Introduce state dependency to compare IRFs of labor market and financial sector reforms conditional on the state of institutions, state footprint, and product market reform indicators relative to baseline.
  - Specification includes a binary variable ϑ_{i,t}^j equal to 1 when the values of institutions, state footprint, and product market are above the 70th percentile of the sample; this reflects how additional reforms in these areas could affect labor market and financial sector reforms.
  - Interpretation: larger IRFs of labor market and financial sector reforms in the sequencing scenario relative to baseline imply that improving institutional quality, rationalizing state footprint, and product market reforms should be prioritized.
- Packaging scenario:
  - Examine whether bundling reforms in institutions, state footprint, and product market together would yield larger productivity gains than implementing them in isolation.
  - The reform package is calculated as the simple average of the institutions, state footprint, and product market reform indices.
- Robustness:
  - Panel VAR results are broadly in line with the LP baseline results.

### Key quantitative details and sample definitions
- Data coverage for structural indices: 2000–20.
- Estimation sample for LPs: 53 advanced and emerging market developing economies over 2000–19.
- Time horizon considered in LPs: h = 1, 2, ...5.
- Sequencing threshold: above the 70th percentile of the sample.
- Standard shock magnitude: 1 percent increase in structural reform indicator.

*Source: Staff Illustration.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1omnea2024002.pdf_