## sipea2024020 - 1. Oman has made significant strides in advancing economic development and improving living

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---

### Overview and context
- Supported by large hydrocarbon production and favorable oil prices, average GDP per capita in Oman increased from $7,700 in the 1990s to $14,800 in the 2000s and further to $20,700 in the 2010s.
- The hydrocarbon sector continues to dominate economic activity:
  - The share of hydrocarbon exports in total exports remains about 65 percent.
  - Hydrocarbon activities constituted more than 37 percent of total output in 2022.
- Nonhydrocarbon activities remain subject to fluctuations in oil prices and are hampered by low productivity and a largely segmented labor market.

### Stylized facts on nonhydrocarbon performance
- Nonhydrocarbon real GDP growth has been strongly correlated with government spending and exhibited high oil price-driven volatility.
  - Government expenditures (investment, wages, subsidies) have been the main engine of nonhydrocarbon growth, with government investment directly supporting construction and infrastructure projects.
  - Nonhydrocarbon growth is exposed to oil-price volatility through government spending, underscoring the need for private sector-led growth to strengthen resilience.
- Potential nonhydrocarbon growth has slowed, driven primarily by declining productivity and subdued trend employment growth.
  - Total Factor Productivity (TFP) growth has generally declined since the global financial crisis.
  - The labor market remains segmented, with higher wages, benefits, and job security in the public sector relative to the private sector; this wage differential has distorted incentives, particularly for mid- to low-skill jobs, contributing to negative contributions of TFP to potential nonhydrocarbon growth.
  - Potential nonhydrocarbon GDP has been driven more by factor accumulation than productivity improvements.
- Investment trends:
  - Gross capital investment in Oman has declined in recent years.
  - Foreign direct investment (FDI) inflows surged in 2018 and have remained elevated since.
  - Nonhydrocarbon investment has been volatile and highly concentrated in non-tradable, labor-intensive activities (construction and services), limiting the scope for capital-intensive investment.
  - More than half of total FDI was still directed toward the oil and gas sector in 2021 (NCSI 2022).

### Role of structural reforms — empirical findings
- Cross-country local projections (panel of 53 advanced and emerging market economies, 2000–19) were used to quantify productivity effects of structural reform improvements.
- Short- and medium-term impacts on TFP from a one-percent increase in structural indicators (baseline specification):
  - Institutional quality: TFP is estimated to increase by 0.8 percent two years after a one-percent improvement in institutional quality.
  - Reducing state footprint: productivity gains of about 0.5 percent two years after a one-percent improvement.
  - Product market reforms: productivity gains of about 0.2 percent two years after a one-percent improvement.
  - Financial sector and labor market reforms: on average, gains appear elusive in the short and medium term under the baseline, indicating a need for proper reform sequencing.
- Quantified scenarios for Oman:
  - If Oman reduced its existing 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 alone would lift productivity by more than 8.5 percent cumulatively over the medium term, reflecting large potential gains from strengthening regulatory quality, control of corruption, and government effectiveness.
  - Packaging (simultaneous implementation) of institutional quality, state footprint reduction, and product market regulation improvements that close gaps vis-à-vis advanced economies by 50 percent each would yield productivity gains of about 5 percent over the medium term — larger than the simple sum of individual reform gains.
- Sequencing effects:
  - Labor market and financial sector reforms yield higher and more significant productivity gains when implemented after sufficient progress in institutional quality, state footprint, and product markets.
  - Baseline gains from labor market and financial sector reforms are insignificant without prior progress in those prerequisite areas.

### Key policy recommendations
- Strategic packaging and sequencing:
  - Package and sequence structural reforms to maximize short-term and medium-term productivity gains; institutional quality, state footprint reduction, and business environment improvements are prerequisites to unlock larger gains from subsequent reforms.
- Improve institutional quality:
  - Prioritize strengthening regulatory quality and government effectiveness.
  - Enhance transparency and management of public procurement.
  - Enforce greater transparency and accountability in public institutions.
  - Reduce the size of the public sector and improve civil servant skillsets.
  - Leverage digitalization in public service provision to improve institutional quality and productivity.
- Rationalize government role and support private sector-led growth:
  - Further limit government involvement in the economy while improving efficiency of government spending and limiting its size.
  - Ongoing divestment efforts by the Oman Investment Authority (OIA) and measures to attract private domestic and foreign investment are expected to reduce the public sector footprint and enhance productivity.
  - Expanding the private sector role can help level public-private wage differentials and incentivize Omanis to work in the private sector, with positive productivity implications—particularly when followed by labor market reforms.
- Advance product market reforms to amplify other reforms:
  - Continue improving the business environment (simplified start-up procedures, relaxation of foreign ownership restrictions, improved permits processes).
  - Further enhance product market competition, streamline administrative and regulatory requirements (including export and import procedures), and promote investment in R&D.
  - Bundling product market reforms with institutional and state footprint reforms will create an enabling environment that boosts the impact of other reform measures.

*Source: IMF staff analysis in "sipea2024020 - 1. Oman has made significant strides in advancing economic development and improving living" (PDF).*

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

### Key findings on labor market reforms
- Oman’s labor market is fragmented across different dimensions; 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.
- Further 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;
  - lead 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.
- Additional measures to increase female labor force participation include promoting more women to senior managerial positions and institutionalizing flexible work arrangements.

### Policy recommendations on labor market
- Enhance mobility-enabling policies for expatriate workers to facilitate sectoral reallocation and structural transformation.
- Strengthen incentives for upskilling to attract mid to high-skilled expatriate workers and raise productivity.
- Improve the quality of education to reduce skills mismatches and promote technology and science-related fields among young Omanis.
- Promote female labor force participation via:
  - promotion of women to senior managerial positions;
  - institutionalizing flexible work arrangements.

### Financial sector 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—strengthening the role of financial institutions in the economy, developing financing products, and strengthening financial inclusion—is expected to enhance credit, particularly for small and medium enterprises (SMEs).
- Targeted financing schemes (such as Oman Development Bank financing) should be limited to viable SMEs.
- 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 and enhancing lending opportunities for private firms.
- Ongoing efforts to develop financial markets are expected to promote alternative financing sources.

### Structural indicators: construction and components
- Five structural indices are constructed to identify main drivers of TFP and measure Oman’s position versus other economies: state footprint, institutions, product market, labor market, and financial sector development.
- Construction method:
  - Each sub-indicator is standardized to vary between zero and one.
  - Take unweighted average across sub-indicators for each dimension.
  - Scale the score to 100, with a higher value showing favorable conditions for TFP.
  - Data sources: World Development Indicators, the UNCTAD database, and the Fraser Institute’s database covering the period 2000–20.
- Index components:
  - State footprint index: government consumption as percent of total consumption; government investment as percent of total investment; size of state-owned enterprises in the economy.
  - Institutions index: UNCTAD’s institution index including the six Worldwide Governance Indicators (Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption).
  - Product market index: nontariff trade barriers; administrative requirements; regulatory burden.
  - Labor market index: hiring/firing regulations; centralized collective bargaining; human capital (captures labor market flexibility and quality of labor inputs).
  - Financial sector index: net credit to the private sector*; stock market capitalization; foreign bank assets among total assets.
    - Footnote: Net credit to the private sector is defined as credit to the private sector net of credit to government.

### Empirical approach: Local Projections (LP) and scenarios
- Baseline LP specification (panel of 53 advanced and emerging market developing economies over the period 2000–19):
  - Dependent variable: log form of total factor productivity (TFP).
  - Structural reform indicator 푆푆푆푆 represents reforms; shocks are presented in percentage terms, where the standard shock reflects a 1 percent increase in 푆푆푆푆.
  - Control lagged variables 푋푋 include private investment, total factor productivity, real GDP growth, and human capital index.
  - Country fixed effects 훼훼푖,ℎ included.
  - Time horizon ℎ = 1, 2, ...5; impulse response functions (IRFs) based on estimates of 훿훿ℎ coefficients; robust standard errors via Huber-White sandwich estimator.
- Sequencing estimation:
  - Introduces state dependency following El Herradi and Leroy (2021) and Ramey and Zubairy (2018).
  - Compares IRFs of labor market and financial sector reforms conditional on the state of institutions, state footprint, and product market reform indicators relative to baseline.
  - Binary variable 휗휗푖푡푗 equals 1 when values of institutions, state footprint, and product market are above the 70th percentile of the sample.
  - Larger impulse responses in sequencing relative to baseline imply that improving institutional quality, rationalizing state footprint, and product market reforms should be prioritized ahead of other reforms.
- Packaging scenario:
  - Examines whether bundling reforms on institutions, state footprint, and product market together yields larger productivity gains than implementing these reforms in isolation.
  - Reform package is calculated as the simple average of the institutions, state footprint, and product market reform indices.
- Note: Panel VAR results are broadly in line with the LP baseline results.

*Source: IMF staff (sipea2024020 - 18. Labor market reforms are crucial to lifting productivity and supporting Oman’s development).*

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

### sipea2024020 - 1. Oman has made significant strides in advancing economic development and improving living

### Overview and context
- Supported by large hydrocarbon production and favorable oil prices, average GDP per capita in Oman increased from $7,700 in the 1990s to $14,800 in the 2000s and further to $20,700 in the 2010s.
- The hydrocarbon sector continues to dominate economic activity:
  - The share of hydrocarbon exports in total exports remains about 65 percent.
  - Hydrocarbon activities constituted more than 37 percent of total output in 2022.
- Nonhydrocarbon activities remain subject to fluctuations in oil prices and are hampered by low productivity and a largely segmented labor market.

### Stylized facts on nonhydrocarbon performance
- Nonhydrocarbon real GDP growth has been strongly correlated with government spending and exhibited high oil price-driven volatility.
  - Government expenditures (investment, wages, subsidies) have been the main engine of nonhydrocarbon growth, with government investment directly supporting construction and infrastructure projects.
  - Nonhydrocarbon growth is exposed to oil-price volatility through government spending, underscoring the need for private sector-led growth to strengthen resilience.
- Potential nonhydrocarbon growth has slowed, driven primarily by declining productivity and subdued trend employment growth.
  - Total Factor Productivity (TFP) growth has generally declined since the global financial crisis.
  - The labor market remains segmented, with higher wages, benefits, and job security in the public sector relative to the private sector; this wage differential has distorted incentives, particularly for mid- to low-skill jobs, contributing to negative contributions of TFP to potential nonhydrocarbon growth.
  - Potential nonhydrocarbon GDP has been driven more by factor accumulation than productivity improvements.
- Investment trends:
  - Gross capital investment in Oman has declined in recent years.
  - Foreign direct investment (FDI) inflows surged in 2018 and have remained elevated since.
  - Nonhydrocarbon investment has been volatile and highly concentrated in non-tradable, labor-intensive activities (construction and services), limiting the scope for capital-intensive investment.
  - More than half of total FDI was still directed toward the oil and gas sector in 2021 (NCSI 2022).

### Role of structural reforms — empirical findings
- Cross-country local projections (panel of 53 advanced and emerging market economies, 2000–19) were used to quantify productivity effects of structural reform improvements.
- Short- and medium-term impacts on TFP from a one-percent increase in structural indicators (baseline specification):
  - Institutional quality: TFP is estimated to increase by 0.8 percent two years after a one-percent improvement in institutional quality.
  - Reducing state footprint: productivity gains of about 0.5 percent two years after a one-percent improvement.
  - Product market reforms: productivity gains of about 0.2 percent two years after a one-percent improvement.
  - Financial sector and labor market reforms: on average, gains appear elusive in the short and medium term under the baseline, indicating a need for proper reform sequencing.
- Quantified scenarios for Oman:
  - If Oman reduced its existing 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 alone would lift productivity by more than 8.5 percent cumulatively over the medium term, reflecting large potential gains from strengthening regulatory quality, control of corruption, and government effectiveness.
  - Packaging (simultaneous implementation) of institutional quality, state footprint reduction, and product market regulation improvements that close gaps vis-à-vis advanced economies by 50 percent each would yield productivity gains of about 5 percent over the medium term — larger than the simple sum of individual reform gains.
- Sequencing effects:
  - Labor market and financial sector reforms yield higher and more significant productivity gains when implemented after sufficient progress in institutional quality, state footprint, and product markets.
  - Baseline gains from labor market and financial sector reforms are insignificant without prior progress in those prerequisite areas.

### Key policy recommendations
- Strategic packaging and sequencing:
  - Package and sequence structural reforms to maximize short-term and medium-term productivity gains; institutional quality, state footprint reduction, and business environment improvements are prerequisites to unlock larger gains from subsequent reforms.
- Improve institutional quality:
  - Prioritize strengthening regulatory quality and government effectiveness.
  - Enhance transparency and management of public procurement.
  - Enforce greater transparency and accountability in public institutions.
  - Reduce the size of the public sector and improve civil servant skillsets.
  - Leverage digitalization in public service provision to improve institutional quality and productivity.
- Rationalize government role and support private sector-led growth:
  - Further limit government involvement in the economy while improving efficiency of government spending and limiting its size.
  - Ongoing divestment efforts by the Oman Investment Authority (OIA) and measures to attract private domestic and foreign investment are expected to reduce the public sector footprint and enhance productivity.
  - Expanding the private sector role can help level public-private wage differentials and incentivize Omanis to work in the private sector, with positive productivity implications—particularly when followed by labor market reforms.
- Advance product market reforms to amplify other reforms:
  - Continue improving the business environment (simplified start-up procedures, relaxation of foreign ownership restrictions, improved permits processes).
  - Further enhance product market competition, streamline administrative and regulatory requirements (including export and import procedures), and promote investment in R&D.
  - Bundling product market reforms with institutional and state footprint reforms will create an enabling environment that boosts the impact of other reform measures.

*Source: IMF staff analysis in "sipea2024020 - 1. Oman has made significant strides in advancing economic development and improving living" (PDF).*

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

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

### Key findings on labor market reforms
- Oman’s labor market is fragmented across different dimensions; 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.
- Further 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;
  - lead 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.
- Additional measures to increase female labor force participation include promoting more women to senior managerial positions and institutionalizing flexible work arrangements.

### Policy recommendations on labor market
- Enhance mobility-enabling policies for expatriate workers to facilitate sectoral reallocation and structural transformation.
- Strengthen incentives for upskilling to attract mid to high-skilled expatriate workers and raise productivity.
- Improve the quality of education to reduce skills mismatches and promote technology and science-related fields among young Omanis.
- Promote female labor force participation via:
  - promotion of women to senior managerial positions;
  - institutionalizing flexible work arrangements.

### Financial sector 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—strengthening the role of financial institutions in the economy, developing financing products, and strengthening financial inclusion—is expected to enhance credit, particularly for small and medium enterprises (SMEs).
- Targeted financing schemes (such as Oman Development Bank financing) should be limited to viable SMEs.
- 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 and enhancing lending opportunities for private firms.
- Ongoing efforts to develop financial markets are expected to promote alternative financing sources.

### Structural indicators: construction and components
- Five structural indices are constructed to identify main drivers of TFP and measure Oman’s position versus other economies: state footprint, institutions, product market, labor market, and financial sector development.
- Construction method:
  - Each sub-indicator is standardized to vary between zero and one.
  - Take unweighted average across sub-indicators for each dimension.
  - Scale the score to 100, with a higher value showing favorable conditions for TFP.
  - Data sources: World Development Indicators, the UNCTAD database, and the Fraser Institute’s database covering the period 2000–20.
- Index components:
  - State footprint index: government consumption as percent of total consumption; government investment as percent of total investment; size of state-owned enterprises in the economy.
  - Institutions index: UNCTAD’s institution index including the six Worldwide Governance Indicators (Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption).
  - Product market index: nontariff trade barriers; administrative requirements; regulatory burden.
  - Labor market index: hiring/firing regulations; centralized collective bargaining; human capital (captures labor market flexibility and quality of labor inputs).
  - Financial sector index: net credit to the private sector*; stock market capitalization; foreign bank assets among total assets.
    - Footnote: Net credit to the private sector is defined as credit to the private sector net of credit to government.

### Empirical approach: Local Projections (LP) and scenarios
- Baseline LP specification (panel of 53 advanced and emerging market developing economies over the period 2000–19):
  - Dependent variable: log form of total factor productivity (TFP).
  - Structural reform indicator 푆푆푆푆 represents reforms; shocks are presented in percentage terms, where the standard shock reflects a 1 percent increase in 푆푆푆푆.
  - Control lagged variables 푋푋 include private investment, total factor productivity, real GDP growth, and human capital index.
  - Country fixed effects 훼훼푖,ℎ included.
  - Time horizon ℎ = 1, 2, ...5; impulse response functions (IRFs) based on estimates of 훿훿ℎ coefficients; robust standard errors via Huber-White sandwich estimator.
- Sequencing estimation:
  - Introduces state dependency following El Herradi and Leroy (2021) and Ramey and Zubairy (2018).
  - Compares IRFs of labor market and financial sector reforms conditional on the state of institutions, state footprint, and product market reform indicators relative to baseline.
  - Binary variable 휗휗푖푡푗 equals 1 when values of institutions, state footprint, and product market are above the 70th percentile of the sample.
  - Larger impulse responses in sequencing relative to baseline imply that improving institutional quality, rationalizing state footprint, and product market reforms should be prioritized ahead of other reforms.
- Packaging scenario:
  - Examines whether bundling reforms on institutions, state footprint, and product market together yields larger productivity gains than implementing these reforms in isolation.
  - Reform package is calculated as the simple average of the institutions, state footprint, and product market reform indices.
- Note: Panel VAR results are broadly in line with the LP baseline results.

*Source: IMF staff (sipea2024020 - 18. Labor market reforms are crucial to lifting productivity and supporting Oman’s development).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024020.pdf_