Public Information Notice No. 10/21

Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Oman

February 17, 2010

On February 8, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Oman on a lapse of time basis.¹

Background

Oman was able to weather the global crisis with a limited impact due to its strong past performance and economic management. During the last decade, Oman improved its macroeconomic fundamentals, boosted significantly the balance sheet of the government, strengthened the supervisory and regulatory frameworks, and advanced its economic diversification program. Against this backdrop, the economy performed strongly in 2008—owing to high oil prices and despite global turmoil—and continued to do well in 2009.

In 2009, the decline in Oman’s terms of trade and reduced confidence led to a slowdown in non-hydrocarbon growth to 2 percent. With growth in the hydrocarbon sector estimated at 6½ percent, overall growth is estimated at about 3½ percent. Inflation declined to about 3½ percent, owing primarily to falling import prices and weaker domestic demand. Despite a significant decline in imports, lower exports resulted in a current account deficit of about 2 percent of GDP.

Recovering oil prices created room for higher spending than envisaged in the budget, although at a level lower than that recorded in 2008. Consistent with the government’s long term development objectives, emphasis was placed on investment rather than current expenditures. The overall fiscal balance is estimated to have registered a surplus of about 3 percent of GDP in 2009.

Private credit growth has slowed from its recent high levels, reflecting a decline in credit demand and risk aversion by banks. In the first 9 months of 2009, credit to the private sector grew at an annualized rate of less than 5 percent. Confidence is expected to improve in 2010—supported by higher oil prices, sound macroeconomic policies, and prospects of world recovery.

The banking sector has been resilient to the global crisis, owing to strong supervisory and regulatory frameworks, and liquidity support. Despite higher provisioning—mainly against limited cross-border exposures—the sector remained profitable in the first 2 quarters of 2009, albeit at lower levels than in previous years. Banks remain well capitalized and have a low ratio of nonperforming loans (NPLs)—3 percent. The impact of developments in Dubai is expected to be limited.

The medium-term outlook is positive, but downside risks remain. The economy should perform well over the medium-term, supported by public investment in the hydrocarbon sector, infrastructure, and other strategic projects. Downside risks to this outlook include a decline in oil prices, a lackluster global recovery, and spillovers from additional unexpected adverse financial developments in the region. Absent the discovery of new hydrocarbon reserves or significant advances in exploration or extraction technology, maintaining the current standard of living for future generations would require increased public savings and the successful implementation of a job-creating growth and diversification strategy.

Executive Board Assessment

Directors commended the authorities for their sound policy management during the global financial crisis, and noted that the impact on Oman of recent developments in Dubai remained limited. They indicated that high hydrocarbon revenues had underpinned strong growth and good external performance over recent years, providing space for a continued build-up of official foreign assets and fiscal support to the economy. Directors noted that despite lower hydrocarbon prices, the economy had continued to grow in 2009, and that the budget balance was estimated to have remained in surplus. Looking forward, they considered the medium-term outlook as favorable, but noted that the key challenge faced by the authorities over the next few decades was the expected depletion in oil reserves, which necessitated higher public savings and the development of alternative sources of value added.

Directors welcomed the resilience of the financial system to the global crisis but underscored that continued vigilance was warranted. They concurred with the authorities’ decision to retain temporarily the foreign currency facility established by the Central Bank, and recommended that both this facility and the one created to support the equity market be eventually phased-out. Directors encouraged the authorities to conduct regular stress testing of the banking system and to extend the analysis to testing against tail risks. They also stressed the need to enhance crisis preparedness by testing and, if necessary, updating the resolution framework for financial institutions, and by formalizing institutional mechanisms for cross-border and cross-sector supervision.

Directors recommended that the authorities continue with their efforts to improve the efficiency of the financial system and make it more resilient. Reforms should focus on establishing a systematic record of the financial history of borrowers, implementing limits on the share of borrowers’ income that can be pre-assigned for loan repayment, and expanding consumer access to financial information. Directors also urged the authorities to develop a benchmark sovereign yield curve, enhance liquidity management, and strengthen coordination between the central bank and the government, including via the introduction of a single treasury account.

Directors encouraged the authorities’ to increase public savings—preferably via a reduction in current spending—and welcomed their intention to re-evaluate the long-run diversification strategy, in light of the expected decline in hydrocarbon revenues over the long term. In addition to progressively removing untargeted subsidies, Directors encouraged the authorities to analyze the costs and benefits associated with the unilateral implementation of a VAT if neighboring countries continue to delay the introduction of a VAT at the regional level. Directors welcomed recent structural policy reforms to facilitate private domestic and foreign investment and develop areas of comparative advantage. They underscored the importance of continuing the efforts to improve education and the business environment, and of preserving an efficient level of investment spending consistent with the authorities’ growth and employment objectives.

Directors supported the authorities’ decision to maintain the peg to the U.S. dollar, which provides a stable nominal anchor. Since Oman has decided not to join the GCC Monetary Union, they encouraged the authorities to keep under review the appropriateness of the exchange regime in light of future developments in the Union.

Directors welcomed the authorities’ efforts to participate in the Fund’s Coordinated Portfolio Investment Survey and to further improve the quality of the data used to compile the International Investment Position. They noted that priority should also be given to data timeliness and dissemination.