Press Release No. 19/113

IMF Staff Concludes 2019 Article IV Visit to Oman

April 11, 2019

• Oman’s reform efforts rightly aim at strengthening the fiscal position, enhancing private sector-led growth and job creation, and encouraging economic diversification.
• Deeper fiscal consolidation is important to ensure fiscal and external sustainability. In the near term, introducing VAT and measures to reduce government spending are of the essence.
• Continued reforms that improve the functioning of the labor market, build human capital, and enhance the business environment, productivity and competitiveness are key.

An International Monetary Fund (IMF) team led by Stéphane Roudet visited Muscat from March 26 to April 8 to hold the 2019 Article IV consultation discussions with Oman. At the conclusion of the visit, Mr. Roudet made the following statement:

“Economic activity is gradually recovering. After reaching a low of 0.5 percent in 2017, real non-hydrocarbon GDP growth is estimated to have increased to 1.5 percent last year, reflecting higher confidence driven by a rebound in oil prices and higher government spending. Oil and gas production increases brought overall real GDP growth to 2.2 percent. Non-hydrocarbon growth is projected to increase gradually over the medium term, reaching about 4 percent, assuming efforts to diversify the economy continue.

“Preliminary budget execution data indicate an improvement in the overall fiscal balance last year. The fiscal deficit is estimated to have declined to about 9 percent of GDP from 13.9 percent of GDP in 2017, reflecting higher oil revenues. Nonetheless, budget implementation remained challenging, with some spending overruns and tax revenue underperformance compared to the budget. In addition, after several years of improvement, the underlying (non-oil) primary balance deteriorated due to higher spending.

“The fiscal deficit is projected to decline to about 8 percent of GDP this year, as the impact of lower oil prices is more than offset by a decline in spending, one-off revenue, and implementation of a new excise tax on selected products. Further efforts to curtail spending and the planned introduction of VAT could reduce the deficit by another two percentage points of GDP over the next two years. However, thereafter, assuming the IMF’s projected gradual decline in oil price and production materializes, and given the expected increase in interest payments, the fiscal deficit would increase again, pushing government and external debt up and increasing vulnerability to shocks.

“Deeper fiscal consolidation is therefore important to ensure fiscal and external sustainability. The authorities are encouraged to lay out and implement an ambitious medium-term fiscal adjustment plan, based on reforms to tackle current spending rigidities—particularly on the wage bill and subsidies—streamline public investment, and raise non-hydrocarbon revenue. These efforts should be implemented by prioritizing measures that help limit the impact of fiscal consolidation on growth and by placing more of the adjustment burden on those who can best shoulder it. In the near term, expeditious introduction of VAT and measures to adjust government expenditure are of the essence.

“External buffers remain adequate. Gross international reserves of the Central Bank of Oman increased by about US$1.3 billion in 2018 to US$17.4 billion. The government’s external assets in the State General Reserve Fund, Oman’s sovereign wealth fund provide additional buffers. The exchange rate peg to the U.S. dollar is appropriate considering the structure of the economy.

“Accelerating structural reforms is paramount to promote private investment and job creation, improve productivity and competitiveness, and advance diversification. On the labor market front, better aligning public sector wages and benefits with the private sector and sustaining efforts to improve education and training is key. The government recently adopted important reforms in the areas of commercial law and arbitration and licensing procedures. Vision 2040’s emphasis on fiscal sustainability, governance and rule of law is welcome. Further efforts to strengthen the business environment, including by reducing obstacles to foreign direct investment, fostering competition, and further easing trade barriers would help strengthen external competitiveness. Accelerating diversification efforts under the Tanfeedh program could also help raise non-hydrocarbon exports.

“Banks benefit from high capitalization, low non-performing loans, and strong liquidity buffers. Maintaining strong regulation and supervision will help strengthen resilience and ensure sustained growth.

“The IMF team highly values the candid discussions with the Omani authorities and expresses its gratitude for their hospitality and excellent cooperation.”