Oman: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, July 6, 2021
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- Published: July 6, 2021
Economic Outlook
- Containment measures and health support limited COVID-19 cases and fatalities; cautious reopening helped contain new cases since early 2021.
- Real GDP contracted by 2.8 percent in 2020; non-hydrocarbon growth was -3.9 percent and hydrocarbon GDP had a shallower decline.
- Projections:
- Overall GDP is projected to grow around 2.5 percent in 2021.
- About 3 percent average growth over the medium term.
- Non-hydrocarbon GDP growth of 1.5 percent is projected for 2021.
- Non-hydrocarbon growth increases gradually over the medium term, reaching 4 percent in 2026.
- Inflation turned negative in 2020, expected to increase to 3 percent in 2021 given the introduction of VAT and recovery in aggregate demand, before declining to about 2.5 percent over the medium term.
- Fiscal and external balances:
- Fiscal deficit deteriorated sharply in 2020 to about 19.3 percent of GDP.
- Fiscal balance projected to improve to -2.4 percent of GDP in 2021.
- Current account rose to 13.7 percent of GDP in 2020; expected to decline to 0.6 percent of GDP over the medium term.
- Key uncertainties and risks:
- COVID-19 variants, oil price volatility, and potential social pressures from fiscal consolidation.
- Upside risks: strong vaccine roll-out and stronger global rebound; benefits from strong fiscal consolidation and structural reforms.
Near-Term Policies: Supporting Economic Recovery
- Main near-term priority: combating the pandemic until recovery is entrenched, including vaccine rollout.
- Authorities aim to vaccinate 70 percent of the targeted population by year-end.
- Economic Stimulus Plan (adopted March 2021) provides and extends substantial support to affected sectors and strengthens the business environment.
- Policy guidance:
- Maintain pandemic-related support measures until recovery is firmly established; withdraw individual measures carefully and coordinately.
- Explore strengthening insolvency and debt restructuring tools to facilitate resource reallocation.
- With oil prices higher than budgeted, scope exists for additional temporary targeted support for affected households and businesses without jeopardizing medium-term consolidation.
- Temporary social protection may help jobseekers not covered by the Job Security Scheme, given elevated female and youth unemployment rates.
- Fiscal stance:
- 2021 adjustment of 4.3 percent of GDP in the non-hydrocarbon structural primary balance, primarily reflecting:
- 5 percent VAT introduced in April.
- Lower wage bill primarily from mandatory retirement.
- Reduction in water and electricity subsidies.
- Modest cuts in capital spending.
- Impact of consolidation mitigated by social spending and temporary reductions and waivers of taxes and fees.
- Monetary/financial measures:
- Banks remain well-capitalized and liquid despite a slight increase in non-performing loans ratio and a decline in profitability.
- Credit risk is a concern; Central Bank of Oman should maintain forward-looking assessments of banks’ asset quality and ensure adequate capital buffers.
- Extending loan moratoria should be data-dependent and increasingly targeted to distressed but viable borrowers.
Fiscal Policy: Reinforcing Fiscal Sustainability
- Steadfast implementation of the Medium-Term Fiscal Plan (MTFP) is essential to reduce fiscal vulnerabilities and put debt on a downward path.
- MTFP targets elimination of the fiscal deficit over the medium term by boosting non-hydrocarbon revenue while keeping nominal fiscal expenditure broadly constant and improving efficiency and targeting.
- Public communication and social safety net strengthening are essential to sustain public support for the MTFP and structural reforms.
- Strengthening the medium-term fiscal framework:
- A target for the non-hydrocarbon structural primary balance could serve as an appropriate fiscal anchor, supplemented by a floor on government net financial assets.
- Expand fiscal risk analysis and sensitivity assessments to develop contingency plans for adverse shocks.
- Authorities have requested IMF technical assistance to help strengthen the medium-term fiscal framework.
- Public financial management and fiscal governance improvements:
- Increase disclosures in quarterly fiscal reports (revenue, expenditure, financing).
- Add a tax expenditure assessment to the budget to strengthen transparency over tax incentives.
- Expand fiscal coverage beyond the budgetary central government to capture EDO and OIA activities and SOEs for a better picture of public sector sustainability.
- Develop a sovereign asset liability management framework given eroding financial buffers and the growing role of SOEs.
- Establishment of the Debt Management Committee to coordinate debt issuance and manage financial exposures is welcome.
- Authorities have requested IMF technical assistance to develop a medium-term debt strategy.
Monetary and Financial Policies: Safeguarding Financial Stability
- The exchange rate peg remains an appropriate policy anchor, delivering low and stable inflation.
- The MTFP and structural reforms are critical to ensure external sustainability and support the exchange rate peg.
- Regulatory and supervisory priorities:
- Strengthen the regulatory framework by grounding the Bank Resolution Framework (issued in 2019) in the Banking Law to provide legal certainty for effective resolution implementation.
- Monitor risks related to lending to the commercial real estate sector, which has been negatively impacted by the pandemic.
- Continue efforts to promote Fintech to enhance financial inclusion while containing risks.
Structural Reforms: Managing the Transition toward Stronger Growth
- Private sector competitiveness and productivity:
- Policies to enhance productivity, labor market flexibility, promote investment, and improve the business climate are on the right track.
- Carefully assess whether benefits of free trade zones outweigh the considerable tax exemptions granted.
- Labor market reforms and measures:
- Simplified multiple minimum wages into a single minimum wage of OMR 325/month.
- Time-bound wage subsidy of OMR 200/month for first time Omani jobseekers to facilitate private sector employment of Omanis, initially expected to cover about 15,000 persons.
- Relaxation of restrictions on job transfers for expatriates.
- Job Security Fund—an unemployment benefit scheme—to facilitate worker reallocation between employers.
- Ongoing efforts to update the labor law to support labor market flexibility.
- Recommendations: increase female employment, ensure public sector wage growth does not outpace private sector, and implement plans to reduce the labor cost gap with caution.
- SOE reform and governance:
- OIA’s plan to enhance efficiency and governance of SOEs and privatize some SOEs is progressing.
- Near-term priorities: publish audited financial statements, assess each entity’s business strategy and public policy role, mitigate intra-public sector financial exposures.
- OIA and Capital Market Authority are developing a Code of Governance for SOEs to strengthen corporate governance and facilitate IPOs and transparency.
- Green transition:
- Authorities are reducing domestic electricity and water subsidies.
- Plans to utilize abundant wind and solar energy resources to attract investors and contribute to growth and job creation.
Oman: Staff Concluding Statement of the 2021 Article IV Mission (July 6, 2021).