Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Oman—2013 Article IV Consultation Concluding Statement of the IMF Mission

May 14, 2013

I. Introduction

High oil prices and increased crude oil production have helped bolster the economic recovery after the global crisis. Responding to societal concerns, recent policy initiatives have focused on labor market issues and public investment. While the recent measures—expanded public employment, higher wages and benefits, unemployment benefits, and new infrastructure and social investment projects—have been financed by higher oil revenues, the rise in current spending has increased the vulnerability to a sustained drop in oil prices. The projected trend of increasing fiscal deficits after 2015 underscore the need for measures to contain current expenditures, and increase non-oil revenues from 2013 onwards. The overarching policy challenge facing the Omani authorities is to achieve strong and sustainable growth and employment over the long term while ensuring medium-term fiscal sustainability. Meeting this challenge will require (i) a gradual fiscal adjustment and strengthening fiscal institutions; (ii) fostering private sector growth and creating a productive Omani workforce; (iii) developing the small and medium-sized enterprises sector; (iv) maintaining macroeconomic and financial stability; and (v) promoting financial sector development.

This statement contains the preliminary findings and policy recommendations of the IMF mission, following discussions with the Omani authorities and a range of private sector officials.1 The IMF team values the candid and comprehensive discussions with the Omani counterparts, and would like to express its sincere gratitude to them for their close cooperation.

II. Current Economic Developments

1. The economy continued to grow in 2012, supported by high oil prices and increased production, and by fiscal expansion. Overall real GDP growth is projected to have reached 5.0 percent in 2012, up from 4.5 percent in 2011. The non-oil sector is projected to grow at 5.8 percent in 2012, supported by public investment, and increased activity in services sector. The overall consumer price inflation declined to 2.9 percent in 2012 from 4 percent in 2011 as moderating international food prices and government subsidies on core goods and services held down the pressures from increases in public and private-sector wages and salaries.

2. The fiscal and external balances are estimated to remain in surplus in 2012. High hydrocarbon revenue has offset the cost of the recent fiscal expansion, keeping the overall fiscal balance in surplus of 4.5 percent of GDP, compared to 9.1 percent in 2011. Current expenditures are estimated to have risen by about 39 percent in 2012, constituting now 80 percent of hydrocarbon revenues—as the civil wage bill rose by a projected 19 percent. There was an under-execution in capital spending by 10 percent compared to the previous year. Revenue from exports of crude oil and liquefied natural gas (LNG) in 2012 is expected to bring the current account surplus to $9 billion or 11.6 percent of GDP.

3. Monetary policy remains accommodative. The spread between the average lending and deposit rates narrowed further to 4.3 percent at end-2012 compared to 4.8 percent at end-2011. Total credit continued to grow by 14 percent in 2012, while nonperforming loans remained low at 2.1 percent. Credit to public enterprises and the private sector increased by 16.4 percent and 14.9 percent, respectively, in 2012, while total deposits continued to rise by 12.7 percent. As a result, the credit to deposit ratio increased slightly to 101 percent in 2012 from 99 percent in 2011.

III. Outlook and Risks

4. The economic outlook for 2013 remains strong. Non-oil growth is projected at 5.5 percent, supported by a large public investment program. Overall real GDP growth is, however, projected at 5.1 percent reflecting a slower rate of increase in oil production. Inflation is projected at 3.1 percent. The fiscal and external balances are balance is expected to remain in surplus.

5. During 2014–18, a large public investment program will support an average real growth of 5.4 percent in the non-oil sector. However, as crude oil production levels off and starts declining, overall real GDP growth is projected to average 3.6 percent, and inflation outlook remains moderate. In addition, a projected decline in oil prices would bring a turnaround in fiscal and current account surpluses after 2015 and 2016, respectively. The accumulated fiscal buffers would provide initial cushion but would erode quickly. The increasing wage bill and current spending, if not contained, could endanger the government’s longer term fiscal sustainability.

6. Notwithstanding current financial buffers, recent spending initiatives have reduced the policy space to respond to shocks. Steep increases in government hiring and an increase in minimum wages of nationals in the private sector have reduced public discontent, but the limited fiscal space constrains the continuation of any further measures financed from the budget. Higher current spending and relatively stable non-oil revenue have raised the fiscal breakeven oil price (the oil price needed to balance the budget in the medium term) from $62/bbl in 2008 to $80/bbl in 2012, and to a projected $120/bbl by 2018, exceeding currently projected oil prices. To build more resilience and accumulate fiscal buffers to offset the risk of sustained reduction in oil prices, it has become urgent to restrain spending growth and increase nonhydrocarbon revenues.

7. The main downside risk to the outlook is a sustained fall in oil prices. A renewed global recession could lead to a large and prolonged decline in oil prices. One standard deviation decline in oil prices ($28) relative to the baseline will result in large deficits in the fiscal and current account balances from 2013 onwards, implying bigger fiscal risks in the near term. Financing the deficit in this scenario would require a combination of cuts in investments, complete drawdown of reserves, and a large increase in borrowing, negatively affecting growth prospects.

IV. Policy Challenges and Priorities

Fiscal Sustainability

8. Fiscal sustainability is becoming a significant challenge. Spending restraint and nonoil revenue enhancing measures are needed to support a sustainable fiscal policy in the medium term. The mission’s medium-term fiscal sustainability exercise shows that the current fiscal balances are not consistent with intergenerational equity and need an adjustment of about 10 percent of total GDP (23 percent of nonoil GDP).2 The mission recommends an initial adjustment of 1 percent of GDP in 2013 by rationalizing the planned increase in workforce, and restraining goods and services spending. This would balance the impact of the required fiscal consolidation with the need to maintain the current momentum in economic activity.

9. In the medium term, containing current expenditure, particularly the wage bill, including by curtailing increases in government jobs; and administrative expenditures should remain the key focus. With a large public workforce, the recent additions in government jobs most likely have resulted in a considerable redundancy and skills mismatch. Containing the wage bill also warrants more emphasis since government job creation and increases in public sector wages go against the objective of creating incentives for the Omani labor force to move into the private sector. Prioritization of capital expenditure is important to ensure the efficiency of investment. Meeting development needs efficiently would be best served by an integrated public investment management process that covers all sectors and public enterprises and incorporates project appraisal and funding, selection, delivery, and evaluation of major capital projects.

10. It would be difficult to achieve a sustainable fiscal position without targeting generalized subsidies, particularly on fuel prices, that are disproportionately benefitting the well-off. A gradual alignment with international fuel prices, while ensuring targeted support to protect the poor, would in the long run generate fiscal space for social and other infrastructure investments that will generate jobs and growth.

11. Enhancing non-oil revenues is an important element in the fiscal adjustment strategy. Preparations are underway to establish a GCC-wide value added tax (VAT). The mission encourages the authorities to work with the other GCC countries to expedite the introduction of the VAT. The agreement with the industry for an increase in the prices of natural gas, when implemented would increase the government’s revenues.

12. Introducing a medium-term budget framework (MTBF) would help anchor fiscal policy and support macroeconomic stability. A key driver for this reform would be to establish a macro-fiscal unit in the Ministry of Finance to ensure that the budget is consistent with macroeconomic developments and government objectives. The mission also encourages the authorities to develop a medium-term expenditure framework to ensure the efficiency of public spending. The adoption of a procedural “rules-based” framework for managing oil revenue and determining its distribution between saving and spending will help de-link government spending from volatile oil prices and will ensure that the fiscal stance is consistent with long-term sustainability.

Fostering the Private Sector and a Productive Omani Workforce

13. Creating job opportunities for the Omani workforce is a top priority for the government. The government created 100,000 new jobs in civil and defense sectors in 2011–13. The authorities also increased minimum wages for Omani nationals in the private sector in two stages from RO 140 ($368) to RO 325 ($855) a month, and announced a restriction on the number of expatriates in the total population at 33 percent, without indicating any timeline for its implementation.

14. While the above measures have been successful in stabilizing public expectations, the lasting benefits of the employment measures are not clear. These initiatives have imposed strains on the cost structure of the economy, on the government budget, and on public pension funds, adding to fiscal sustainability concerns. The wage and benefits differential between the public and private sectors will need to be compressed by gradually curtailing high public-sector wages, reducing public job creation and training the national labor force, including by providing incentives such as temporary monetary support. The implementation of these measures should help alter the relative job preferences of Omanis and create a vibrant and dynamic private sector with jobs that are attractive to nationals.

15. Generating needed jobs and reducing oil dependence require a dynamic private sector with an actively engaged Omani workforce. With public spending driven growth, the challenge is to channel public spending into the development of the self-sustaining private sector. Improving productivity and developing and investing in the tradable sector, including services, logistics, tourism and manufacturing, to promote non-oil exports and create high-valued and sustainable employment are paramount. This calls for: (i) improving the business environment; (ii) promoting a greater role for SMEs in selected strategic areas; (iii) coordinating with the private sector in setting up skill improvement programs; (iv) enhancing the educational quality, vocational training, and education, particularly in rural areas in the near term; and (v) promoting female labor force training and participation by improving women's access to managerial, technical, and vocational disciplines.

Developing SMEs

16. The government’s focus on developing SMEs has a potential for improving economic diversification and creating employment. The Government has initiated a number of measures to give a boost to this segment, including, tying up soft loans and extending financial guarantees through the Oman Development Bank, allocating a share of public tenders and sourcing a share of procurement by large contractors of government projects to SMEs. providing mentorship and assistance to entrepreneurs, and setting up a development fund to target college and university students entering the job market. Nevertheless SMEs face a number of constraints such as lack of entrepreneurship, access to finance, lack of market support, and inadequate incubation support, which are being addressed by the authorities. The mission underscores the need for a single authority to coordinate the efforts of SMEs. Active links with export-oriented corporates would also provide needed synergies in diversifying the economy and creating employment.

Strengthening Macroeconomic and Financial Stability

17. The exchange rate peg to the U.S. dollar has provided a strong and credible monetary anchor. Monetary operations should be enhanced within the fixed rate framework to foster the development of the money market and pave the way for monetary transmission through the interest rate channel. Regular issuance of domestic treasury bills (T-bills) in a range of maturities would help strengthen the CBO’s ability to manage liquidity in the banking system. A liquidity forecasting framework could provide guidance and give a clearer basis for making decisions on liquidity management. The CBO could also consider expanding the range of maturities for CDs. In addition, there is a need for introducing liquidity management tools for Islamic banks and windows.

18. The banking system is sound, profitable and well-regulated. On aggregate, commercial banks in Oman are less dependent on foreign financing, with foreign liability shares below 10 percent. The banking system-wide capital adequacy ratio was 16.0 percent and gross NPLs were at 2.1 percent of total loans in December 2012, unchanged from end-2011. The central bank has in place a number of macroprudential regulations limiting sectoral exposures, liquidity and maturity mismatches, and personal loans exposure. The central bank has issued a comprehensive regulatory framework for Islamic banking. Nevertheless, the mission underscores the importance of strengthening supervision, particularly with the commencement of Islamic banking, as banks are likely to become more competitive to retain their market share or seek new markets and products.

19. Establishing a formal macroprudential institutional and policy framework would help strengthen financial stability. While macroprudential policies have a long history of implementation by the central bank, the authorities should articulate a formal mandate over financial stability, as it can provide clear roles and responsibilities for mitigating systemic risks. In addition, a formal coordination framework with the different regulatory agencies is essential. It will help reduce regulatory overlaps and gaps and identify and mitigate systemic risks.

Developing the Domestic Financial Sector

20. The development of a deep and liquid domestic debt market requires proactive efforts from government, central bank, Capital Markets Authority, and market participants. The government needs to implement a debt management program and facilitate the emergence of a large and diversified issuer and domestic institutional investor base. A focused issuance program of government securities is essential to establish benchmark securities, improve the CBO’s monetary policy operations and liquidity management, and help meet Basel 3 liquidity guidelines in the future and spur market development. Issuance of sukuk would further support the liquidity management of Islamic banks and windows.

Table 1. Oman: Selected Economic Indicators, 2010–18


      Prel. Est Proj.  
  2010 2011 2012 2013 2014 2015 2016 2017 2018












Oil and gas sector


Total exports of oil and gas (US$ billions)

26.3 34.9 38.1 38.2 35.8 33.5 32.8 31.6 30.7  

Average crude oil export price (US$/barrel)

76.6 103.0 109.6 105.7 100.5 96.1 93.1 91.3 90.1  

Crude oil production (in millions of barrels/day)

0.86 0.88 0.92 0.95 0.94 0.93 0.92 0.92 0.91  

National accounts

(Annual percentage change, unless otherwise indicated)  

Nominal GDP (US$ billions)

58.8 70.0 78.3 81.4 82.8 84.5 87.4 91.4 95.6  

Nominal GDP (in billions of rials Omani )

22.6 26.9 30.1 31.3 31.8 32.5 33.6 35.1 36.7  

Real GDP

5.6 4.5 5.0 5.1 3.4 3.4 3.8 3.8 3.6  

Real hydrocarbon GDP 1

4.5 2.1 3.4 4.2 -0.7 -1.1 0.2 0.3 -0.7  

Real nonhydrocarbon GDP

6.2 5.8 5.8 5.5 5.4 5.4 5.3 5.3 5.3  

Consumer prices (average)

3.3 4.0 2.9 3.1 3.2 3.3 3.5 3.5 3.5  

GDP Deflators

15.5 13.9 6.6 -1.0 -1.7 -1.3 -0.2 0.6 0.9  

Investment and saving

(Percent of GDP)  

Gross capital formation

24.2 23.2 24.1 28.0 30.6 32.6 32.6 32.5 32.8  


15.3 14.8 13.4 14.0 14.2 14.4 14.5 14.6 14.7  


9.0 8.4 10.7 14.0 16.4 18.2 18.0 17.9 18.1  

Gross national savings

34.2 38.6 35.7 38.1 36.5 33.4 32.1 30.7 29.9  


18.8 27.0 20.2 22.0 18.4 14.8 13.4 11.9 9.2  


15.4 11.5 15.5 16.1 18.2 18.7 18.7 18.9 20.7  

Central government finances

(Percent of GDP)  

Revenue and grants

39.3 47.3 47.6 47.2 45.3 43.4 42.7 41.7 39.5  


33.4 42.6 42.0 41.2 38.2 35.2 33.9 32.2 29.6  

Nonhydrocarbon and grants

5.9 4.7 5.6 6.0 7.1 8.2 8.8 9.5 9.9  


35.3 40.0 45.1 42.7 44.1 45.5 46.3 46.9 47.3  


22.4 27.1 33.6 31.4 32.6 33.9 34.6 35.2 35.6  


11.3 10.8 9.4 10.0 10.2 10.4 10.5 10.6 10.7  

Overall balance (Net lending/borrowing)

5.5 9.1 4.5 5.7 2.5 -0.9 -2.4 -4.1 -6.8  

Non-hydrocarbon primary balance (in percent of non-oil GDP)2

-52.5 -76.1 -84.0 -73.6 -68.5 -64.1 -61.3 -58.8 -56.5  

Total government debt, of which:

5.5 5.5 6.0 7.0 7.9 8.7 9.2 9.6 10.0  

External debt

3.8 3.8 4.0 4.4 4.8 5.2 5.5 5.7 5.8  

Monetary sector

(Annual percentage change, unless otherwise indicated)  

Net foreign assets

15.9 16.1 1.0 12.6  

Net domestic assets

5.7 6.8 25.1 16.2  

Credits to the private sector

6.2 13.0 14.9 15.0  

Broad money

11.3 12.2 10.7 14.2  

External sector

(US$ billions, unless otherwise indicated)  

Exports of goods

36.6 47.1 52.1 54.2 53.6 53.9 56.9 58.6 59.5  

Oil and gas

25.2 33.4 36.3 36.4 33.9 31.5 31.2 30.8 29.5  


11.4 13.7 15.8 17.8 19.7 22.4 25.7 27.8 30.0  

Imports of goods

-17.9 -21.5 -26.0 -28.0 -30.1 -33.7 -36.7 -40.2 -42.5  

Current account balance

5.9 10.7 9.1 8.2 4.9 0.7 -0.4 -1.6 -2.7  

Percent of GDP

10.0 15.3 11.6 10.1 5.9 0.8 -0.4 -1.7 -2.9  

Central Bank gross reserves

13.1 14.5 15.9 17.4 19.4 21.2 23.3 24.6 25.7  

In months of next year's imports of goods and services

5.6 5.1 5.2 5.3 5.3 5.3 5.3 5.3 5.2  

Total external debt

7.2 8.5 9.8 9.8 9.9 9.9 9.9 10.0 10.0  

Percent of GDP

12.2 12.2 12.5 12.1 11.9 11.7 11.3 10.9 10.4  

Memorandum Items:


Nominal effective exchange rate (2005=100)

94.5 91.2 94.0 96.8  

Real effective exchange rate (2005 = 100) 3/

104.1 101.1 104.4 107.1  

Exchange rate (rial per dollar; period average) 3/

0.38 0.38 0.38 0.38

Sources: Omani authorities; and IMF staff estimates and projections.

1 Includes crude oil, refining, natural gas, and LNG production.

2 Excluding hydrocarbon revenues and expenditures and investment related, and including 'net lending and equity' defined by authorities.

3 2013 refers to March.

1 An International Monetary Fund (IMF) mission, comprising Messrs Prasad (head), Hasanov, Katayama, and Zavarce, visited Oman from April 30 to May 14, 2013, to hold discussions for the 2013 Article IV consultation.

2 The exercise targets a constant per capita annuity in real terms.


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