Press Release No. 18/138

IMF Staff Concludes 2018 Article IV Visit to Oman

April 19, 2018

• Oman is responding to lower oil prices by bolstering its fiscal position, boosting private sector-led growth and job creation, and fostering economic diversification.
• Timely implementation of VAT and excises and measures to curtail spending is of the essence; additional fiscal adjustment is needed to strengthen fiscal and external sustainability.
• Maintaining robust banking sector regulation and supervision is important to bolster financial sector resilience in support of sustained economic growth.

An International Monetary Fund (IMF) team led by Stéphane Roudet visited Muscat April 3-16 to hold the 2018 Article IV consultation discussions with Oman. At the conclusion of the visit, Mr. Roudet made the following statement:

“Non-hydrocarbon economic growth is estimated to have picked up modestly in 2017 to about 2 percent, from 1.5 percent in 2016, as higher confidence in the wake of the rebound in oil prices helped offset the impact from fiscal consolidation on economic activity. However, overall real GDP growth turned negative (-0.3 percent) because of a significant contraction of oil output (-2.8 percent) due to the implementation of the OPEC+ agreement. The government’s diversification efforts and the planned completion of major infrastructure projects are expected to gradually raise non-hydrocarbon growth to about 4 percent over the medium term.

“Preliminary budget execution data point to a significant improvement in the fiscal position last year, on the back of higher oil prices and spending restraint. The government has made progress in curtailing both current and capital expenditure, helping reduce the breakeven fiscal oil price. Combined with a large increase in oil revenues, this brought the overall deficit down to around 12.8 percent of GDP from 21 percent of GDP in 2016. Nonetheless, budget implementation proved challenging, with some spending overruns and tax revenue underperformance compared to the budget. The government is undertaking further reforms to raise non-hydrocarbon revenue, such as introducing value-added and excise taxes, and intends to continue with spending restraint. This would bring the deficit to below 4 percent of GDP in the next two years.

“Notwithstanding commendable progress in advancing fiscal consolidation, the deficit is expected to pick up to about 7 percent of GDP by 2023, reflecting a gradual decline in the IMF’s oil price assumptions and an increase in interest payments. Substantial additional fiscal adjustment is therefore needed. It should be underpinned by further efforts to tackle current spending rigidities—particularly on the wage bill and subsidies—streamline the large public investment program, and introduce new taxes over the medium term. These efforts should be accompanied by social impact analysis and measures to protect vulnerable households. The authorities are encouraged to formulate fiscal policy decisions within a more formal medium-term framework to reduce implementation risks. Strengthening budget planning and expenditure controls would also help reduce budgetary overruns and prevent payment delays.

“The banking sector appears sound, with banks featuring high capitalization, low non-performing loans, and strong liquidity buffers. Although private sector credit growth has somewhat moderated, and interest rates are likely to increase with U.S. monetary policy tightening further, credit growth is expected to remain healthy. Against this backdrop, the recent countercyclical measures may help banks and borrowers weather the more difficult economic environment. Maintaining robust banking sector regulation and supervision is important to bolster financial sector resilience in support of sustained economic growth.

“Gross reserves of the Central Bank of Oman decreased by about US$4 billion in 2017 to US$16 billion. The government’s external assets in the State General Reserve Fund, Oman’s sovereign wealth fund, provide significant additional external buffers. The exchange rate peg to the U.S. dollar is appropriate considering the current structure of the economy.

“Structural reforms that promote private sector development, productivity and competitiveness gains, diversification, and job creation for nationals are paramount. Tackling labor market inefficiencies—for example by better aligning public sector wages and benefits with the private sector, encouraging more labor market flexibility for nationals, and sustaining efforts to improve education and training—is key in this respect. Further improving the business climate, including by reducing excessive regulations and fostering competition, and accelerating Tanfeedh implementation are also important.

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