IMF Executive Board Concludes 2018 Article IV Consultation with Oman
July 6, 2018
On June 20, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Oman.
Reflecting the lower oil price environment, Oman has posted double-digit fiscal and current account deficits over the past few years, leading to large increases in government and external debt and a decline in external buffers. Against this backdrop, the authorities have launched reforms to bolster the fiscal position and boost private sector-led growth and diversification.
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 as higher oil prices and spending restraint brought the overall deficit down to below 13 percent of GDP. Nonetheless, budget implementation proved challenging, with some spending overruns and tax revenue underperformance compared to the budget. At the same time, the current account deficit is estimated to have improved by about 3 percentage points of GDP. 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 around 4 percent of GDP in the next two years.
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 as U.S. monetary policy normalization continues, credit growth is expected to remain healthy.
Executive Board Assessment [2]
Executive Directors noted that fiscal and current account deficits since 2014 had pushed government and external debt up and reduced external buffers. Directors concurred that ongoing reforms and the recovery in oil prices would help reduce fiscal and external deficits significantly over the next couple of years. While non oil growth is expected to recover gradually and there is a potential upside from the recent increase in oil prices, persistent twin deficits are expected to lead to further increases in government and external debt over the medium term. Directors also highlighted risks to the outlook from possible fiscal underperformance, tighter financing conditions, and heightened regional political uncertainty. Against this backdrop, Directors welcomed the authorities’ efforts to bolster the fiscal position and encouraged implementation of structural reforms to boost private sector led growth, increase economic diversification, create jobs and foster inclusive growth.
Directors encouraged the authorities to accelerate reforms to bolster fiscal and external sustainability, maintain confidence, and support the exchange rate peg. Deeper fiscal adjustment is critical to put public finances on a sustainable trajectory. Directors called for steadfast efforts to implement ongoing reforms, including the introduction of a VAT and excise taxes, under the planned timeline. Additional reforms are needed for more rapid reductions in the fiscal deficit and debt, through measures to tackle current spending rigidities, streamline capital outlays and enhance efficiency, while further raising non hydrocarbon revenue. In this context, Directors recommended the introduction of a formal medium term fiscal framework and improvements to budget planning and expenditure controls.
Directors concurred that the exchange rate peg had delivered monetary policy credibility with low and stable inflation. They also noted that fiscal adjustment is key to ensure external sustainability over the long term.
Directors commended the authorities for the soundness of the financial system and encouraged them to maintain robust banking sector regulation and supervision. Continued efforts are also required to identify and closely monitor any emerging pressures on asset quality and any potential build up in financial sector risks. Directors stressed the need to ensure that the prudential framework and financial sector buffers remain strong. They encouraged the central bank to strengthen its liquidity and crisis management and preparedness frameworks to further bolster resilience. Efforts to enhance the AML/CFT framework and its effective implementation are also important.
Directors underlined the need for structural reforms to promote private sector development and productivity to enhance competitiveness, diversification, and job creation for nationals. They recommended addressing labor market inefficiencies by better aligning public sector wages and benefits with the private sector, making the labor market for nationals more flexible, and tackling skill mismatches through better education and on the job training. Directors emphasized the importance of enhancing the business climate, including through reforms to modernize the insolvency framework, lowering the burden of administrative procedures and enacting planned legislations on FDI and public private partnerships. They encouraged the authorities to accelerate their program to boost private sector investment.
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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