Mission Concluding Statement 

Oman: Staff Concluding Statement of the 2021 Article IV Mission

July 6, 2021

Washington, DC: The authorities have acted decisively to address the health and economic effects of the COVID-19 pandemic. While gradual recovery is expected in 2021 and beyond, combating the pandemic and mitigating its effects remains the key near-term priority until the recovery is firmly established. The 2021 fiscal stance balances substantial consolidation with significant support for hard-hit sectors. Over the medium term, steadfast implementation of t he authorities’ Medium-Term Fiscal Plan (MTFP) is needed to reduce fiscal vulnerabilities and put debt on a firm downward path. The banking sector remains well-capitalized and liquid, benefiting from the sustained prudent oversight by the central bank and the strong buffers before entering the crisis. Over the medium term, accelerating structural reforms is paramount to unlock growth potential. In this regard, the authorities have embarked on a broad range of structural reforms to further boost job creation, manage public resources more efficiently, and attract more private investment.

The IMF mission highly values the candid discussions with the authorities and expresses its gratitude for their excellent cooperation.

Economic Outlook

1. Oman moved rapidly and decisively to contain the COVID-19 crisis. Containment measures and health support to the population have limited the cases and fatalities. The authorities’ cautious approach toward reopening has helped contained the new cases since early 2021. Fiscal, monetary, and financial support measures introduced by the government have been deployed to ease the burden on households, firms, and banks.

2. The economy is expected to gradually recover from the pandemic and strengthen over the medium term. Official provisional data indicate that real GDP contracted by 2.8 percent in 2020, with non-hydrocarbon growth at -3.9 percent and a shallower decline in hydrocarbon GDP. Benefiting from the projected modest increase of hydrocarbon production, overall GDP is projected to grow around 2.5 percent in 2021 with about 3 percent average growth over the medium term. Non-hydrocarbon GDP growth of 1.5 percent is projected for 2021, as vaccine rollout gradually restores domestic economic activity along with the recovery of external demand. Thereafter, it increases gradually over the medium term as the impact of fiscal adjustment subsides, reaching 4 percent in 2026. Inflation turned negative in 2020 owing to subdued demand, but it is 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.

3. Fiscal and external balances are projected to improve considerably over the medium term . After deteriorating sharply in 2020 to a deficit of about 19.3 percent of GDP, reflecting lower oil revenue and a slump in economic activity, the fiscal balance is projected to improve to -2.4 percent of GDP in 2021 (owing to recovery of hydrocarbon revenue beyond that anticipated in the MTFP, hiving off hydrocarbon expenditure to Energy Development Oman (EDO), significantly higher nominal GDP reflecting a rebound in hydrocarbon prices, and fiscal adjustment measures), and move to a surplus over the medium term, with a substantial decline in the government debt. After rising to 13.7 percent of GDP in 2020, the current account deficit is expected to decline to 0.6 percent of GDP over the medium term due to fiscal consolidation and higher trade balance surplus.

4. However, there are substantial uncertainties around the outlook. The emergence of COVID-19 variants could prolong the impact of the pandemic on the global outlook and financial conditions, and thus intensify the economic impact on Oman. Volatility in oil prices would have a significant impact on the outlook. Fiscal consolidation could weigh on economic growth and social pressures could create headwinds for reforms. Upside risks to the outlook would come from a strong roll-out of vaccination and a stronger rebound in global activity than anticipated. Strong fiscal consolidation and continued implementation of structural reforms could considerably improve the outlook.

Near-Term Policies: Supporting Economic Recovery

5. The near-term priority continues to be combating the pandemic until the recovery is entrenched. Efforts have focused on addressing the health crisis (including vaccine rollout), supporting the recovery, minimizing economic scarring, and mitigating risks to financial stability. To this end, with a substantial recent increase in vaccine supply, vaccine rollout has picked up quickly and the authorities hope to vaccinate 70 percent of the targeted population by year-end. Also, the Economic Stimulus Plan, adopted in March 2021, provides and extends substantial support to affected sectors and strengthens the business environment. Given the uncertainties, these measures should remain in place until recovery is firmly established, and withdrawal of individual measures should be carefully coordinated and calibrated to avoid undermining the recovery. At the same time, it would be important to explore the scope for further strengthening insolvency and debt restructuring tools to facilitate resource reallocation.

6. The 2021 fiscal stance balances frontloaded consolidation to address fiscal vulnerabilities with support for the recovery. Adjustment of 4.3 percent of GDP in the non-hydrocarbon structural primary balance is envisaged, primarily reflecting the 5 percent VAT introduced in April, lower wage bill primarily from mandatory retirement, reduction in water and electricity subsidies, and modest cuts in capital spending. The impact of consolidation is mitigated by various policy support measures including social spending and temporary reductions and waivers of taxes and fees. With oil prices currently higher than budgeted, there is scope for additional temporary targeted support for affected households and businesses if needed without jeopardizing medium-term consolidation objectives. Notably, temporary social protection may be helpful to provide income support to the jobseekers not covered by the Job Security Scheme, particularly given the elevated female and youth unemployment rates.

7. Monetary and financial policy responses should strike a balance between supporting the economy and containing risks to financial stability. Banks are well-capitalized and liquid despite a slight increase in non-performing loans ratio and a decline in profitability, but credit risk is a concern going forward given the uncertain outlook. A prolonged pandemic could further intensify corporate vulnerabilities. The Central Bank of Oman should continue to have a forward-looking assessment of banks’ asset quality and ensure adequate capital buffers to withstand credit risks if they materialize. Extending loan moratoria should be data-dependent and increasingly targeted to distressed but viable borrowers.

Fiscal Policy: Reinforcing Fiscal Sustainability

8. Steadfast implementation of the Medium-Term Fiscal Plan (MTFP) is essential to reinforce fiscal sustainability. The MTFP targets the elimination of the fiscal deficit over the medium term by boosting non-hydrocarbon revenue while keeping nominal fiscal expenditure broadly constant and improving its efficiency and targeting. Frontloaded consolidation measures in the 2021 budget have been smoothly implemented, bolstering confidence. Going forward, intensive outreach to the general public and continued efforts to further strengthen the social safety net are essential to sustain public support for the fiscal balance plan and structural reforms.

9. Strengthening Oman’s medium-term fiscal framework, with a clear fiscal anchor, would help in achieving the fiscal consolidation. The government has taken important steps in developing the fiscal framework with a balanced budget objective. However, given the sensitivity of the headline fiscal balance to oil prices, a target for the non-hydrocarbon structural primary balance—which would be robust to oil price and cyclical volatility while supporting the MTFP’s consolidation goals—could be an appropriate fiscal anchor, supplemented by a floor on government net financial assets. Expanding fiscal risk analysis, including the sensitivity of fiscal plans to varying economic scenarios, would also support the development of contingency plans to respond to future adverse shocks. The authorities have requested IMF technical assistance to help strengthen the medium-term fiscal framework.

10. Enhancing public financial management and fiscal governance would improve accountability and effectiveness of policy . More disclosures in quarterly fiscal reports are needed, including on revenue, expenditure, and financing. Adding a tax expenditure assessment to the budget would strengthen transparency over various tax incentives. With EDO tasked with hydrocarbon capital expenditure and Oman Investment Authority (OIA) oversight of State-Owned Enterprises (SOEs), fiscal coverage should be expanded beyond the budgetary central government to give a better picture of the sustainability of the broader public sector. A sovereign asset liability management framework should be developed given eroding financial buffers and the growing role of SOEs. The establishment of the Debt Management Committee to coordinate debt issuance of Oman and manage financial exposures is welcome. The authorities have requested IMF technical assistance to help develop a medium-term debt strategy to guide the government’s borrowing program and provide more predictability to the financial system.

Monetary and Financial Policies: Safeguarding Financial Stability

11. 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.

12. The regulatory framework could be strengthened further. The Bank Resolution Framework, issued in 2019, should be grounded in the Banking Law to provide legal certainty in supporting effective resolution implementation. Though sectoral lending exposures are broad, risks relating to lending to the commercial real estate sector, which has been negatively impacted by the pandemic, should be carefully monitored. The team also notes ongoing efforts to promote Fintech to enhance financial inclusion while containing risks.

Structural reforms: Managing the Transition toward Stronger Growth

13. Enhancing competitiveness in the private sector is a crucial element in boosting non-oil private sector growth . Policies aimed at enhancing productivity growth and the ongoing reforms that aim at enhancing labor market flexibility, promoting investment, and improving the business climate go in the right direction. It would be important however to carefully assess whether the realized benefits of the free trade zones outweigh the considerable tax exemptions given.

14. Flexible labor policies would ease human resource reallocation and strengthen job creation. To this end, recent steps taken by the authorities include: (i) the system of multiple minimum wages linked to qualification levels has been simplified and a single minimum wage of OMR 325/month is now in place; (ii) a 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; (iii) relaxation of restrictions on job transfers for expatriates; (iv) the Job Security Fund—an unemployment benefit scheme—to facilitate the reallocation of workers between different employers; and (v) efforts to update the labor law to support efforts to strengthen labor market flexibility. Looking forward, increased attention should be paid to further increasing female employment to promote inclusive growth. Also, to foster sustained private sector job creation public sector wage (and benefits) growth should not outpace that of the private sector. Plans to further reduce the labor cost gap between Omanis and expatriates by increasing fees for hiring expatriates should be implemented with caution to avoid undermining the price competitiveness of the private sector.

15. SOE reforms are welcome and would enhance competition and more efficient use of public resources. The OIA’s plan to enhance the efficiency and governance of SOEs and privatize some of the SOEs is progressing well. The near-term priorities should continue to be strengthening corporate governance by publishing audited financial statements, assessing each entity’s business strategy and public policy considerations, and mitigating financial exposures including intra-public sector assets and liabilities. OIA and Capital Market Authority are working together to develop a Code of Governance for SOEs to strengthen corporate governance, making it easier for SOEs to go through initial public offerings, and meet the required transparency.

16. The authorities are taking actions to develop a greener Omani economy . In addition to reducing domestic electricity and water subsidies, plans are being developed to utilize Oman’s abundant wind and solar energy resources, which have the potential to attract domestic and foreign investors and eventually contribute to growth and job creation.