Oman's non-oil economic growth to hit 4pc: IMF
MUSCAT, July 7, 2018
Oman's non-hydrocarbon economic growth is set to have picked up modestly last year to 2 per cent from 1.5 per cent in 2016, as higher confidence in the wake of the rebound in oil prices helped offset the impact from fiscal consolidation on economic activity, according to International Monetary Fund (IMF).
However, overall real GDP growth turned negative (-0.3 per cent) because of a significant contraction of oil output (-2.8 per cent) due to the implementation of the Opec+ agreement, stated the executive board of the IMF in its Article IV consultation with Oman.
The government’s diversification efforts and the planned completion of major infrastructure projects are expected to gradually raise non-hydrocarbon growth to about 4 per cent over the medium term, it added.
The IMF report pointed out that Oman had posted double-digit fiscal and current account deficits over the past few years amid the lower oil price environment thus 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, it stated.
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 per cent of GDP.
Nonetheless, budget implementation proved challenging, with some spending overruns and tax revenue underperformance compared to the budget, said the report.
At the same time, the current account deficit is estimated to have improved by about 3 percentage points of GDP, it added.
The IMF's executive board lauded the government for undertaking further reforms to raise non-hydrocarbon revenue, such as value-added and excise taxes, and its spending restraint. "This would bring the deficit to around 4 per cent of GDP in the next two years," it stated.
According to IMF, the sultanate's 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 US monetary policy normalisation continues, credit growth is expected to remain healthy, it stated.
IMF's executive directors noted that fiscal and current account deficits since 2014 had pushed government and external debt up and reduced external buffers.
They 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," they stated in the report.
They also highlighted risks to the outlook from possible fiscal underperformance, tighter financing conditions, and heightened regional political uncertainty.
Against this backdrop, the IMF 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.
They encouraged the Omani 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, they added.
The IMF 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," they said.
In the report, the IMF directors have recommended the introduction of a formal medium-term fiscal framework and improvement to budget planning and expenditure controls.
They also concurred that the exchange rate peg had delivered monetary policy credibility with low and stable inflation.
In its conclusion, the IMF report commended the authorities for the soundness of the financial system and encouraged them to maintain robust banking sector regulation and supervision.
They stated that continued efforts were also required to identify and closely monitor any emerging pressures on asset quality and any potential build up in financial sector risks.
Directors also stressed the need to ensure that the prudential framework and financial sector buffers remain strong. They encouraged the central bank to boost its liquidity and crisis management and preparedness frameworks to further bolster resilience.
The IMF directors underlined the need for structural reforms in Oman to promote private sector development and productivity to enhance competitiveness, diversification, and job creation for nationals.
They recommended addressing labour 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.-TradeArabia News Service
