Oman can improve its business environment by streamlining regulatory processes, says IMF
The International Monetary Fund (IMF) has completed its Article IV visit to Oman.
Led by Allison Holland, the IMF team visited Muscat from May 3-16 to hold the 2017 Article IV consultation discussions with Oman. At the conclusion of the visit, Holland made the following statement:
“We have had constructive discussions with the authorities over the past two weeks. The authorities recognise that the sustained decline in oil prices underscores the need to undertake sustained fiscal adjustment, accelerate economic diversification, and increase the role of the private sector to stimulate the economy. Economic growth moderated in 2016 to about 3 per cent, from 4.2 per cent in 2015, with non-hydrocarbon growth slowing from 4.2 to 3.4 per cent given the continued impact of low oil prices. We expect overall growth will remain flat in 2017, as the oil production cuts agreed with OPEC will fully offset the 2.5 per cent growth in the non-hydrocarbon sector, which is expected to slow due to planned fiscal consolidation. We are encouraged by the authorities’ efforts to turn the goals of the 9th Development Plan into concrete actions through the Tanfeedh implementation process. Successful implementation of these initiatives will boost medium-term growth prospects. We expect non-hydrocarbon growth to average about 3.5 per cent over the medium term. Improving the business environment, including by streamlining regulatory processes and increasing the level of vocational skills, will support efforts to increase private sector employment. While inflation is expected to increase in 2017 reflecting an expected increase in imported food prices and the continued impact of subsidy reforms, it should moderate subsequently.
“The authorities took important policy measures in 2016, including fuel price reform, to address the impact of lower oil prices on government finances, but implementing the budget proved challenging. The combination of lower oil prices and higher spending has resulted in a widening of the budget deficit to around 22 per cent of GDP. The authorities have set appropriately ambitious fiscal targets in the 2017 budget that would reduce the deficit by almost half to 12 per cent of GDP if achieved. Steadfast implementation of the budget will protect policy credibility and sustain investor confidence, which has underpinned Oman’s access to international financing at favourable terms over the past year. Over the medium term, timely implementation of the increase in corporate income tax and planned introduction of VAT and excise duties will underpin a continued improvement in the fiscal position. The current account deficit, estimated at 17 per cent of GDP in 2016, is also expected to decline.
“The authorities and the IMF team agreed that to maintain fiscal sustainability and support the exchange rate peg over the medium to long term, additional fiscal adjustment—beyond the measures that are already in the pipeline—will be needed. The team encouraged the authorities to anchor the proposed adjustment in a medium-term fiscal framework, and recommended that additional measures could include phasing out remaining subsidies, restraining government expenditures—both recurrent and capital, and increasing non-oil revenues further. The team advised the authorities to continue to strengthen their framework for debt and asset management to ensure financing needs are effectively managed, while further fiscal reform would also help limit borrowing costs.
“The Omani banking system remains well capitalised, deposits have increased, liquidity conditions appear to have eased, and credit to the private sector continues to grow. Interest rates are likely to increase as US monetary policy tightens further. Gross reserves of the Central Bank of Oman increased in 2016 from $17.5 billion to $20.3 billion and are considered adequate on a number of metrics. The exchange rate peg to the US dollar continues to serve Oman well given the current structure of the economy.
The IMF team would like to thank the authorities for their hospitality, cooperation and candid discussions.”