An IMF team led by Stéphane Roudet visited Muscat between April 3-16 to hold the 2018 Article IV consultation discussions with Oman.
At the conclusion of their 13 days visit to the sultanate, Roudet, in a statement released on Thursday said, “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.”
He said the Omani 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 per cent of GDP from 21 per cent of GDP in 2016.”
Roudet said that Oman’s 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 four per cent of GDP in the next two years,” he said.
According to the IMF, Oman’s non-hydrocarbon economic growth is estimated to have picked up modestly in 2017 to about two 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. However, overall real GDP growth, the IMF said, turned negative 0.3 per cent in 2017 because of a significant contraction of oil output (by negative 2.8 per cent).
“The government’s diversification efforts and the planned completion of major infrastructure projects are expected to gradually raise non-hydrocarbon growth to about four per cent over the medium term,” Roudet said.
The IMF warned that the deficit is expected to pick up to about seven per cent of GDP by 2023, reflecting a gradual decline in the Fund’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 programme, and introduce new taxes over the medium term,” Roudet said.
He further said the structural reforms that promote private sector development, productivity and competitiveness gains, diversification, and job creation for nationals are paramount. Further improving the business climate, including by reducing excessive regulations and fostering competition, and accelerating Tanfeedh implementation are also important, the IMF official added.
Banking sector appears sound
Roudet said Oman’s banking sector appears sound, with banks featuring high capitalisation, low non-performing loans, and strong liquidity buffers.
Roudet said, “Although private sector credit growth has somewhat moderated and interest rates are likely to increase with US 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.” He added that maintaining robust banking sector regulation and supervision is important to bolster financial sector resilience in support of sustained economic growth.
The IMF noted that the sultanate’s exchange rate peg to the US dollar is appropriate considering the current structure of the economy.