Oman’s reform efforts rightly aim at strengthening the fiscal position, enhancing private sector-led growth and job creation, and encouraging economic diversification, International Monetary Fund (IMF) says.

“Deeper fiscal consolidation is important to ensure fiscal and external sustainability. In the near term, introducing VAT and measures to reduce government spending are of the essence. Continued reforms that improve the functioning of the labor market, build human capital, and enhance the business environment, productivity and competitiveness are key,” an International Monetary Fund (IMF) team led by Stéphane Roudet said after their visit to Muscat from March 26 to April 8 to hold the 2019 Article IV consultation discussions with Oman.

Mr. Roudet said that economic activity is gradually recovering.

“After reaching a low of 0.5 percent in 2017, real non-hydrocarbon GDP growth is estimated to have increased to 1.5 percent last year, reflecting higher confidence driven by a rebound in oil prices and higher government spending. Oil and gas production increases brought overall real GDP growth to 2.2 percent. Non-hydrocarbon growth is projected to increase gradually over the medium term, reaching about 4 percent, assuming efforts to diversify the economy continue,” Roudet said.

“Preliminary budget execution data indicate an improvement in the overall fiscal balance last year. The fiscal deficit is estimated to have declined to about 9 percent of GDP from 13.9 percent of GDP in 2017, reflecting higher oil revenues. Nonetheless, budget implementation remained challenging, with some spending overruns and tax revenue underperformance compared to the budget. In addition, after several years of improvement, the underlying (non-oil) primary balance deteriorated due to higher spending,” Roudet added.

Roudet underlined the importance of “deeper fiscal consolidation” to ensure fiscal and external sustainability.

The authorities are encouraged to lay out and implement an ambitious medium-term fiscal adjustment plan to help streamline public investment, and raise non-hydrocarbon revenue, he said. These efforts should be implemented by prioritizing measures that help limit the impact of fiscal consolidation on growth and by placing more of the adjustment burden on those who can best shoulder it. In the near term, an expeditious introduction of VAT and measures to adjust government expenditure are of the essence, he said.

External buffers remain adequate, according to the IMF. Gross international reserves of the Central Bank of Oman increased by about $1.3 billion in 2018 to $17.4 billion. The government’s external assets in the State General Reserve Fund, Oman’s sovereign wealth fund provide additional buffers. The exchange rate peg to the US dollar is appropriate considering the structure of the economy, it said.

“Accelerating structural reforms is paramount to promote private investment and job creation, improve productivity and competitiveness, and advance diversification. On the labour market front, better aligning public sector wages and benefits with the private sector and sustaining efforts to improve education and training is key. The government recently adopted important reforms in the areas of commercial law and arbitration and licensing procedures. Vision 2040’s emphasis on fiscal sustainability, governance, and rule of law is welcome. Further efforts to strengthen the business environment, including by reducing obstacles to foreign direct investment, fostering competition, and further easing trade barriers would help strengthen external competitiveness. Accelerating diversification efforts under the Tanfeedh programme could also help raise non-hydrocarbon exports,” the Fund stated.

Commercial banks, the statement noted, benefit from high capitalization, low non-performing loans, and strong liquidity buffers. Maintaining strong regulation and supervision will help strengthen resilience and ensure sustained growth, said Roudet.