US-based association for the global financial services industry, Institute of International Finance (IIF) said that Oman is making strong strides in fiscal consolidation and structural reforms to help the economy resist the effects of the COVID-19 pandemic.
Oman introduced a host of fiscal reforms in response to the COVID crisis as many ministries were reorganized or merged to reduce expenditure. Other new measures include a 10 percent reduction in the cost of wages, defense and transfers to public companies.
In early 2021, the government plans to implement a 5 percent VAT and income tax, which could raise around 2 percent of GDP in additional non-hydrocarbon revenue.
Other steps include the privatization of state properties and the development of Omani work opportunities by reducing the number of expats and introducing programs for job training. Compared to other GCC nations Oman still spends a lot more on public sector like salaries, defense, and capital expenditure.
Garbis Iradian, Chief Economist of IIF in MENA (Middle East and North Africa) said, “Oman’s government spending as a share of GDP is 43 percent which is much higher than most developing and emerging economies. Oman still has ample scope to scale back spending and raise the efficiency of public investment”.
IIF and IMF forecasts comparison
The latest Regional Economic Outlook of the International Monetary Fund (IMF) predicted a 10 percent contraction for the economy of Oman in 2020, with growth expected to return to positive territory only in 2022.
The IIF projections show economic conditions in a much more favorable light, with fiscal deficits much smaller than those of the IMF. The IIF attribute it to the fact that Oman’s expected average crude oil export prices for this year will be $4 per barrel higher than the Brent crude or IMF forecast. Hydrocarbon production is likely to decline by only 2 percent in 2020, as compared with the IMF’s projection of a decline of 12 percent.
“Our projections are based on continued fiscal adjustment, including further cuts in spending and the introduction of a VAT in early 2021. Indeed, official figures for the first seven months of this year are consistent with our forecast, showing a deficit of OMR 5.24 billion, equivalent to 6.5 per cent of GDP”, Mr. Iradian added.
This year’s fiscal deficit funding was primarily met by borrowing from the domestic banking sector, tapping Oman’s sovereign wealth fund and some public asset privatization. As compared to the past three years, bond issuance in US dollars has been limited this year.
Oman raised $2 billion ($1.25 billion 7-year bonds at 6.75 percent and 0.75 billion 7.37 percent 12-year bonds) on the international market on October 21, the first bond sale since July 2019. The revenues from the issuance of the bond are likely to be used to repay the bridge loan (one-year loan) of $2 billion that was received in August. Local development bonds worth $1.4 billion were also issued by the government. In August 2020, official reserves remained largely stable at around $17 billion.
“The fiscal deficit will narrow substantially beyond 2020, supported by cuts in spending and tax reforms. We are encouraged by the resumption of fiscal consolidation despite the deep recession,” said Mr. Iradian.
Peg to stay intact
The IIF expects the Omani Riyal peg to the dollar to be retained. Recently, the Omani authorities affirmed their firm commitment to the peg and said that there will be no possibility of change in the short term. The peg to the dollar is underpinned by significant foreign public assets (approximately $17 billion in official reserves and $15 billion in sovereign wealth fund by the end of 2020).