Oman’s fiscal deficit on ‘markedly declining trend’: IMF

April 24 – The IMF mission in its recently concluded visit has welcomed the measures which have already been taken by the Omani government to address the fiscal challenges and highlighted the importance of continuing with the fiscal consolidation, according to the Ministry of Finance.
2017 was recognised as the year of consolidation where deficit has been brought down to 12.8 per cent of the GDP compared to 21 per cent in 2016. The introduction of VAT, Customs & Excise duties, combined with tight spending limits is expected to reduce the deficit to 4 per cent of GDP in 2019, according the projections by the IMF staff. The deficit is expected to gradually increase to 7 per cent of the GDP in 2023.
“However, this forecast is based mainly on two assumptions: 1) declining oil price; and 2) higher current expenditure and debt service. Both assumptions appear overly pessimistic and must be taken with a high degree of caution,” the statement said.
According to most private and public sector forecasters, oil prices will be rising, not falling, in the next decade, due to severe supply constraints provoked by underinvestment in exploration.
“Furthermore, the Omani government is committed to pursue an ambitious fiscal consolidation combined with expenditure optimisation, intended to cap the deficit to GDP ratio in order to prevent any risk of government debt build up,” the ministry said.
An economic policy focused on the efforts to diversify the economy away from the oil and gas sector and the planned completion of major infrastructure projects are expected to steadily raise the non-hydrocarbon GDP growth to about 4 per cent over the medium term. It must also be stressed that, according to the IMF, higher oil prices helped offset the impact of fiscal consolidation resulting in non-hydrocarbon growth to pick up to 2 per cent in 2017 from 1.5 per cent in 2016. Real GDP turned negative (-0.3 per cent) mainly due to the oil production cut in compliance with the Opec agreement.
“The argument advanced by some media outlets that the real GDP decline results from lower oil revenues is blatantly inaccurate: in fact the IMF clearly indicates that the oil revenues rose from 20.7 per cent of GDP in 2016 to 22.8 per cent of GDP in 2017.
On the other hand, the value of hydrocarbon exports increased from $16.0 billion in 2016 to $19.2 billion in 2017,” the Ministry said.
According to the provisional figures for 2017, there is a reduction in defence spending of around 14 per cent and in capital expenditure of around 9 per cent between 2016 and 2017 and as a result the fiscal deficit is on a markedly declining trend, it stressed.
“Oman had decided to delay the introduction of VAT in order not to further depress the economy. Nevertheless, it must be observed that the non-oil government revenues have increased from 6.1 per cent of GDP in 2014 to 8.9 per cent of GDP, which represents a notable jump. A heavier handed approach would have been detrimental for the private sector growth at such critical juncture,” it observed.
Oman has been successful in substantially completing its massive infrastructure plan for instance the Duqm Special Economic Zone Infrastructure Project, Al Batinah Express Road and more recently the opening of the new Muscat International Airport last month, the Ministry said.
Public investment shall now be guided by the fiscal cushion and focus on public private partnership fostering private sector participation. Likewise spending on defence is expected to further decline with a major positive impact on the fiscal burden during the forecast period, it noted.
Higher productivity through technological advances,, vocational training and efficiency gain in utilities production and distribution will be a priority followed by gradual reforms for subsidies and optimisation of Government wage bill with due care to the social impact. This is expected to address the current spending rigidity highlighted by the IMF, the Ministry stated. The CBO has recently introduced macro prudential measures to encourage private sector lending and cushion to some extent the expected rise in the interest rates.
The Government, according to the Ministry statement, is also considering the privatisation of state-owned enterprise to reduce the public debt and expand the role of the private sector. In this context the government is preparing structural reforms to promote public private partnership and facilitate foreign investments, it said.
“The overriding aim of the Omani government is a balanced budget and reduced reliance on oil revenue through a gradual enhancement of non-oil revenues and a gradual reduction of expenditure. The expenditure was more than $15 billion in 2015 and now it is at level of less than $12 billion,” it said.
“Moreover, the government budget for 2018 is based on the so called golden rule current revenues will finance current expenditure and borrowed resources are destined to capital expenditure. Indeed, the deficit is largely due to infrastructure spending, mostly for the oil and gas sector.
In other words, these expenditure will be devoted to much needed investment to boost the potential of the Omani economy and will generate enough resources to repay the additional debt they require. Furthermore, the Omani government based its 2018 budget figures on a rather conservative oil price forecast of $50 per barrel,.” “Oman will continue to strike the right balance between financial sustainability and economic growth.
The Government managed to reduce expenditure substantially by over RO 3 billion despite of the demand of growing population for governments services,” the Ministry concluded.