Muscat: The last half-century has seen a period of unprecedented economic and social development across all sectors in the Sultanate. Yet the sharp fall of oil prices since 2014 has been a burden on government finances, directly increasing the gap between government revenues and expenditures.
The government has undertaken various measures to address this challenge by increasing non-oil revenues and reducing government expenditures and avoided any measures with social impacts.
Yet the prolonged fall of oil prices weakened the government’s ability to continue funding its operations, especially given the inflexible nature of the remaining expenditures, leading to large annual deficits.
To fund these deficits, the government heavily relied on borrowing, particularly
from international markets, in addition to reducing its reserves. This has significantly increased debt levels and debt servicing costs to unsustainable ones.
Moreover, the dual shock of the COVID-19 pandemic and oil market disruptions have placed an urgent spotlight on the country’s fiscal situation. This has facilitated an increased perception of credit risk and hence consecutive reductions in Oman’s
sovereign credit ratings from international credit rating agencies to reach almost junk levels.
The reductions in ratings are expected to continue in case no additional fiscal consolidation measures are taken, which will make borrowing become more
difficult and costlier.
In light of these fiscal challenges, and given the uncertainty in the future of oil prices, a Medium-Term Fiscal Plan (MTFP) for the years 2020-2024 was developed with an overarching objective of achieving fiscal balance in the medium term.
The implementation of this plan will be alongside the implementation of several economic programs and measures aiming to improve the business environment and stimulate investments, in addition to the launch of a social safety net that will reduce the impacts of the fiscal measures on selected groups of society.
ECONOMIC AND FISCAL PERFORMANCE
The discovery of oil and gas served as an engine for Oman’s remarkable progress during the past five decades. Oman has long recognized the need to diversify its economy and was the first country among the Gulf Cooperation Council (GCC) countries to launch a long-term strategy – Vision 2020 – that focused on economic diversification as a way of reducing its dependency on the oil sector. Vision 2020 focused on diversifying the economic production base by encouraging investment in non-oil activities.
Thanks to these efforts, the Sultanate has grown significantly during this period, and nonhydrocarbon activities have supported this growth increasingly. Real gross domestic product (GDP) has almost doubled from RO 15 billion in 1998 to RO 29 billion in 2019. The contribution of the non-hydrocarbon sector has more than tripled from RO 5 billion to RO 19 billion, in constant prices, over the same period. Nonhydrocarbons accounted for nearly 67% of Oman’s real GDP in 2019 compared to 36% in 2001.
Through Vision 2020’s period of economic expansion, the Sultanate has maintained price stability through prudent monetary policy. Inflation rates (measured by the Consumer Price Index) have averaged less than 2 percent during the execution of Vision 2020.
Furthermore, the domestic banking sector in the Sultanate has shown resilience and is well-positioned to deal with any economic shocks that may arise due to global trends while continuing to support economic activities, especially in the non-oil sector.
Prior to the COVID-19 pandemic, economic growth was set to return in 2020 as major non-hydrocarbon projects and Ghazeer gas projects were due to become operational. According to the IMF’s October 2019 World Economic Outlook, Oman’s real GDP was expected to grow by 3.7% in 2020 and 4.3% in 2021.
The government has made substantial fiscal adjustments since the decline in oil prices in mid-2014. Key fiscal reforms over the 2014-2019 period undertaken to support this fiscal consolidation helped in achieving the following: Increasing non-hydrocarbon sources of revenue: by 17% primarily driven by the introduction of excise taxes, the expansion of the corporate income tax, and some reforms in government service fees.
Reducing civil ministry spend: by 13% thanks to efficiency gains on government operations. Reducing the investment budget: by more than 20% driven by efforts to prioritize and rationalize new projects prior to their inclusion in annual spending plans.
Subsidy reforms: Expenditures on subsidies have fallen by almost 50% primarily due to fuel subsidy reforms.
At the same time, The Implementation Support and Follow Up Unit (previously), and the relevant government entities have pushed business environment reforms under the 9th Five-Year Development Plan.
Government subsidies to public services account for approximately RO1 billion. Whereas all public either citizens or expatriates, companies and financially capable people benefit from the subsidized services. The Sultanate recognizes adjustments to the revenue-raising framework alone are not enough; as such, the Government is also pursuing a range of cost containment and expenditure optimization initiatives.
Redesigning subsidies and the social safety net are critical components to helping contain future expenditure growth and capture savings opportunities.
This initiative intends to reallocate the subsidy to the vulnerable and people who deserve it by gradually increasing the electricity and water tariffs and ensuring that support is provided for vulnerable populations.
The speed of the recent downgrades highlights the severity of the fiscal downturn while the continuing negative outlook suggests additional downgrades are likely over the next 6-12 months without additional fiscal reforms.
Sovereign credit ratings impact the ability of a sovereign to access the international debt markets, guide on expected interest rates, and determine the type of issuance options available. With the accelerated credit rating downgrades, the Sultanate’s ability to access international credit markets has become more limited, and the borrowing options more difficult and costly. In light of these challenges,
and given the uncertainty in future oil price expectations, this MTFP seeks to avoid undertaking measures that could have more severe socioeconomic implications and to avoid reducing the Sultanate’s attractiveness as an investment destination. The implementation of these fiscal consolidation measures and policies included in the plan will result in some temporary socio-economic impact.
However, the plan will help improve the Sultanate’s financial position and reduce the public debt and improving the overall credit environment in the Sultanate.
FISCAL SUSTAINABILITY
An enabler for Vision 2040 The Sultanate’s fiscal sustainability is considered an enabler for Oman Vision 2040, and an immediate priority to allow the Vision’s implementation to begin on a strong standing. Fiscal sustainability aims to improve the ability to withstand financial circumstances and absorb and economic or social challenges that may arise in the future, as well as ensure financial efficiency for the government and the ability to fund the vision’s development plans. The Vision’s objectives are articulated in twelve national priorities, of which, four priorities have particularly shaped the Sultanate’s medium-term fiscal strategy.
These include:
- Economic diversification and fiscal sustainability
- The private sector and the global investment value-chain
- 3. Social Protection and wellbeing 4. Governance of the state’s administrative bodies, resources, and projects 6 3.
The Medium-Term Fiscal Plan (MTFP) 2020-2024 The Medium-Term Fiscal Plan (MTFP) 2020-2024 has been developed to reduce the primary and overall fiscal deficits as a percentage of GDP in the medium term to sustainable levels in the mid-term period. The MTFP serves as the financial framework supporting Oman 2040 vision. The MTFP has developed a holistic framework based on the following pillars: 1. Supporting economic growth: Sustainable fiscal consolidation requires that the economy grow and develop.
VAT
The Sultanate introduced VAT by the issuance of Royal Decree No 121/2020 on October 12, 2020. The Value Added Tax (VAT) will be imposed within 180 days from the date of publication of Royal Decree in the Official Gazette. Oman will join 160 other countries in the world that impose the VAT. The introduction of VAT will serve as the foundation for the Sultanate’s revenue-raising framework by introducing a broad-based indirect tax. A socio-economic impact assessment has been carried out by an independent, third-party to assess the fiscal, social, and economic impact of VAT in Oman.
INCOME TAX ON HIGH EARNERS
The government is actively looking at all sources of revenue in order to plug the gap in the deficit. This includes looking at personal income tax. The use of personal income tax is a widely used tool to diversify governments’ revenues.
The proceeds from personal income tax it usually directed towards public services and social programs, as it is used as a tool to redistribute the income within a society. Currently, the government is evaluating the tax and how it can best be implemented. The government will evaluate the tax from all aspects including, societal impacts, economic impacts, and fiscal impacts. In order to ensure the most
efficient and equitable tax for all.
The Sultanate’s fiscal strategy, in line with Vision 2040, aims to increase the efficiency of the state administrative apparatus and foster a business environment that supports private sector growth. The Government acknowledges that in order to carry out the fiscal reform package as presented, several additional improvements to public finance management (PFM) activities in the Sultanate are necessary.
LABOUR REFORMS
The Ministry of Labor is undergoing a comprehensive review of the labor:
1) focusing on the laws and regulations governing the labor market;
2) tracking significant changes in labor market conditions.
As part of the country’s development, it is necessary to take stock of changes in the labor market and structure. In order to be able to compete globally, Oman has to increase flexibility in the labor market to adapt to changes in supply and demand.
A review of the laws and legislation will help to raise the living standards of Omanis and ensure that companies will employ Omanis.
As part of the process, the Ministry of Labor is reviewing the policies and rates Omanization has imposed on various sectors by making Omanization targets more flexible. These policies will help to increase employment opportunities for Omanis and help to attract businesses by reducing structural labor rigidity.
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