An International Monetary Fund’s (IMF) virtual mission to Oman – conducted from January 17 to January 31 to review economic developments, the outlook and policies – has commended the sultanate’s swift response to contain the spread of COVID-19 infections in the country.
The mission also lauded the substantial fiscal measures that Oman has implemented to mitigate the impact of COVID-19 on the economy.
The discussions between the IMF team and the authorities here focused on the impact of COVID-19 pandemic and related oil price shock, and policy priorities during the recovery phase and beyond.
Economic developments and outlook
‘The authorities of Oman responded rapidly in 2020 to contain the spread of COVID-19 infections. The swift and well-coordinated response effectively limited the spread of the coronavirus in the latter part of 2020, but the social distancing and other restrictions weighed heavily on economic activity, particularly those requiring close human contact,’ the mission said in a concluding statement of the Article IV Consultation of Oman, held annually.
In addition to the direct impact of COVID-19 on economic activity, sharp declines in oil prices triggered by the global spread of the pandemic, and cuts in oil production under the OPEC+ agreement, weighed on the oil sector.
The IMF statement added that fiscal measures to support the economy included interest-free emergency loans, waiving or reducing selected taxes and fees, flexibility to pay taxes in installments, and establishing the Job Security Fund to support citizens who lost their jobs.
In addition, the Central Bank of Oman (CBO) eased financial conditions through lower interest rates and liquidity injections, deferred loan installment payments, and relaxed macro prudential requirements on capital buffers and liquidity ratios.
‘Nevertheless, the shocks took a heavy toll on the economy in 2020. Overall GDP contracted by 6.4 per cent (revised up from the previous IMF forecast of -10 per cent)’, the IMF mission observed.
‘Construction, hospitality, and wholesale and retail trade sectors were particularly hard-hit. Employment conditions due to the economic slowdown were mostly relieved by a 15.7 per cent reduction in expatriates and the flexibility to negotiate temporary wage cuts.’
To address rising fiscal vulnerabilities, the mission acknowledged, the authorities announced an ambitious medium-term fiscal adjustment plan and broad public-sector reforms.
The fiscal adjustment plan (Tawazun) targets the elimination of the fiscal deficit over 2021-25 by boosting non-oil revenues while keeping nominal fiscal expenditures broadly constant.
‘A modest recovery is anticipated for 2021, with further strengthening of growth over the medium term, but there is substantial uncertainty around the outlook. While the roll-out of vaccination and the easing of social distancing restrictions would support increased activity globally as well as in Oman, substantial medium-term fiscal consolidation would weigh on growth.’
‘Steady implementation of fiscal adjustment plans would strengthen fiscal and external balances substantially over the medium term.’
‘Combating the pandemic and mitigating its effects should remain a priority until the recovery is firmly underway. Short term policies should continue to address the health crisis, including vaccine rollout, support the recovery, minimize long lasting economic scarring, and mitigate risks to financial stability,’ the IMF statement said.
The mission added that premature and overly rapid retrenchment could hurt early recovery and pose even larger costs on the economy.
‘In this regard, withdrawal of the various types of fiscal, monetary, and financial sector support measures should be carefully coordinated and calibrated to continue to support hard-hit but viable sectors, while gradually reducing support for those that no longer need it.’
‘The Medium-Term Fiscal Balance Plan is welcome, and its successful implementation is key to reinforcing fiscal sustainability and alleviating financing pressures’, the IMF team stated, noting that the key revenue measures under this plan ‘include: (i) introducing VAT in 2021; (ii) a personal income tax on high-income earners being developed; and (iii) full-year impact of the expansion of the excise tax base in 2020. Key expenditure measures include (i) containing the wage bill via civil service reforms; (ii) targeting energy subsidies to the most vulnerable groups; (iii) streamlining capital expenditure; and (iv) broad-based improvements in expenditure efficiency’.
‘These policies would also help mitigate structural weaknesses in public finances, notably heavy reliance on hydrocarbon revenue and rigidities in expenditure,’ the IMF mission added.