IMF lauds Sultanate’s fiscal reforms in response to downturn
The International Monetary Fund (IMF) has broadly welcomed the fiscal policy measures and fuel subsidy reforms adopted by the Omani authorities in the wake of the slump in international crude prices.
The positive endorsements came in an ‘end-of-mission’ press release issued by the multilateral lending agency upon the conclusion of a visit of an IMF team led by Allison Holland as part of the 2017 Article IV consultations with the Omani government.
“We have had constructive discussions with the authorities over the past two weeks. The authorities recognise that the sustained decline in oil prices underscores the need to undertake sustained fiscal adjustment, accelerate economic diversification, and increase the role of the private sector to stimulate the economy,” the world body said in its press statement.
According to the IMF, economic growth moderated in 2016 to about 3 per cent, from 4.2 per cent in 2015, with non-hydrocarbon growth slowing from 4.2 to 3.4 per cent given the continued impact of low oil prices. Overall growth, however, is expected to remain flat in 2017 as the oil production cuts agreed with Opec will fully offset the 2.5 per cent growth in the non-hydrocarbon sector, it noted.
Applauding the Sultanate’s fiscal, regulatory and policy responses in reaction to the downturn, the IMF said: “We are encouraged by the authorities’ efforts to turn the goals of the 9th Development Plan into concrete actions through the Tanfeedh implementation process. Successful implementation of these initiatives will boost medium-term growth prospects.”
Non-hydrocarbon growth, it said is expected to average about 3.5 per cent over the medium term. Improving the business environment, including by streamlining regulatory processes and increasing the level of vocational skills, will support efforts to increase private sector employment. While inflation is expected to increase in 2017 reflecting an expected increase in imported food prices and the continued impact of subsidy reforms, it should moderate subsequently, the Fund noted.
The statement also commend the authorities on the “important policy measures” it had taken in 2016, including fuel price reform, to address the impact of lower oil prices on government finances, but implementing the budget proved challenging.
The combination of lower oil prices and higher spending has resulted in a widening of the budget deficit to around 22 per cent of GDP. The authorities have set appropriately ambitious fiscal targets in the 2017 budget that would reduce the deficit by almost half to 12 per cent of GDP if achieved. “Steadfast implementation of the budget will protect policy credibility and sustain investor confidence, which has underpinned Oman’s access to international financing at favourable terms over the past year,” the Fund stated.
Over the medium term, timely implementation of the increase in corporate income tax and planned introduction of VAT and excise duties will underpin a continued improvement in the fiscal position. The current account deficit, estimated at 17 per cent of GDP in 2016, is also expected to decline, it further pointed out The authorities .“and the IMF team agreed that to maintain fiscal sustainability and support the exchange rate peg over the medium to long term, additional fiscal adjustment — beyond the measures that are already in the pipeline — will be needed. The team encouraged the authorities to anchor the proposed adjustment in a medium-term fiscal framework, and recommended that additional measures could include phasing out remaining subsidies, restraining government expenditures — both recurrent and capital, and increasing non-oil revenues further. The team advised the authorities to continue to strengthen their framework for debt and asset management to ensure financing needs are effectively managed, while further fiscal reform would also help limit borrowing costs,” the world body said.