Oman banking sector remains wellcapitalized and liquid: IMF

The Executive Board of the International Monetary Fund (IMF) said Oman authorities have acted decisively to address the health and economic effects of the COVID-19 pandemic.

While gradual recovery is expected in 2021 and beyond, combating the pandemic and mitigating its effects remains the key nearterm priority until the recovery is firmly established.

The 2021 fiscal stance balances substantial consolidation with significant support for hard-hit sectors. Over the medium term, steadfast implementation of the authorities' MediumTerm Fiscal Plan (MTFP) is needed to reduce fiscal vulnerabilities and put debt on a firm downward path.

The banking sector remains wellcapitalized and liquid, benefiting from the sustained prudent oversight by the central bank and the strong buffers before entering the crisis. Over the medium term, accelerating structural reforms is paramount to unlock growth potential. In this regard, the authorities have embarked on a broad range of structural reforms to further boost job creation, manage public resources more efficiently, and attract more private investment.

The IMF mission highly values the candid discussions with the authorities and expresses its gratitude for their excellent cooperation.

Oman moved rapidly and decisively to contain the COVID-19 crisis. containment measures and health support to the population have limited the cases and fatalities.

The authorities' cautious approach toward reopening has helped contained the new cases since early 2021. Fiscal, monetary, and financial support measures introduced by the government have been deployed to ease the burden on households, firms, and banks.

The economy is expected to gradually recover from the pandemic and strengthen over the medium term. Official provisional data indicate that real GDP contracted by 2.8 percent in 2020, with non-hydrocarbon growth at -3.9 percent and a shallower decline in hydrocarbonGDP.

Benefiting from the projected modest increase of hydrocarbon production, overall GDP is projected to grow around 2.5 percent in 2021 with about 3 percent average 2 growth over the medium term. Non-hydrocarbon GDP growth of 1.5 percent is projected for 2021, as vaccine rollout gradually restores domestic economic activity along with the recovery of external demand.

Thereafter, it increases gradually over the medium term as the impact of fiscal adjustment subsides, reaching 4 percent in 2026. Inflation turned negative in 2020 owing to subdued demand, but it is expected to increase to 3 percent in 2021 given the introduction of VAT and recovery in aggregate demand, before declining to about 2.5 percent over the medium term.

Fiscal and external balances are projected to improve considerably over the medium term. After deteriorating sharply in 2020 to a deficit of about 19.3 percent of GDP, reflecting lower oil revenue and a slump in economic activity, the fiscal balance is projected to improve to -2.4 percent of GDP in 2021 (owing to recovery of hydrocarbon revenue beyond that anticipated in the MTFP, hiving off hydrocarbon expenditure to Energy Development Oman (EDO), significantly higher nominal GDP reflecting a rebound in hydrocarbon prices, and fiscal adjustment measures), and move to a surplus over the medium term,

with a substantial decline in the government debt. After rising to 13.7 percent of GDP in 2020, the current account deficit is expected to decline to 0.6 percent of GDP over the medium term due to fiscal consolidation and higher trade balance surplus.

However, there are substantial uncertainties around the outlook. The emergence of COVID-19 variants could prolong the impact of the pandemic on the global outlook and financial conditions, and thus intensify the economic impact on Oman. Volatility in oil prices would have a significant impact on the outlook.

Fiscal consolidation could weigh on economic growth and social pressures could create headwinds for reforms. Upside risks to the outlook would come from a strong roll-out of vaccination and a stronger rebound in global activity than anticipated. Strong fiscal consolidation and continued implementation of structural reforms could considerably improve the outlook.