Oman’s economy is dominated by the oil sector and a large central government. Oil accounts for about 40 percent of GDP. about 92 percent of exports, and about 75 percent of budgetary revenues.1 Central government expenditure was equivalent to about 49 percent of GDP on average during 1981—95, one of the highest ratios in the world. Budget deficits have been high, averaging about 10 percent of GDP over 1991—95. Fiscal adjustment has become an increasingly important concern for Oman, since the assets of the State General Reserve Fund (SGRF)—established in 1980 to create a source of revenues after the exhaustion of oil reserves—have been substantially depleted to finance the large budget deficits. The government has been fully aware that the fiscal policy stance pursued through 1995 is unsustainable, and accordingly it adopted a medium-term fiscal consolidation plan beginning in 1996 as part of its Fifth Five-Year Plan. As a result of the government’s swift implementation of policies envisaged under the FFYP, the budget deficit declined to an average of 2.4 percent of GDP in 1996–97, and the ratio of expenditure to GDP fell to about 38 percent. The effect of fiscal contraction on non-oil real GDP growth has been moderate, which might be evidence for an increasing robustness and independence of private sector economic activity from the government’s impulses.

Policies Toward Sustainable Growth