Oman: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
15 Nov 2022
eISBN:
9798400226472
Language:
English
Keywords:
potential GDP; transmission mechanism; return on assets; headline inflation; return on equity
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1. The authorities undertook substantial vaccination efforts and policy actions to mitigate the fallout from the COVID-19 pandemic and foster the recovery. Nearly all persons 12 years and older had been at least partially vaccinated and about 90 percent were fully vaccinated as of end-May 2022. With a high vaccination rate and declining infections, all COVID-19 social restrictions have been removed. In 2020–2021, targeted fiscal, monetary, and financial measures provided relief to households, firms, and banks supporting the recovery in non-hydrocarbon sector.

Abstract

1. The authorities undertook substantial vaccination efforts and policy actions to mitigate the fallout from the COVID-19 pandemic and foster the recovery. Nearly all persons 12 years and older had been at least partially vaccinated and about 90 percent were fully vaccinated as of end-May 2022. With a high vaccination rate and declining infections, all COVID-19 social restrictions have been removed. In 2020–2021, targeted fiscal, monetary, and financial measures provided relief to households, firms, and banks supporting the recovery in non-hydrocarbon sector.

Background

1. The authorities undertook substantial vaccination efforts and policy actions to mitigate the fallout from the COVID-19 pandemic and foster the recovery. Nearly all persons 12 years and older had been at least partially vaccinated and about 90 percent were fully vaccinated as of end-May 2022. With a high vaccination rate and declining infections, all COVID-19 social restrictions have been removed. In 2020–2021, targeted fiscal, monetary, and financial measures provided relief to households, firms, and banks supporting the recovery in non-hydrocarbon sector.

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New Covid-19 Cases

(7-Day Moving Average)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Our World in Data; and IMF staff Calculation.
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Vaccinations

(Percent of total targeted population, >12 years)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Our World in Data; and IMF staff calculations.

2. The government is continuing to implement reforms under “Oman Vision 2040”. These reforms focus, among others, on reinforcing fiscal sustainability, strengthening governance of state-owned enterprises (SOEs), boosting non-oil private sector growth, facilitating job creation, and investing in cleaner sources of energy. Financial markets have remained supportive, with narrowing borrowing spreads (reaching below emerging markets spreads for the first time since end-2018). The government has implemented many of the recommendations from the 2021 Article IV (Annex I). The Fund has provided technical assistance in key reform areas such as fiscal frameworks, tax administration, public debt management, and external sector statistics. Oil prices have risen to a multi-year high and are projected to remain high over the medium term, strengthening fiscal and external buffers.

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Sovereign Spreads

(In basis points)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: Bloomberg LP.
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Average Petroleum Spot Price Futures 1/

($/bbl)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Bloomberg LP;and IMF staff calculations.1/ Average of Brent, WTI, and Dubai Fateh crude oil.

Recent Economic Developments

3. The economic recovery is gaining traction, supported by revival in the hydrocarbon sector and the relaxation of social restrictions. Overall GDP growth rebounded from -3.2 percent in 2020 to 3.0 percent in 2021, with real hydrocarbon GDP growing by 3.7 percent mainly due to strong oil condensate production not covered by the OPEC+ agreement, and non-hydrocarbon GDP growing by 1.8 percent supported by the gradual reopening and recovery of the economy. Nevertheless, hard hit sectors, specifically construction and services, remain below pre-pandemic levels. At the same time, the labor market has gradually normalized since 2021, with increased labor force participation of nationals offsetting the reduction in expatriate workers. Recent data indicates continued recovery in expatriate workers and new labor market entrants in 2022 H1, supported by the overall economic recovery.

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Sources: Haver Analytics; country authorities; and IMF staff calculations.1/ Other services include transport, storage, financial, real estate, public administration, and others.

4. Headline consumer price inflation has been contained thus far. Headline inflation turned positive to 1.5 percent (y-o-y) in 2021, following the introduction of VAT. On the back of domestic economic recovery, continued global supply chain disruptions, and higher global energy and food prices, it edged up to 4.4 percent (y-o-y) in January 2022 but subsequently decelerated to 2.4 percent in August 2022, largely due to higher base from the introduction of the VAT, price caps on selected fuels, wheat, and flour, and a stronger U.S. dollar. Since 2021Q1, Producer Price Index (PPI) inflation has been significantly higher than CPI inflation largely reflecting the larger weight of hydrocarbon products in the PPI, which has amplified the impact of higher international oil prices, as well as the prevalence of consumer-related administrative prices and cap on selected fuels.

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Contribution to Inflation

(y-o-y, percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF Staff Calculations.
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Consumer and Producer Price Indices

(y-o-y, percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

5. High oil prices and fiscal consolidation improved the fiscal position considerably in 2021. The overall central government balance improved by 12.8 percentage points of GDP to a deficit of 3.2 percent, largely due to higher hydrocarbon revenue, expenditure restraint, and the introduction of VAT. While the 2021 budget anticipated that Energy Development Oman (EDO) would be hived off from central government from the beginning of the year, this was significantly delayed, and the government covered EDO operational expenses, amounting to 2.4 percent of GDP, until it was fully established and commenced its funding operations. Central government debt declined to 62.9 percent of GDP (69.7 percent at end-2020). State-owned enterprise (SOE) debt stood at 41.8 percent of GDP in 2021, though risks are mitigated by considerable assets in Oman Investment Authority (OIA). Net financial assets ratio—central government deposits at depository corporations and OIA’s liquid assets less central government debt—increased to -25.5 percent of GDP (-28.5 percent at end-2020).

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Fiscal Revenues and Expenditure

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.
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Contribution to Reducing Fiscal Deficit, 2021

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.1/ Due to the establishment of EDO. the gas purchasing agreement with PDO has changed resulting in higher gas cost, but also higher gas revenue.

6. The external position has strengthened substantially. Buoyed by hydrocarbon exports and fiscal adjustment, the current account (CA) deficit narrowed to 5.0 percent of GDP in 2021 (16.6 percent in 2020). The improvement was also bolstered by increased non-hydrocarbon exports and lower remittance outflows due to reduction in expatriates amid COVID-19. International reserves held at the Central Bank of Oman (CBO) increased by US$4.7 billion in 2021, including due to the August 2021 SDR allocation (US$733 million) that the authorities intend to keep as part of reserves, to US$19.7 billion (5.3 months of prospective imports and 71.4 percent of the IMF ARA metric). Including liquid assets of the OIA would raise reserves above the ARA threshold. Staff assess Oman’s external position as moderately weaker than the level implied by fundamentals and desirable policies (Annex II).

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Contribution to Current Account

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources Country authorities: and IMF staff calculations.
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Contribution to Financial Account

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

7. The banking system has weathered the recent shocks relatively well, but private sector credit growth has remained subdued. Financial soundness indicators appear healthy, benefiting from the strong buffers before entering the crisis. Banks’ capital and liquidity ratios are well above regulatory requirements. As of end-June 2022, the NPL ratio was around 4.0 percent, with provisioning exceeding 113 percent, while profitability improved slightly, with return on assets increasing to 1.3 percent (1.1 percent at end-2021). Private sector credit growth remained anemic at 2.3 percent (y/y), reflecting weaker credit demand in the hard-hit sectors. However, claims on the government and SOEs increased by 7.6 percent and 14.4 percent, while their deposits increased by 13.2 percent and 32.6 percent, respectively.

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Capital and Liquidity Indicators

(Percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.
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Banks’ Claims by Sector

(Y-o-Y growth rates, percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities, Haver: and IMF staff calculations.

Outlook and Risks

8. The economic outlook remains favorable supported by cyclical and structural factors. Overall GDP growth is projected at 4.3 percent in 2022, supported by increased hydrocarbon production due to the recent relaxation in OPEC+ quotas and stepped-up condensate production, and continued recovery of non-hydrocarbon economic activity. Benefiting from planned investments and structural reforms (Section C), non-hydrocarbon growth is projected to strengthen gradually to 4.0 percent over the medium term, and overall GDP growth is projected at 2.7 percent over the same horizon as hydrocarbon production stabilizes. Rebounding economic activity and rising global inflationary pressures are expected to push up inflation to 3.0 percent in 2022 given the relatively high dependence on imports and large weight of tradable items in the CPI basket.

Text Table. Oman: Selected Macroeconomic Projections, 2019–27 1/

article image
Sources: Country authorities; and IMF staff calculations

The coverage of non-oil trade data has been expanded in 2020 to include international transactions in free-trade zones. Therefore, data from 2020 and beyond is not comparable with non-oil trade data from previous years.

9. Fiscal and external balances will improve considerably in the near-term but moderate over the medium term. The twin balance will be driven by high oil prices and implementation of measures under the authorities’ Medium-Term Fiscal Plan (MTFP), which targets the durable elimination of fiscal deficits. A substantial fiscal surplus is expected in 2022, thereafter gradually diminishing to 1.0 percent of GDP by 2027 as oil price decline. Central government debt is expected to decline to 36.8 percent of GDP by 2027. While central government debt sustainability improved due to high oil prices and fiscal adjustment, the debt remains vulnerable to shocks to primary balance, GDP growth, the exchange rate, and interest rates (Annex III).Following the trajectory of oil prices and fiscal consolidation, external current account surpluses are expected over the medium term, causing official reserves held at the CBO to rise to 80.7 percent of the ARA metric by 2027.

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Fiscal and External Balances

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.

10. Direct spillovers on the Omani economy from the war in Ukraine have been small. With negligible direct trade or financial links to Russia and Ukraine, the direct impact of the war in Ukraine has been positive thus far, mostly via higher oil prices (Annex IV). Oman is dependent on both Russia and Ukraine for about 60 percent of its total wheat imports, but has stockpiled food items and begun to tap new markets to ensure food security. Nevertheless, the war could potentially imply adverse spillovers to Oman, including through slower global economic activity affecting demand for oil in the short term, inflation from rising and volatile international prices for food and energy, and additional supply chain disruptions.

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Food CPI Weight, Food Imports Share of Total Imports and Dependancy on Russia-Ukraine Imports

(Percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Comtrade; and IMF staff calculations.

11. Uncertainties continue to cloud the outlook, with downside risks dominating in the short run (Annex V).

  • On the upside, the outlook could be bolstered by higher-than-expected hydrocarbon windfall, accelerated implementation of structural reforms under Vision 2040, and the realization of investment projects from regional partners.

  • On the downside, risks stem particularly from uncertainty about the war in Ukraine and its impact on the global economy and oil prices, a renewed flare-up of COVID-19 infections, tighter-than-expected global financial conditions, increased inflationary pressures from higher global food and energy prices, more persistent disruption in global supply chains, pressures to spend the hydrocarbon windfalls, and climate-related events.

12. Authorities’ Views. The authorities broadly agreed with the staffs assessment of the economic outlook and risks. They are pressing ahead with fiscal and structural reforms to mitigate risks and improve the resilience of the economy.

Policy Discussions

The policy discussions focused on: (i) strengthening fiscal frameworks; (ii) safeguarding financial stability; and (iii) securing more inclusive, diversified, and sustainable economic growth.

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Text Figure. Oman: Policies to Support Recovery and Promote Economic Transformation

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

A. Fiscal Policy: Strengthening Fiscal Frameworks

13. The authorities continue to be committed to fiscal consolidation notwithstanding oil revenue windfalls in 2022. The 2022 budget maintains fiscal prudence by containing wages and goods & services expenditure while moderately increasing capital expenditure (0.5 percent of GDP) and social outlays to mitigate inflationary pressures, support economic recovery, and maintain social cohesion (1.9 percent of GDP, primarily in fuel subsidies). Strengthening the economic recovery, rebuilding buffers, and gradually reducing government debt are key priorities. Building on fiscal adjustment of 4.3 percent of GDP in the non-hydrocarbon structural primary balance during 2020–21, additional adjustment of about 2.5 percent of GDP is being undertaken in 2022 largely through containing the wage bill and other current expenditure. Given the oil revenue windfall, the fiscal balance is expected to improve to a surplus of 5.3 percent of GDP in 2022 (first time since 2013), considerably higher than budget projections. In this context, there is scope for additional temporary targeted support to the most affected households and sectors, if needed, without jeopardizing medium-term fiscal consolidation objectives. The government utilized some of the hydrocarbon windfalls to repay, prepay, and buyback part of central government debt to improve its maturity profile, and therefore the debt is expected to decline to 43.7 percent of GDP in 2022, partly reflecting non-policy factors (the increase in nominal GDP due to higher oil prices).

14. Successfully achieving the medium-term objectives under the MTFP would require additional revenue and expenditure measures. To strengthen social cohesion and public support for reforms, the authorities are finalizing a comprehensive social safety net reform to ensure adequate and efficient safety net programs, covering social security reform, subsidies, and social programs (increasing spending by about 1.0 percent of GDP from 2023). Additional capital expenditure during 2023–2025, including green infrastructure, will be about 0.4 percent of GDP yearly. A delay in phasing out electricity subsidies will increase subsidies by 0.5 percent yearly over 2023–2025. Against this background, mobilizing non-hydrocarbon revenue and containing expenditure would be necessary to achieve MTFP objectives.

  • Mobilizing non-hydrocarbon revenue: Despite the introduction of VAT in 2021, tax revenue remains low (averaging 3.3 percent of GDP over 2017–2021). There is scope to mobilize more revenue by broadening the VAT tax base through removing exemptions, except for basic food items, and revisiting the VAT rate over time. To strengthen tax administration, challenges relating to taxpayer registration, compliance, staffing, and IT systems are being gradually addressed, including with support from IMF TA The authorities have advanced preparations to implement the personal income tax (PIT) on high-income earners, estimated to yield 0.2 percent of GDP, which is now expected to be implemented in 2024.

  • Rationalizing expenditure: savings from the mandatory retirement scheme along with the revised salary scales for new hiring would amount to 1.2 percent of GDP in structural terms in 2022 and then remain constant in real terms. Ministries have started submitting monthly reports to ensure spending is in line with the Budget.

  • Targeting subsidies: reforms reduced petroleum subsidies from 3.2 to 0.1 percent of GDP between 2014 and 2021 but these would rise in 2022 due to recent price caps. Staff emphasized that the phased withdrawal of untargeted energy and water subsidies should be a priority, including lifting the cap and resuming the reforms through the authorities’ targeted National Subsidy System.

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Primary Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.
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Tax Revenue in Oman and Comparable Economies

(Percent of non-oil GDP, 2021)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

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Subsidies and Transfers

(Percent of GOP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff estimates ‘Projected.

Text Table. Oman: Decomposition of Fiscal Adjustment

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates.

Adjusted by the economic cycle, assuming revenue elasticity of one and expenditure elasticity of zero.

Percent of nominal potential GDP.

Mainly non-tax revenue and largely reflecting dividend income from OIA, which is constant in nominal term.

15. Steadfast implementation of MTFP will significantly reduce the gap with the fiscal position consistent with intergenerational equity. The nonhydrocarbon primary deficit would decline to 26.0 percent of nonhydrocarbon GDP, compared with the Permanent Income Hypothesis (PIH) norm of 19 percent (computed as an annuity constant in real per capita terms). Additional measures beyond the medium term would therefore be needed to achieve full fiscal sustainability with an equitable distribution of the oil wealth across generations.

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Projected and Sustainable Non-Hydrocarbon Primary Deficit

(As percent of non-hydrocarbon GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF staff estimates.

16. There was agreement that establishing strong fiscal frameworks with clear fiscal objectives and a long-term fiscal anchor would help achieve fiscal consolidation. Further developing institutional capacity and enhancing data quality will be essential. Building on the significant progress made under the MTFP, reforms would best be situated within a broader framework for fiscal policy making, including strengthening the medium-term macroeconomic framework, publishing a fiscal risk statement, developing a medium-term expenditure framework, and expanding fiscal coverage, which are prerequisites for adopting an effective fiscal rule. In the meantime, complementing the implicit deficit ceiling of 3 percent of GDP with a rule on the non-hydrocarbon primary balance to non-hydrocarbon GDP would delink expenditure decisions from commodity price volatility and more accurately assess the fiscal stance. A fiscal rule based on the non-hydrocarbon structural primary balance, which disconnects spending from the volatility of oil and gas prices and economic fluctuations, could be appropriate for Oman in achieving fiscal sustainability and macroeconomic stabilization objectives (see Selected Issues Paper I).

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Text Figure. Oman: Revenues, Expenditures, and Oil Price

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.

17. The authorities continue to advance reforms to strengthen public financial management and transparency.

  • Transparency. Fiscal transparency is increasing including publishing the first-ever pre-budget statement in 2021 and announcing OIA investment spending as part of the 2022 Budget The authorities emphasized their commitment to fiscal transparency and aim to provide more disclosure on revenue, expenditure, and financing in the monthly fiscal performance bulletin. With the increasing role of the rest of the public sector in undertaking investment, amounting to 9.6 percent of GDP for OIA-affiliated entities and EDO in 2022, broadening fiscal coverage beyond the central government is essential in assessing Oman’s true fiscal stance and position.

  • Public financial management reforms. A treasury single account (TSA) will be gradually rolled out starting in 2022H2 to centralize public revenue and improve cash management. A joint committee was formed between the MoF and the State Audit Institution to improve financial performance and strengthen governance and efficiency.

  • Fiscal risks. Fiscal risks are multifaceted in Oman and their potential impact on the fiscal position could be significant (Annex VI). The authorities identified several risks to the implementation of the MTFP. While fiscal adjustment under the MTFP is paramount, managing and mitigating fiscal risks would reinforce fiscal sustainability. Staff recommended publishing a fiscal risk statement to underpin fiscal policy credibility. Furthermore, explicitly taking risks into account in setting the fiscal anchor would strengthen robustness to the materialization of such risks.

18. Efforts to develop a robust and integrated asset-liability management framework are ongoing. The authorities are developing a public debt law to regulate and manage debt operations and a national register of government assets to centralize asset management and enhance its efficiency. The OIA has split its assets into the National Development Portfolio (SOE assets) and the Future Generations Portfolio (largely foreign assets), with the former aiming to contribute to the development of the economy and support the Budget through dividends and privatization proceeds. Expanding the scope of the Debt Management Committee (DMC) to coordinate the various sovereign entities involved in managing assets and liabilities would facilitate identifying and mitigating risks in the public sector balance sheet. Efforts continue to enhance public debt management, including drafting an inaugural Medium Term Debt Strategy (MTDS) to guide the government borrowing program, improve the debt profile, deepen domestic debt markets, develop a yield curve, and maintain access to the international capital markets.

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Sovereign Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff estimates.
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Sovereign Repayments

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.

Text Table. Oman: Sovereign Balance Sheet 1/

(2021 or latest available, percent of GDP)

article image
Sources: Country authorities; and IMF staff calculations and estimates.

A simplified balance sheet. It can be extended to include public pension funds and contingent liabilities.

IMF staff estimate using the perpetual inventory method.

Net present value of government hydrocarbon revenue.

Government ownership in the banking system and CBO net assets.

19. Authorities’ Views. The authorities underscored their commitment to fiscal prudence and a growth-friendly consolidation. Social safety net reform would strengthen household resilience. The authorities stressed their commitment to improving the targeting of the petroleum subsidies starting from 2023. They are examining options for reforming water subsidies. They intend to update the MTFP regularly and align it with the respective five-year Development Plan under Vision 2040. They intend to expand the mandate of the DMC to oversee sovereign assets in addition to liabilities.

B. Monetary and Financial Policies: Safeguarding Financial Sector Stability

20. The exchange rate peg continues to serve Oman well. The peg has provided a credible monetary anchor, helping to deliver low and stable inflation. A more flexible exchange rate could over time support the development of the non-hydrocarbon tradable sector and enable CBO to follow a more independent interest rate policy. However, a move away from the peg would remove a credible monetary anchor, increase uncertainty, and have limited benefits for competitiveness in the near term. Official foreign reserves, fiscal prudence, and structural reforms would continue to reinforce the peg. The peg should be reviewed regularly to ensure it remains appropriate. Further hikes in the CBO’s policy rate are expected in line with US monetary policy tightening.

21. Plans to phase out subsidies and strengthen the efficiency of the economy would necessitate enhancing monetary policy transmission channels to manage inflation. Weak monetary transmission is driven by structural excess liquidity in the banking sector, hindering interbank market activity and limiting the response of lending rates and bank credit to changes in the policy rate. As a result, control of inflation—which has been below that of the US in recent years—has relied significantly on administered pricing and subsidies (Annex VII). As these tools become less available with the progression of structural reforms it would be important to take steps to strengthen liquidity management tools and the monetary transmission mechanism to manage inflation.

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Oman and US Inflation

(percent, year on year)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

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Interest Rates

(In percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Haver, CBO and IMF staff calculations.

22. Efforts to develop a liquidity management framework are advancing. The CBO’s Monetary Policy Enhancement Project (MPEP) is working to upgrade the liquidity management framework and improve the transmission mechanism channels of monetary policy. Building capacity at the CBO is central to effectively monitor and forecast liquidity in the banking sector. Absorbing structural excess liquidity would require, among others, developing shariah-compliant instruments for Islamic banking entities, reversing existing criteria for reserve requirement eligibility to only include non-security assets, and reintroducing CBO certificates of deposit with maturities that do not overlap with T-bills.1 Paving the way for a more effective monetary policy framework requires better coordination between fiscal and monetary authorities, deepening financial markets, and strengthening liquidity management.

23. Policy trade-offs between enhancing the liquidity management framework, establishing the TSA, and supporting credit require careful coordination. A substantial sovereign-bank nexus exists where 30.4 percent of bank deposits are from the sovereign (government and SOEs), while banks’ claims on the sovereign have increased to 21.7 percent of total assets at end-2021. With the establishment of the TSA, the authorities and staff agreed that careful coordination would be needed to ensure that banking system liquidity remains adequate to support credit provision as these policy initiatives are implemented.

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Sovereign Bank Nexus

(Percent of total assets)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Haver Analytics; and IMF staff calculations.

24. The impact of tighter global financial conditions is expected to be limited, but continued vigilance remains needed (Annex VIII). Tighter financial conditions would increase interest payments on external debt, but fiscal consolidation is expected to alleviate this pressure on fiscal and CA balances. Despite the negative NFA position in the banking sector, ample liquidity and the high share of non-interest-bearing deposits (36 percent of total deposits at end-June 2022) make banks less sensitive to changes in global financing conditions. Continuing fiscal consolidation efforts, rebuilding FX buffers, and deepening domestic financial markets would help in increasing the resilience of the Omani economy against shifts in global risk appetite.

25. The gradual approach in exiting from pandemic financial policy support measures is appropriate, but close monitoring of banks’ credit quality remains essential. The loan moratorium scheme was phased out at end-December 2021, with a transition strategy for banks that allowed all affected borrowers to restructure or reschedule loans based on their revised cashflows until end-September 2022, while ensuring asset-impairment recognition and corresponding provisions. The amount subject to deferment stood at 3.4 percent of gross loans at end-July 2022. The CBO intends to restore the remaining prudential measures (capital conservation buffers, liquidity ratio, and lending ratio) to pre-pandemic levels as the impact of the pandemic declines, given comfortable banking system liquidity and capital buffers. CBO stress tests, based on June 2022 data, indicate sufficient capital buffers to withstand severe scenarios. Uncertainties to the outlook and tighter-than-expected financial conditions may pressure bank asset quality, especially to vulnerable sectors, hence asset classifications and loan-loss provisions would continue to reflect credit risk and losses.

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Loans, NPLs, and Provisions

(Percent of Gross Loans)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: CBO; and IMF staff calculations.

26. The authorities are continuing to strengthen regulatory and supervisory frameworks.

  • Banking system. With Islamic banking entities accounting for about 16 percent of the banking sector assets, the CBO is finalizing a medium-term strategy for the sector, including a lender of last resort facility and a sharia-compliant deposit insurance scheme. Enacting the new Banking Law would, among others, align the legislation with the Core Principles for Effective Banking Supervision, and provide legal certainty for actions published in the Bank Resolution Framework. The CBO aims to expand its capabilities to incorporate climate risks in its assessment of financial stability and promote green financing.

  • Capital markets. The Securities Law was enacted in 2022 to regulate the securities sector. The Capital Market Authority raised foreign ownership limits in joint stock companies to 100 percent to catalyze capital inflows and participation of expatriates in the domestic stock market. It is also finalizing a draft Regulation for Bonds and Sukuk, which includes requirements for sustainable and responsible investment The authorities plan to list some SOEs in the stock market

  • Digitalization of the financial system. Digitalization is moving forward but carefully. The CBO continues to develop the Fintech ecosystem by launching the Fintech Regulatory Sandbox Framework and testing the use of blockchain technology for trade finance. It is also developing an open banking strategy and exploring adopting a CBDC, which are currently at early stages. Keeping pace and monitoring risks, including AML/CFT risks, of digital initiatives should continue to be a priority.

  • AML/CFT. The authorities continue to strengthen their AML/CFT framework by issuing the revised supervisory instructions in April 2022 to improve compliance and enhance risk-based supervision, including onsite and offsite supervision. The National AML/CFT Strategy aims to further improve the effectiveness of AML/CFT policy and operations, and the authorities have made progress on a number of the goals outlined in the Strategy.

27. Authorities’ Views. The authorities acknowledged the need to strengthen the monetary transmission mechanism and stressed that the CBO is taking steps to enhance the monetary policy framework. They would continue to implement the MPEP and the TSA in coordination with stakeholders to ensure that banking system liquidity remains adequate. They highlighted steps to further develop the capital markets, including developing a framework for local currency bond markets.

C. Structural Reforms: Boosting Growth and Employment

28. Strong, job-rich, and sustainable private sector-led growth is needed to offer opportunities to job seekers and ensure higher living standards for future generations. Steadfast implementation of the authorities’ reform agenda under Vision 2040 is essential to achieving this goal. To this end, the Vision 2040 Implementation Follow-up Unit is actively developing and updating reform plans and following up on existing initiatives with relevant government agencies. A broad-based reform that tackles multifaceted challenges within a coherent framework would be paramount to achieving the authorities’ ambitious structural reform agenda. Well-sequenced reform measures and steadfast implementation, accompanied by sustained broad consultation with all stakeholders, is crucial to secure broad social support for the reform agenda. The key priorities include enhancing labor market flexibility, improving the business environment for private investment, advancing SOE reforms, leveraging digitalization, and continuing the implementation of green initiatives.

29. Labor market reforms are key to raise competitiveness, inclusive growth, and private sector employment. Vision 2040 aims to promote new investments based on knowledge-economy, develop the education system, and increase the participation of women in the labor market. The government has made progress to improve labor market functioning and flexibility—including by relaxing restrictions on job transfers for expatriates, reducing hiring fees for expatriates, and launching government sponsored training and habilitation initiatives to facilitate job seeking in the public and private sectors. The Job Security Fund established in November 2020 has provided unemployment benefits to facilitate the reallocation of workers. Work on updating the labor law is ongoing. Deeper reforms to support the transition to a harmonized market-based labor market would include:

  • Gradually eliminating factors that may hinder market efficiency and segment the private and public labor markets, including flexibility in hiring and firing workers, and differential policies for nationals versus expatriates. The current minimum wage of OMR325 per month can be revisited to better reflect labor productivity and there is merit to extend minimum wage requirement to cover expatriates. Wage growth in the public sector should not outpace that of the private sector to help secure the gains from reforms and keep incentives aligned between public sector and private sector jobs. Strengthening public sector performance metrics and linking them to pay scale and promotion can help foster creativity and better job performance.

  • Further increasing female employment to promote inclusive and sustainable growth, including by continuing to improve the working environment for women and providing flexibility in work schedules and locations (Box 1). Promoting more women to senior positions and encouraging female entrepreneurs under SME initiatives could generate positive demonstration effects to encourage further female labor participation.

  • Further improving the policy framework for expatriates and adopting more flexible expatriate labor policies to facilitate resource reallocation and attract more high-skilled labor, thereby increasing productivity and harnessing the positive spillovers from expatriates to the wider economy-including transfer of skills and boosting consumption and investment. The government decision to reduce fees for renewal and issue of expatriate work permits would help reduce burdens on commercial activities and support the recovery. Also, the decision to allow expatriates to invest in real estate would encourage consumption and investment of expatriates and thus support domestic demand. The authorities launched the Investment Residency Program that offers self-sponsored residence permits, which will help generate more job opportunities while attracting and retaining investment.

  • Leveraging synergies between planned social safety net and labor market reforms. The social safety net reforms—which would simplify the various social assistance programs and tackle potential weaknesses in social safety nets—provide an opportunity to press ahead with labor market reforms by strengthening social protection for nationals during the transition period.

uA001fig28

Unemployment Rate and Change in Expatriates Employment

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: Oman NCSI, Haver analytics, and IMF staff calculations
uA001fig29

Estimated Share of Women in Managerial Positions

(in percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: ILO; and IMF staff calculations.

Empowering Omani Women in the Labor Market

Oman has made significant strides in improving female participation in the labor market. Over the last two decades, female labor force participation rate (FLFP) grew from 23 percent to 35 percent in 2021, owing mainly to improvement in educational attainment among Omani women, demographic changes including migration to urban agglomerations, expansion in the services sector, and government initiatives, including under the National Strategy for Advancement of Omani Women (2007–2020).

uA001fig30

Female Labor Participation Rate

(Percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: ILO, World Bank; and IMF staff calculations.

However, female participation remains low compared to most GCC countries and EMDEs and at less than half of that of men. The low female labor participation is in contrast with the higher educational attainment of women compared to men, indicating misallocation of resources in the economy. At the same time, the share of Omani women in managerial positions has remained almost flat over the last two decades.

While there appear to be no legal restrictions on female participation, further efforts to support women’s participation in the labor force should be continued. To this effect, there is scope to further improve working environment for women, including by providing flexibility in work schedules and locations, extending maternity benefits, improving the provision of childcare, and facilitating job searching. Advancing private sector development would also facilitate forming a virtuous cycle between urbanization progress and greater economic empowerment of women. Staff estimates indicate that increasing female participation from the current 35 percent to the world average of about 50 percent would lift non-hydrocarbon potential GDP by more than 3 percent over the medium term.

uA001fig31

School Enrollment, Gender Parity Index (GPI)

(Complete Parity = 1)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: World Bank and IMF staff calculations.
uA001fig32

Potential Non-Hydrocarbon Output

(Projected potential output, 2021 = 100)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: country authorities, and IMF staff calculation.

30. Oman has been making efforts to improve the business environment. The government has promulgated a range of laws such as the Foreign Capital Investment Law (FCIL), which allows for 100 percent foreign-owned company and single shareholder companies, and the Commercial Companies Law (CCL) to improve the business environment. In October 2021, the Executive Regulations of the CCL was issued to improve the regulatory framework of commercial companies. In this regard, the recent launch of the electronic licensing service via its Invest-Easy Portal, governed by the FCIL, is welcome.

31. Advancing SOE reforms would be essential in enhancing efficiency of public resource management and promoting competition. Guided by the Rawabet program, with the main goals of enhancing governance and setting the strategic priorities and the evaluation framework across OIA-related entities, the OIA issued the Code of Governance of State-Owned Enterprises (SOEs) in February 2022 to ensure the efficient utilization of human and financial resources and assets. To promote financial transparency, OIA plans to disclose key financial performance metrics of SOEs. To stimulate private sector participation in the economy, OIA’s share in new projects is limited to 40 percent. While these reforms are welcome, it would be important to promote market competition by strengthening the role of the Competition Protection and Monopoly Prevention Centre, and gradually limiting SOEs to strategic industries as the economy diversifies.

32. Leveraging digitalization and managing its risks is key to promoting potential growth. Oman’s National Digital Economy Program (ONDEP) envisions an increase in the contribution of the digital economy from 2 percent of GDP to 10 precent of GDP by 2040. To this effect, the authorities are embarking on a set of Intitiatives under the ONDEP including, among others, the Roadmap for Government Digital Transformation (2021–2025) which aims at digitizing 80 percent of government services by 2025. In this respect, reskilling workers remains crucial to ensure their effective participation in the digital economy. The authorities’ plans to institute strategic partnerships with the private sector to support the implementation of ONDEP’s programs are welcome.

33. Pressing ahead with climate adaptation, mitigation, and transition management is essential to foster greener growth and address climate risks. Oman exhibits vulnerablities to climate change (Figure 6). To this end, the authorities have established the National Fund for Emergency to address climate challenges from natural disasters, and have committed under the Nationally Determined Contributions to reducing greenhouse gas emission by 7 percent by 2030. The National Energy Strategy has set an ambitious target to derive 20 percent of electricity from renewables by 2027. In this context, the recent authorities’ decisions to freeze new gas-based power projects and meet any additional demand for electricity from renewable sources only are commendable. Ongoing investment in cleaner energy sources, including in solar, wind, and green hydrogen, will lay the foundation for greater use of renewable energy sources. There is also the need to ensure full integration of climate-related priorities into the macroeconomic policy frameworks and the development of green financing as Oman transition to a low-carbon economy.

34. There have been improvements in the compilation and dissemination of economic data, but further efforts are needed. Data coverage is broadly adequate for surveillance. The National Center for Statistics and Information (NCSI) has updated the national accounts data based on the System of National Accounts 2008 and adopted 2018 as a new base year for national accounts data instead of 2010. The NCSI has started publishing quarterly real GDP data. There is a scope to improve coverage of fiscal data from central government to general government, and assets and liabilities of SOEs. The CBO made considerable progress to improve the quality of external sector statistics, while there is room to improve the quality of non-financial sector international transactions and historical data for non-oil trade activity. More could also be done to publish financial soundness indicators of the banking system and real estate price indices and provide disaggregate labor market data.

35. Authorities’ Views. The authorities stressed their commitment to accelerating structural reforms in line with Vision 2040. They have established offices in government entities to ensure better coordination in implementing these reforms. Labor market flexibility is being improved by relaxing restrictions on part-time jobs and movements between the private and public sectors and drafting new labor and civil service laws. They have stepped up efforts to address climate risks and manage the transition to a low carbon economy, including finalizing a Carbon-Neutral Initiative and a draft climate law.

Staff Appraisal

36. The economic recovery is gaining traction. Strong measures helped mitigate the health and socioeconomic impacts of the pandemic. Non-hydrocarbon growth is expected to strengthen over the medium term, supported by the oil price outlook, planned investments, and structural reforms. Fiscal and external buffers have increased, supported by increased hydrocarbon revenues and substantial fiscal consolidation. Nevertheless, downside risks, notably from global sources, dominate in the short run.

37. The authorities remain committed to fiscal consolidation notwithstanding oil revenue windfalls and social pressures. Significant fiscal adjustment is being implemented in 2022, which has allowed for increased social spending while still generating a substantial surplus due to the oil windfall. However, reinforcing fiscal sustainability over the medium term, as envisaged under the MTFP, and creating space for social safety net reforms and higher capital expenditure require additional measures. Thus, efforts to strengthen tax administration and implement a PIT are welcome. The phased withdrawal of untargeted energy and water subsidies should be a priority. Intensive public outreach is essential to sustain support for fiscal consolidation amid rising oil windfalls.

38. Establishing strong fiscal frameworks with clear objectives and a long-term anchor would help achieve fiscal sustainability. Fiscal frameworks would lay the foundation for adopting a fiscal rule. A rule based on the non-hydrocarbon structural primary balance, which is robust to hydrocarbon price volatility and economic fluctuations, could be appropriate. Ongoing reforms to improve public financial management and transparency are welcome and developing a sovereign asset and liability management framework should be a priority.

39. The exchange rate peg remains appropriate. The peg has provided a credible monetary anchor, helping to deliver low and stable inflation. Official foreign reserves, fiscal prudence, and structural reforms would continue to reinforce the peg. Better coordination between fiscal and monetary authorities, improved liquidity management, and deeper financial markets would improve the capacity for a more independent monetary policy.

40. Financial system risks are low, but the CBO should continue its close monitoring of bank asset quality and its efforts to strengthen regulatory frameworks. Restoring prudential rules to pre-pandemic levels should be a priority. Enacting the new Banking Law would align the legislation with international best practices. Careful coordination is needed to ensure that banking system liquidity remains adequate as plans to enhance the liquidity management framework and establish the TSA are implemented. Progress in developing capital markets is welcome.

41. Steadfast implementation of structural reforms under Vision 2040 is paramount to secure more inclusive, diversified, and sustainable growth. Strengthening the social safety net would help facilitate reforms to improve labor market flexibility. Advancing SOE reforms should also be prioritized to promote competition, strengthen governance, and stimulate private sector participation in the economy. To facilitate the digital economy transformation, worker skills will need to be upgraded. Pressing ahead with addressing climate challenges should be a priority.

42. Staff proposes that the next Article IV consultation with Oman follow the standard 12-month cycle.

Figure 1.
Figure 1.

Oman: Recent Economic Developments

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.1/ For EMs, Total GDP.
Figure 2.
Figure 2.

Oman: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.1/ Central government deposits at depository corporations and Oman Investment Authority’s liquid assets less central government debt
Figure 3.
Figure 3.

Oman: Monetary and Financial Developments

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; Bloomberg L.P., Haver Analytics; and IMF staff calculations.1/ The coverage of non-oil trade data has been expanded in 2021 to include international transactions in free-trade zones. Therefore, data from 2021 and beyond is not comparable with non-oil trade data from previous years
Figure 4.
Figure 4.

Oman: External Sector Developments 1/

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities, Bloomberg L.P., Haver Analytics; and IMF staff calculations.1/ The coverage of non-oil trade data has been expanded in 2020 to include international transactions in free-trade zones. Therefore, data from 2020 and beyond is not comparable with non-oil data from previous years.
Figure 5.
Figure 5.

Oman: Banking Sector Soundness Indicators

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; Haver Analytics, and IMF staff calculations.1/ Total (General +Specific) Provisions.
Figure 6.
Figure 6.

Oman: Climate Change

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Table 1.

Oman: Selected Economic Indicators, 2019–27

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Sources: Omani authorities; and IMF staff estimates and projections.

Includes crude oil, refining, natural gas, and LNG production.

Data prior to 2022 were adjusted by taking out expenditures on gas and oil that were hived off to Energy Development Oman in 2021.

Adjusted by the economic cycle.

Table 2a.

Oman: Government Finances, 2019–27 1/ (Millions of rials Omani, unless otherwise indicated)

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Sources Ministry of Finance; and IMF staff estimates and projections.

Table covers central government operations.

Includes the dividend from Oman Liquefied Natural GasCompany (OLNG).

Excludes net lending and equity’.

Includes’net lending and equity’.

Table 2b.

Oman: Government Finances, 2019–27 1/ (Percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates and projections.

Table covers central government operations.

Includes the dividend from Oman Liquefied Natural Gas Company (OLNG).

Excludes’net lending and equity’.

Includes’net lending and equity’.

Table 3.

Oman: Monetary Survey, 2019–27 (Millions of rials Omani, unless otherwise indicated, end of period)

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Sources: Central Bank of Oman: and IMF staff estimates and projections

Includes mainly Ministry of Finance Deposits

Includes foreign currency deposits and deposits relating to letters of credit.

Table 4.

Oman: Balance of Payments Summary, 2019–27

(Millions of USD)

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Sources: Central Bank of Oman; Ministry of Finance; and IMF staff estimates and projections.

The coverage of non-oil trade data has been expanded in 2020 to include international transactions in free-trade zones. Therefore, data from 2020 and beyond is not comparable with non-oil trade data from previous years

Historical flows include CBO and SGRF reserve accumulation.

Table 5.

Oman: Financial Soundness Indicators of the Banking Sector, 2016–22

(Percent)

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Source: Central Bank of Oman

BIS Capital Ratio = (Tier 1+Tier 2 capital)/ Total risk weighted assets.

Core Capital Ratio = Tier 1 capital/ Total risk weighted assets.

Net NPLs = Ratio of Gross NPLs net of Reserve Interest & specific provision Gross advances net of Reserve Interest & specific

Return on Assets = Net profit before taxes/Total assets.

Return on Equity = Net profit before taxes/Total equity.

Annex I. Status of Recommendations of 2021 Article IV Consultation

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Annex II. External Sector Assessment

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Annex III. Debt Sustainability Analysis

Public debt (central government) sustainability risks improved due to high oil prices and fiscal adjustment under the authorities’ the Medium-Term Fiscal Plan (MTFP). Under the baseline scenario, the authorities’ ongoing fiscal consolidation is expected to reduce public debt to about 37 percent of GDP while gross financing needs are forecasted to be 3.9 percent of GDP in 2027. Despite sizable financial buffers, the public debt trajectory remains vulnerable to risks, particularly from oil markets developments, pressures to spend oil windfalls, and shocks to primary balance, GDP growth, the exchange rate, and interest rates. Oman’s external debt has increased substantially in recent years and remains sensitive to exchange rate and current account shocks.

A. Public Debt Sustainability Analysis

Developments and Baseline Scenario

1. Debt profile. After surging from 4 percent of GDP in 2014 to about 70 percent in 2020, public debt improved in 2021 on account of high oil prices and the implementation of the MTFP. Domestically-held debt decreased from 18 to 15.7 percent of GDP between 2020–2021, while externally-held debt decreased from 51.7 to 47.2 percent of GDP for the similar period. Oman’s debt is dominated by medium and long-term maturities, with bonds and sukuk accounting for about 75 percent and 70 percent of domestic and external debt at end-2021, respectively. Further, net debt— central government deposits at depository corporations and OIA’s liquid assets less central government debt—moved from minus 24.2 percent of GDP at end-2016 to 25.5 percent of GDP at end-2021, driven by the large increase in financial liabilities.

2. Macroeconomic assumptions. Non-hydrocarbon growth is projected to gradually recover from the effects of the COVID-19 pandemic and reach about 4 percent by 2027, while overall growth is expected at 2.7 percent reflecting slower growth of hydrocarbon production. The implementation of the authorities’ fiscal consolidation, under the Medium-Term Fiscal Plan (MTFP), will improve the overall fiscal balance from a deficit of 3.2 percent of GDP in 2021 to a surplus in 2022. The non-hydrocarbon structural primary balance, which excludes hydrocarbon revenue and expenditure, would increase from -20.2 percent of GDP to -17.7 percent over the same period. Gross financing needs (GFNs) are projected to decrease over the medium term. GFNs amounted to about 23.5 percent of GDP in 2021. 1 They are expected to decline to 3.8 percent of GDP in 2022—due to high oil prices, fiscal consolidation, the economic recovery, the shift of oil and gas expenditure to EDO—and to around 3.5 percent of GDP by 2023. GFNs are assumed to be financed mainly through issuance of medium to long-term domestic and external debt, and modest drawdowns of fiscal buffers. Therefore, improvements in the primary balance and declining recourse to debt financing are projected to reduce gross (net) public debt to about 37 (-5.6) percent of GDP by 2027. It is assumed financing needs over the medium term will be predominantly financed through debt issuance.

3. The government debt trajectory is sensitive to shocks:

  • Heatmap. The heat map indicators are above high-risk DSA benchmarks, where the debt profile aspect of the assessment is breached for most indicators under the baseline scenario except market perception where the sovereign spreads have narrowed considerably. Among the standard stress tests, the negative GDP growth shock has the largest impact, highlighting the importance for fiscal consolidation to reinforce fiscal and external sustainability.

  • Growth shock. The impact on the debt-to-GDP ratio of the 1 standard deviation shock to real GDP growth, equivalent to 3.6 percentage points in each year 2023 and 2024, would increase central government debt over the medium term. In this scenario, debt dynamics are worse than the baseline, with debt being 53.9 percent of GDP by 2027 (about 17 percentage points higher than the baseline).

  • Primary balance shock. This shock deteriorates the primary balance by 3.9 percentage points of GDP in years 2023 and 2024 and increases public debt to 48.3 percent of GDP by 2027 (about 11.5 percentage points higher than the baseline).2 Gross financing needs would increase 5.7 percent of GDP in 2023, and to about 5.8 percent of GDP in 2024 (4.5 percentage points higher than the baseline).

  • Interest rate shock. While sovereign spreads have markedly declined since late 2020, a tighter financial condition is a risk over the projection period. The debt projections are quite sensitive to real interest rate shocks—the result of the sensitivity of the GDP deflator, and hence the real interest rate, to volatile energy prices.3 The debt trajectory in this scenario does stabilize around 51.7 percent of GDP by 2027.

  • Combined macro-fiscal shock. The macro-fiscal shock combines the growth and interest rate shock and a primary balance shock as in the standard examples above, together with the exchange rate shock. The effect of these shocks on central government debt and gross financing needs is large, reaching about 69 percent and 11.2 percent of GDP in 2027, respectively.

  • Contingent liability shock. This contingent liability is calibrated as 10 percent of banks’ assets (excluding claims on government). Oman’s debt is exposed to explicit contingent liabilities arising from SOEs, amounting to about 10 percent of GDP at end-2021. This shock generates gross debt of 54.1 percent of GDP and gross financing needs of 7.4 percent of GDP by 2027.

4. Maintaining fiscal discipline and rebuilding fiscal buffers will be paramount in reinforcing fiscal and external sustainability. Beside the sharp increase in debt from the 2014–15 decline in oil prices, debt had been on slightly upward trend during 2017–2018 due to insufficient fiscal adjustments, but then increased sharply in 2019 (due to contraction in the oil sector) and amplified in 2020 (due to a dual shock from the pandemic and a collapse in oil prices). Public debt remains vulnerable to risks, particularly from oil markets developments and shocks to GDP growth, the exchange rate, primary balance, and interest rates. Fiscal consolidation (underpinned by the MTFP), higher oil prices, and ongoing structural reforms are projected to considerably narrow the debt over the medium term.4

uA001fig33

Debt Forecasts

(Debt to GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: IMF staff calculations

B. External Debt Sustainability Analysis

5. Oman’s external debt has increased substantially in recent years. It increased from about 72 to 93 percent of GDP during 2017–2021, which was largely driven by the increase in central government external debt, from about 28.5 percent of GDP to 47.2 percent during the same period. The rest of the increase was due to the non-financial private sector, mainly SOEs, as they also ramped up external borrowing over the period. Total external debt is projected to decrease with ongoing fiscal consolidation.

6. Stress tests confirm that external debt dynamics are sensitive to several macroeconomic shocks, especially exchange rate and current account shocks. A one-time real exchange rate depreciation of 30 percent in 2022 would make external debt peak at 96 percent of GDP in 2027. An increase in the current account deficit (excluding interest payments) by half a standard deviation in each year from 2022 onwards, would make external debt peak at 94 percent of GDP in 2027. A combined permanent shock of a one-fourth standard deviation applied simultaneously to the interest rate, growth rate, and non-interest current account balance would raise the external debt to 87 percent of GDP by 2027.

Figure 1.
Figure 1.

Public Sector Debt Sustainability Analysis – Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF staff,1/ Public sector is defined as central government2/ Based on available data.3/ Long-term bond spread over U.S. bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r -rt(l-g) – g – ae(1-r)]/(1-g-n-gn)) times previous period debt ratio, with r= interest rate; n = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; ande = nominal exchange rate depreciation (measured by increase in local currency value of U.S dollar).6/ The real interest rate contribution is derwed from the numerator in footnote 5 asr-n (1-g) and the real growth contribution as-g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1-r).8/ Includes asset changes and interest revenues by SGRF. For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating f Iowa) remain at the level of the last projection year.
Figure 2.
Figure 2.

Public Sector Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

Public Sector Debt Sustainability Analysis – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF Staff.1/ Plotted distribution includes surveillance countries percentile rank refers to an countries2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Oman as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual observations from 1990 to 2011 fa advanced and emerging economies with debt greater than 60 percent of GDP Percent of sample an vertical ams.
Figure 4.
Figure 4.

Public Sector Debt Sustainability Analysis – Risk Assessment

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over U.S. bonds, an average over the last 3 months, 19-Jun-22 through 17-Sep-22.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 5.
Figure 5.

Public Sector Debt Sustainability Analysis – Stress Tests

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF staff.
Figure 6.
Figure 6.

External Debt Sustainability Framework, 2017–2027 (In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

1/ Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).3/ For projection, line includes the impact of oil price changes.4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.
Figure 7.
Figure 7.

External Debt Sustainability: Bound Tests 1/ 2/ (External debt in percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2010.

Annex IV. Impact of the War in Ukraine1

Direct adverse spillovers on the Omani economy from the war in Ukraine are small. Overall, the windfall from higher oil prices is expected to improve fiscal and external balances considerably. Higher global energy and food prices could have limited impact on Oman’s price developments via the import channel, given its exposure to Russia and Ukraine through wheat imports. Financial and trade linkages are limited.,

1. The main direct impact on Oman is a positive spillover, mostly via higher oil prices. Oman has about 10 percent estimated spare oil production capacity (approximately 100,000 bpd), with a current level of production of almost 1 million barrels per day. Production of natural gas accounts for a smaller share, about 17 percent of hydrocarbon GDP in 2022, and it is around full capacity. Second round affects could adversely affect demand for oil in case of a deeper slowdown in the global economy activity, especially in China which imports about 80 percent of Oman’s total oil exports. High oil prices could increase energy transition risks to Oman as the world moves gradually to cleaner energy sources over the medium term. In mitigating such risks, Oman has been investing in green energy, including solar and green hydrogen.

uA001fig34

Exports to Oman, 2019

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: Atlas of Economic Complexity.
uA001fig35

Crude Petroleum Export Destination, 2020

(Percent of total)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: The Observatory of Economic Complexity; and IMF staff calculations.

2. Food and energy inflationary pressures have been contained thus far. Since early 2022, inflation dynamics have been dominated by the higher base from the introduction of the VAT in April 2021, price caps on selected food items (wheat and flour) and selected fuels (M91, M95, and diesel since November 2021), and a stronger U.S. dollar. Bread and cereal account only for 3 percent of the CPI basket. The cap on domestic fuel prices will remain until oil prices decline below US$75 per barrel. Oman is not completely sheltered from global price developments. If inflation in major economies increases due to factors such as higher global oil and food prices and thus production costs, these higher prices could have bigger impact on Oman’s price developments via the import channel.

uA001fig36

Share of Wheat Exports to Oman (2019)

(in Percentage Points)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: UN comtrade, IMF staff calculations.

3. Fiscal and external balances will improve considerably in the near term through higher oil prices. Even prior to the war, Oman has already been benefiting from higher than budgeted (assumed oil price of $50 per barrel) inflows of hydrocarbon revenue. Every $1 increase in the oil price will add about OMR100 million to fiscal revenue annually. The fiscal balance is expected to turn to a surplus of 5.5 percent of GDP in 2022 (first time since 2013), thereby significantly reducing gross financing needs to 3.7 percent of GDP. Similarly, the external current account is projected at 6.8 percent of GDP in 2022 (-5.6 percent of GDP in 2021). 4. From a direct trade perspective, Russia and Ukraine are not important trading partners for Oman. Imports from Russia and Ukraine constituted less than 1 percent of Oman’s total imports. Oman is dependent on both Russia and Ukraine for about 60 percent of its total wheat imports; however, it has stockpiled food items and begun to tap new markets to ensure food security. On Oman’s non-oil exports, it remains less than 0.1 percent of total non-oil goods trade. Overall, at the end of 2021, Russia was the 92nd export destination of Oman and Ukraine the 71st.

uA001fig37

Goods Trade with RUS and UKR

(Percent of total non-oil goods trade)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Atlas bilateral trade data at HS2 level.

5. Oman does not rely on significant tourism receipts from either Russia or Ukraine. Though data is unavailable on the exact share of tourists from Russia and Ukraine, among the 0.65 million tourist arrivals in 2021, about three-fourths came from GCC, India, Yemen, Pakistan, and Egypt. Tourism sector is also small, accounting for less than 3 percent of GDP.

6. There appears to be no financial linkages. There is no cross ownership in the banking system between Oman and Russia and Ukraine. Links through foreign direct investment are non-existence (though the Coordinated Direct Investment Survey offers limited information) nor financial exposure through the FDI channel. As of end-Dec 2021, OIA assets (US$42.3 billion) are mainly invested in Oman (60 percent), North America (18 percent), Developed Europe (10 percent), and Asia and Pacific (5 percent). EM Europe and Central Asia region accounts for about 1.5 percent of the OIA’s investments (approximately $676 million).

uA001fig38

OIA’s Assets- Geographical Breakdown, 2021

(In percent)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Country authorities; and IMF staff calculations.

Annex V. Risk Assessment Matrix

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Note. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Annex VI. Fiscal Risks1

Fiscal risks are multifaceted in Oman and their potential impact on the overall fiscal balance and public debt could be significant. While ongoing fiscal adjustment under the authorities’ medium-term fiscal plan (MTFP) is paramount, identifying, managing, and mitigating fiscal risks would reinforce fiscal sustainability.

A. Context

1. The oil and gas (hydrocarbon) wealth and the large public sector play an important role in the economy. Oil and gas are the major sources of export income and fiscal revenues, and this income impacts the rest of the economy through government spending. As of end-2021, Oman’s economy remains particularly dependent on hydrocarbons, representing about 35 percent of GDP, 75 percent of total fiscal revenue, and 58 percent of total export of goods. Beside the central government, the public sector includes close to 170 state-owned enterprises (SOEs), operating across most economic sectors. Among others, macroeconomic uncertainty, especially shocks stemming from volatility in oil prices, realization of contingent liabilities from SOEs, and subsidies could have an even more pronounced effect on the fiscal balance and public debt.

B. Sources of Fiscal Risk

2. Fiscal risks are multifaceted in Oman. Fiscal risks can arise, among others, from:2

  • Macroeconomic uncertainty, especially from the volatility of oil prices, are relatively frequent and have large impact on the overall fiscal balance and public debt. Volatility and unpredictability of oil prices have increased in recent years, posing significant fiscal challenges. With the high degree of oil dependency, shocks stemming from the sharp fall oil price had resulted, for example, in fiscal deficit reaching 19 percent of GDP and 16 percent of GDP in 2020. Stress scenario—of a one standard deviation adverse oil price shock—would result in a stronger budget and central government net financial asset position in case of higher oil prices, and weaker fiscal positions and financial buffers if oil prices fall sharply. Similarly, while the authorities have an implicit target of containing central government debt below 60 percent of GDP over the medium term as part of their MTFP, it is essential to assess the potential impact on public debt in case of fiscal risks materialize.

  • Realization of contingent liabilities from SOEs can be a source of a fiscal risk either explicit (e.g., government loan guarantees) or implicit (e.g., support during slowdown in economic activity). SOE debt increased from 16 percent in 2015 to about 42 percent of GDP in 2021. The explicit government guarantees to SOEs amounted to 10 percent of GDP. A deterioration of the financial performance of an SOE could trigger the explicit guarantee or impose fiscal costs from direct budget subsidies to compensate loss-making activities. Beside SOEs debt, there are limited financial data on SOEs in Oman, and the size of the sector is largely unknown. Oman Investment Authority (OIA) plans to disclose key financial performance metrics of SOEs to strengthen corporate governance, making it easier for SOEs to go through initial public offerings and meet the required transparency.

  • Public private partnerships (PPPs) are at incipient stage in Oman, with the Public Private Partnership Law adopted in 2019. The authorities aim to undertake certain projects to be carried out under PPPs in the education, health, transport, and logistic sector. While PPPs could improve the efficiency of government spending, they often have complex financial structures and create fiscal risks due to the underlying contractual arrangements.

  • Climate change-related risks to Oman have increased in recent years, as evident by changes in the number and intensity of tropical cyclones. Natural disasters have modest fiscal risks so far. The fiscal cost of cyclone Shaheen in 2021 was about 0.6 percent of GDP. To address climate challenges from natural disasters, the authorities established of the National Fund for Emergency with an initial contribution of 0.3 percent of GDP.

  • Pension funds can pose fiscal risks, which may result in budget transfers from the State budget to the pension funds. In 2021, as part of public sector reforms, the authorities merged 11 different pension plans merged into two funds: (i) the “Social Security Fund” is a civil pension fund for public and private sectors; and (ii) the “Military and Security Service Retirement Fund”.

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Oil Prices and Fiscal Balance

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

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Text Figure. Oman: Upside/Downside Oil Price Scenarios 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Source: IMF Staff Calculations1/ The low oil price scenario assumes the oil price is one standard deviation below the WEO oil price from 2023 to 2027. The high oil price scenario assumes the oil price is one standard deviation above the WEO oil price for the same time period. Both scenarios assume no change in government spending, non-oil revenue collections, or external borrowing relative to baseline.
uA001fig41

SOEs Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: MoF; and IMF staff estimates

C. Conclusion

3. Comprehensive analysis and management of fiscal risks would reinforce fiscal sustainability and promote macroeconomic stability. A comprehensive and timely fiscal data, including extending coverage beyond the central government, are necessary in identifying, managing, and mitigating fiscal risks. At the same time, it is essential to strike a balance between the benefits from reducing exposure to risks against the probability of these risks occurring and costs of risk mitigation (e.g., using buffers and budget contingencies). Better understanding of fiscal risks, greater transparency including through publishing a “Fiscal Risk Statement” that highlight specific fiscal risks and their impact on GDP growth and the fiscal balance, and effective risk management practices can help underpin fiscal policy credibility and market confidence (IMF, 2012). Furthermore, explicitly taking fiscal risks into account in setting the fiscal anchor (and thereby an operational fiscal rule) needs to be robust to the materialization of such risks.

References

  • Boukezia, Racheeda, 2017, “Fiscal Risks in Algeria,” IMF Selected Issues Paper.

  • International Monetary Fund, 2012, “Fiscal Accountability, Transparency and Risk,” IMF Policy Paper.

  • International Monetary Fund, 2016, “Analyzing and Managing Fiscal Risks—Best Practices,” IMF Policy Paper.

Annex VII. Inflation Dynamics in Oman1

The recent increases in international food and oil prices have exerted upward pressures on inflation in Oman. This reflects the relative sensitivity of domestic inflation to volatility in international prices due to the high dependence on imports and greater role of tradable items in the basket of consumer goods. Inflation expectations, excess demand pressures, and population dynamics are also found to have significant effects on domestic inflation.,

A. Context

1. Headline inflation increased in 2022Q1 driven by higher international food and oil prices, before decelerating in 2022Q2 largely due to a higher base effect and a stronger U.S. dollar. While the overall inflation rate has been relatively contained thus far, rising global inflation on the back of higher international energy and food prices and renewed global supply chain bottlenecks could exert further upward pressures on domestic inflation.

2. The exchange rate peg has played an important role in containing inflationary pressures and effectively anchoring inflation expectations. Nevertheless, under a fixed exchange rate regime, the nominal exchange rate cannot move freely to correct for an inflation-induced overvaluation of the real exchange rate. In this context, the recent uptick in global oil and food prices underscores the need for containing inflationary pressures to avoid appreciation of the real exchange rate and subsequent erosion of Oman’s competitiveness. This calls for a closer look into inflation dynamics to inform policies aimed at maintaining macroeconomic stability and protecting the exchange rate peg.

B. Recent Inflation Developments

3. Oman’s headline inflation peaked at 4.4 percent (y-o-y) in January 2022 and subsequently declined. After months of deflation, headline inflation turned positive in April 2021, following the introduction of the value added tax (VAT). The initial inflationary impact of the VAT imposition was amplified by increases in domestic transportation and food prices on the back of higher international food and oil prices and continued global supply chain disruptions, which contributed about 70 percent to the total increase in inflation in March 2022 (y-o-y). However, inflation rates in Oman have been relatively lower than those seen in EMDEs and rest of the world in recent months due to the base effect from the VAT introduced in 2021and caps imposed on prices of selected fuels and food items, as well as a stronger U.S. dollar. Inflation has recently decelerated reaching 2.4 percent in May 2022 (y-o-y).

uA001fig42
Sources: Haver, country authorities; and IMF staff calculations

4. Inflation differential between Oman and the United States is largely driven by domestic policies and cyclical factors. While headline inflation rates in Oman and the US have demonstrated a broad co-movement over the past years, Oman’s inflation (y-o-y) remains below the U.S. despite the peg to the US dollar. This negative inflation differential largely mirrors the prevalence of administered prices and subsidies on selected basic food and fuel items in Oman. Nevertheless, the inflation differential significantly narrowed from March – May 2020 in conjunction with the collapse in oil prices due to the COVID-19 pandemic, reflecting the sensitivity of inflation differential to the oil cycle (Mohaddes and Williams, 2013). Since then, the inflation differential has widened during periods of higher oil prices, which reflects capping of selected prices that contributes to limiting pass-through effects of global inflationary pressures. Inflation differentials widened further in 2022 due to the high base effect of the VAT introduced in 2021.

5. Inflation has been largely driven by tradable items, reflecting high dependence on imports and susceptibility to volatility in international prices. The share of tradable items in the CPI basket remains high at about 60 percent of CPI components. Historically, tradable items have experienced higher inflation and volatility relative to non-tradable items due to the large shares of food and transport items that are more exposed to volatility in international prices. Tradable inflation has played a major role in the recent surge in headline inflation (y-oy). This notwithstanding, tradable inflation moderated in April 2022 (y-o-y), largely driven by the decline in transport inflation, before increasing again in May due to higher transport inflation. The overall inflation (y-o-y), however, continued to decelerate in April and May 2022, reflecting the high base effect and declining non-tradable inflation.

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Text Figure. Oman: CPI Weights

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Haver, country authorities; and IMF staff calculations.

C. Pass-through of External Factors into Domestic Inflation

6. International food and oil prices and global supply chain bottlenecks have played an important role in driving domestic inflation dynamics in Oman over the past years. However, the pass-through effects of international food and oil prices into domestic inflation are relatively short-lived, unlike the impact of global supply chain pressures, which appears more persistent. Particularly, based on the local projection method (Jordà, 2005) using monthly inflation data for Oman, a one-percent increase in the international food price could translate into about 0.2 percent increase in the CPI within 11 months of the initial shock, with the initial impact of the shock disappearing after 13 months.2 Similarly, a one-percent rise in the international oil price culminates in about 0.25 percent increase in domestic CPI within 11 months. The pass-through effects of a shock in the international oil price are expected to vanish 13 months after the initial shock. The strong positive correlation between domestic inflation and international food and oil prices supports the above results. The caps and subsidies on selected fuel and food items contribute to limiting the pass-through effects from changes in international oil and food prices (Regional Economic Outlook, April 2022). In addition, a one-percent shock in the global supply chain pressure, proxied by Global Supply Chain Pressure (GSCP) index, translates into about 0.2 increase in domestic CPI within 12 months, taking up to 22 months to vanish.

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Text Figure. Oman: Impulse Responses of Domestic Inflation to Shocks in External Factors

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Haver and IMF staff calculations

D. Key Drivers of Inflation in Oman

7. In the short run, domestic inflation is driven by inflation expectations, demand pressures, international food and oil prices, and global supply chain pressures. An autoregressive distributed lag (ARDL) model was estimated to identify factors driving domestic inflation, while disentangling long-run inflation relationships from short-term dynamics.3 Based on the ARDL model results (Text Table), inflation expectations, proxied by the lagged inflation (y-o-y), are found to play a key role in driving domestic inflation. The relatively large and positive coefficient of the first lagged inflation points to a high price stickiness in the near term, while the negative and significant coefficient of the fourth lagged inflation indicates that inflation is expected to be contained in about a year. In addition, excess demand, proxied by the output gap, is found to exert upward pressures on domestic inflation. Global factors, including international food and oil prices and global supply chain pressures are found to have positive and significant effects on short-term inflation, reflecting a strong pass-through of global factors into domestic inflation.

8. Population dynamics, demand pressures, international oil price, and global supply chain pressures are key drivers of domestic inflation over the long term. On one hand, population growth is largely driven by the net flow of expatriate workers who constitute about 38 percent of total population and play an important role in dampening wage-push inflation. On the other hand, the expatriate population is largely influenced by the oil price cycle. That said, the positive and significant coefficient of the population growth in the ARDL long-run equation indicates that the inflationary pressures resulting from higher population growth exceed wage containment effects stemming from increased supply of expatriate workers. Demand pressures, international oil price, and global supply chain pressures are also found to affect inflation in the long run.

uA001fig45

Population Dynamics in Oman

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Text Table. Oman: Results of the Autoregressive Distributed Lag Model

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Robust standard errors in square brackets [ ]; *** p<0.01, ** p<0.05.

E. Conclusions

9. Inflation in Oman is sensitive to external factors due to the high dependence on imports and larger weight of tradable items in the CPI basket. This culminates in relatively strong pass-through effects from international oil and food prices and global supply chain pressures into domestic inflation. Inflation expectations, population dynamics, and excess demand pressures are also found to have significant impact on domestic inflation.

References

  • International Monetary Fund. (April 2022). Regional Economic Outlook – Middle East and Central Asia. Washington D.C.: International Monetary Fund.

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  • Jordà, Ò., 2005. Estimation and Inference of Impulse Responses by Local Projections. American Economic Review, 95(1), pp.161–182.

  • Mohaddes, K. and Williams, O. H., 2013. Inflation differentials in the GCC: Does the oil cycle matter? Middle East Development Journal, 5(2), pp.1350012–1.

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    • Export Citation

Annex VIII. The Impact of U.S. Monetary Policy Tightening on Oman1

1. Monetary policy rates in Oman tend to move in line with the federal funds rate. The CBO has raised its policy rate by 375 basis points since January 2022 in response to the U.S. monetary policy tightening cycle, raising repo rates from 0.5 percent in Dec-2021 to 3.75 percent in end-September 2022.

2. Fed tightening has limited effect on non-oil economic activity. Staff VAR estimates suggest that a 75 basis points hike in the Fed rate negatively reduces non-oil GDP in Oman by 0.2percent on impact and the effect gradually dissipates after one year. This effect becomes negligible once controlled for periods of high oil price (70 dollars per barrel and above) and credit to the economy. Periods of high oil prices in Oman are normally associated with expansion in public projects and ample liquidity in the banking sector and elevated banks’ lending, which more than offset any possible adverse spillover from global financial conditions.

uA001fig46

The Effect of Fed Tightening on Non-Oil Growth in Oman

(In Percentage Terms)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: NCSI, FRED and IMF staff calculations.Note: The results show IRF responses of Non-Oil GDP to a Fed rate tightening of 75 basis points. The impulse responses were generated using a VAR regression with Cholesky ordering (Fed rate, Repo rate, lending rate, non-oil GDP). The second model controled for oil prices. All data is in quarterly frequency and covers the period 2012Q1–2022Q1.

3. Fiscal consolidation efforts over the last couple of years have improved the resilience of the Omani economy. While recent and anticipated Fed rate tightening are expected to increase the cost of funding in Oman and other emerging markets, Oman’s recent fiscal reform measures are expected to alleviate the fed tightening effect on the economy. Beside fiscal adjustments under the MTFP, the authorities utilized current oil price windfalls by reducing public debt by US$5.4 billion during the first seven months of 2022, saving more than US$330 million in future interest payments, and lowering public debt to US$48.4 billion by end-July 2022 against US$54.1 billion at end-2020. Such measures, coupled with favorable oil prices outlook, have narrowed Omani spreads to below emerging markets spreads since February 2021, partly alleviating expected increases in cost of external borrowing. Nonetheless, the government debt is exposed to refinancing and interest rate risks, with debt maturing (refixing) in 1 year representing 18.8 percent (28.8 percent) of the total debt as of end-2021.

4. Ample liquidity, large shares of non-interest-bearing deposits and limited reliance on foreign funding would to some extent insulate Oman’s financial sector from turbulence in the global market. The financial sector is mainly dominated by banks, which assets grew from 62 percent of GDP in 2011 to 117 percent in 2021. Despite having a negative net foreign assets position since 2015, the share of foreign liabilities ranged between 5 to 10 percent of total deposits. Banks rely heavily on non-interest-bearing deposits (36 percent of total deposits at end-June 2022), mainly due to large sovereign deposits and a significant share of Islamic banking in the banking sector. Banks performance has been insulated from previous Fed tightening episodes as banks maintained a constant interest rate margins over the past two decades. Given the peg to the dollar, the CBO policy rates closely followed Fed rates. Nevertheless, there is limited pass-through from Fed rates to lending rates in Oman. Credit to the economy is primarily driven by growth of domestic deposits and liquidity in the system.

uA001fig47

Banks Deposits and Credit

(Billions of Rials Omani)

Citation: IMF Staff Country Reports 2022, 343; 10.5089/9798400226472.002.A001

Sources: Haver, CBO; and IMF staff calculators.

5. While Fed tightening is not expected to adversely affect the Omani economy, more vigilance and further improving fundamentals are warranted. Sovereign, financial, and real economic activity in Oman appear to have limited exposure to current Fed tightening, particularly during periods of elevated oil prices. The authorities should alleviate any potential impact by reinforcing fiscal sustainability, accommodating any possible domestic liquidity needs in the system, and supporting hard-hit sector if needed. Beyond these immediate measures, rebuilding FX buffers, and deepening domestic financial markets would help in improving the resilience of the Omani economy against shifts in global risk appetite.
1

Banks are allowed to meet up to 2 percent of reserve requirements through government securities.

1

Repayments of T-bills accounted for 15 percent of GDP. At end-2021, the stock of T-bills, which are issued largely for monetary operations, stood at 3.2 percent of GDP and is assumed to be rolled over the projection period.

2

The primary shock is equal to half of the 10-year historical standard deviation.

3

The large share of Oman’s energy sector and recent large swings in energy prices have resulted in very volatile path for the GDP deflator, contributing to the sharp increase in real effective interest rate.

4

High current oil price enables a large 3-year adjustment in cyclically adjusted primary balance (Figure 3).

1

Prepared by Abdullah AlHassan (MCD).

1

Prepared by Abdullah AlHassan (MCD).

2

Fiscal shocks can be large, adverse, and nonlinear. Cross-country analysis shows that governments experienced on average an adverse fiscal shock of 6 percent of GDP once every 12 years (IMF 2016).

1

Prepared by Muayad Ismail (MCD).

2
To assess the pass-through effects of external factors into domestic inflation, the following equation is estimated:
πt+k=αk+Σj=1lδπt−j+βkxt+Σj=1lγjxt−j+θzt+εt

is the monthly headline inflation (y-o-y), which is seasonality adjusted to account for seasonality in inflation. x is a set of external global factors that are shocked in isolation of each other. These global factors. These global factors include the change in international food price based on the IMF Primary Commodities Food Price Index, change in average spot oil prices, and change in Global Supply Chain Pressure Index (GSCPI) from the Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed. zt is a set of control variables, specifically the nominal effective exchange rate, and the two remaining global factors that are not endogenously included in xt. β measures the pass-through effects of external factors into domestic inflation and δ captures the persistence of headline inflation in Oman. The number of lags in are selected based on Schwarz information criterion.

3

The ARDL model estimated using quarterly data for the period 201Q3–2021Q4, where the dependent variable inflation (y-o-y) was regressed on a number of explanatory variables, including lagged inflation as a proxy of expectation; population growth extrapolated assuming that quarterly population follows the general trend of annual population; excess demand pressure proxied by the output gap calculated using HP filter; change in nominal effective exchange rate, change in average spot oil price, change in international food price based on the IMF Primary Commodities Food Price Index; and change in Global Supply Chain Pressure Index (GSCPI) from the Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed. The Long Run Form and Bounds Test was used to assess long-run inflation relationships in the ARDL model.

1

Prepared by Haytem Troug (MCD).

Other IMF Content

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Cover IMF Staff Country Reports
Oman: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2022: Issue 343
Publisher:
International Monetary Fund
ISBN:
9798400226472
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9798400226472.002

New Covid-19 Cases

(7-Day Moving Average)

Vaccinations

(Percent of total targeted population, >12 years)

Sovereign Spreads

(In basis points)

Average Petroleum Spot Price Futures 1/

($/bbl)

Contribution to Inflation

(y-o-y, percent)

Consumer and Producer Price Indices

(y-o-y, percent)

Fiscal Revenues and Expenditure

(In percent of GDP)

Contribution to Reducing Fiscal Deficit, 2021

(Percent of GDP)

Contribution to Current Account

(Percent of GDP)

Contribution to Financial Account

(Percent of GDP)

Capital and Liquidity Indicators

(Percent)

Banks’ Claims by Sector

(Y-o-Y growth rates, percent)

Fiscal and External Balances

(Percent of GDP)

Food CPI Weight, Food Imports Share of Total Imports and Dependancy on Russia-Ukraine Imports

(Percent)

Text Figure. Oman: Policies to Support Recovery and Promote Economic Transformation

Primary Balance

(Percent of GDP)

Tax Revenue in Oman and Comparable Economies

(Percent of non-oil GDP, 2021)

Subsidies and Transfers

(Percent of GOP)

Projected and Sustainable Non-Hydrocarbon Primary Deficit

(As percent of non-hydrocarbon GDP)

Text Figure. Oman: Revenues, Expenditures, and Oil Price

Sovereign Debt

(Percent of GDP)

Sovereign Repayments

(Percent of GDP)

Oman and US Inflation

(percent, year on year)

Interest Rates

(In percent)

Sovereign Bank Nexus

(Percent of total assets)

Loans, NPLs, and Provisions

(Percent of Gross Loans)

Unemployment Rate and Change in Expatriates Employment

Estimated Share of Women in Managerial Positions

(in percent)

Female Labor Participation Rate

(Percent)

School Enrollment, Gender Parity Index (GPI)

(Complete Parity = 1)

Potential Non-Hydrocarbon Output

(Projected potential output, 2021 = 100)
Figure 1.

Oman: Recent Economic Developments
Figure 2.

Oman: Fiscal Sector Developments
Figure 3.

Oman: Monetary and Financial Developments
Figure 4.

Oman: External Sector Developments 1/
Figure 5.

Oman: Banking Sector Soundness Indicators
Figure 6.

Oman: Climate Change

Debt Forecasts

(Debt to GDP)
Figure 1.

Public Sector Debt Sustainability Analysis – Baseline Scenario

(In percent of GDP unless otherwise indicated)
Figure 2.

Public Sector Debt Sustainability Analysis – Composition of Public Debt and Alternative Scenarios
Figure 3.

Public Sector Debt Sustainability Analysis – Realism of Baseline Assumptions
Figure 4.

Public Sector Debt Sustainability Analysis – Risk Assessment
Figure 5.

Public Sector Debt Sustainability Analysis – Stress Tests
Figure 6.

External Debt Sustainability Framework, 2017–2027 (In percent of GDP, unless otherwise indicated)
Figure 7.

External Debt Sustainability: Bound Tests 1/ 2/ (External debt in percent of GDP)

Exports to Oman, 2019

Crude Petroleum Export Destination, 2020

(Percent of total)

Share of Wheat Exports to Oman (2019)

(in Percentage Points)

Goods Trade with RUS and UKR

(Percent of total non-oil goods trade)

OIA’s Assets- Geographical Breakdown, 2021

(In percent)

Oil Prices and Fiscal Balance

Text Figure. Oman: Upside/Downside Oil Price Scenarios 1/

(Percent of GDP)

SOEs Debt

(Percent of GDP)

Text Figure. Oman: CPI Weights

Text Figure. Oman: Impulse Responses of Domestic Inflation to Shocks in External Factors

Population Dynamics in Oman

The Effect of Fed Tightening on Non-Oil Growth in Oman

(In Percentage Terms)

Banks Deposits and Credit

(Billions of Rials Omani)