- IMF says Oman budget position is unsustainable
- Fiscal deficit is projected at 14.8 per cent of GDP for 2015
The IMFs report on the annual Article IV consultation with Oman has issued a warning that Omans financial position is unsustainable on present trends in government spending and income.
On April 30, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Oman and considered and endorsed the staff appraisal without a meeting, the report posted on the IMF website on 6 May said. The overall fiscal deficit is projected at 14.8 per cent of GDP in 2015 and would remain in double digits over the medium-term in the absence of fiscal reforms. Without further fiscal adjustment, financing the projected cumulative fiscal deficit between 2015 and 2020 would exhaust fiscal buffers and raise debt to about 25 per cent of GDP, or increase government debt to over 70 per cent of GDP by 2020 if buffers were to be preserved.
It would be prudent for Oman to begin the fiscal adjustment process early, given limited buffers and high breakeven oil prices, the report concluded. Because much of the oil price decline is expected to be sustained, any delay in starting medium-term fiscal reforms would further worsen the fiscal outlook and force deeper and less gradual adjustments later with a larger impact on growth. A reversal of the recent oil price decline would enable saving the windfall revenues for intergenerational equity.
On the expenditure side, curtailing the increase in government jobs in civil and defence services and keeping the growth in government employee compensation constant in real terms; gradually phasing out subsidies, complemented by a social safety net, other targeted mitigating measures, and a well-designed communication strategy; and rationalising defence spending, would generate the savings, the report added. Undertaking these reforms in a phased manner and preserving room for capital expenditures would limit the downward drag on growth.
The report said there is large potential for raising non-oil revenues by expanding tax categories and reconsidering tax rates and exemptions for corporates, identifying new sources such as selected excises, VAT, and property taxes.
Implementing a tax on outward remittances is not an efficient way of raising revenues because it has an insignificant revenue-generating potential while it could reduce the overall competitiveness of Omans private sector. Instead, introducing income tax for nationals and expatriates would be less distortive, the report said. Efforts to establish fiscal sustainability should be underpinned by reforms to modernise the current budget system. There is a need for integrating the dual budget, establishing a medium-term budget framework that is integrated with the medium-term macroeconomic framework, and improving the public financial management system. Strengthening the macrofiscal unit will provide expertise in some of these areas.
The report said that Omans non-hydrocarbon growth rate is forecast to drop from 6.5 per cent in 2014 to 5 per cent in 201516 consistent with the governments spending plans, and thereafter to 4.5 per cent in 2017-20 with risks tilted to the downside.
The average inflation rate remained at 1 per cent in 2014, given low non-food inflation. Inflation is projected to remain below 3 per cent in the medium term.
The IMF said the capital adequacy ratio of banks stood ] at 15.1 per cent. This was supported by low net nonperforming loans and high provisioning ratios of 0.6 per cent and 136 per cent, respectively, at end-September 2014.
Stress tests suggest that under a combination of interest rate and market shocks, the solvency of the banking system would be preserved, although some banks would be required to raise capital to meet the central banks regulatory capital requirement, the report said. Banks liquidity situation augurs well for meeting emerging private sector credit demand, and for further financial deepening.
Efforts toward economic diversification should be strengthened, to reduce dependence on oil and to generate jobs for nationals, the report said. Oman needs to improve the business environment by removing impediments to physical, legal, and business infrastructure. Although the government is making serious efforts to develop the SMEs segment, greater coordination between the agencies involved would be beneficial. Developing domestic debt markets will strengthen the diversification process and reduce concentration risks of banks.