The Fund welcomed the fiscal balance plan and said introducing value-added tax (VAT) in 2021, a personal income tax on high-income earners being developed, and full-year impact of the expansion of the excise tax base in 2020 are key to reinforcing fiscal sustainability and alleviate financial pressure. In addition, containing the wage bill via civil service reforms; targeting energy subsidies to the most vulnerable groups; streamlining capital expenditure; and broad-based improvements in expenditure efficiency are also key to reforms.
When introduced, Oman will be the first country in the GCC to levy income tax in the region. It is expected that Oman can introduce income tax in 2022.
Oman aims to bring the fiscal deficit down to 1.7 percent of gross domestic product by 2024, from a preliminary deficit of 15.8 percent this year.
“These policies would also help mitigate structural weaknesses in public finances, notably heavy reliance on hydrocarbon revenue and rigidities in expenditure. Given the impact of fiscal consolidation on economic activity and household incomes, sustained commitment and active outreach to build broad support to the proposed measures would be needed to successfully implement the plan.
“Inadequate implementation of the fiscal adjustment plan could trigger a negative shift in investor sentiment, heightening financing risks. Finally, establishing a sound medium term fiscal framework and a clear fiscal anchor would help in achieving the targeted consolidation, and the IMF stands ready to provide technical assistance in this area,” it said.
Economy shrinks 6.4% in 2020
Oman’s economy likely shrank 6.4 per cent in 2020 due to the coronavirus crisis and low oil prices putting a strain on the state’s coffers.
That would be a narrower contraction than the 10 per cent fall the IMF forecast for Oman last year. But the sultanate’s economy was still hit hard, with its non-hydrocarbon GDP estimated to have reduced by 10 per cent.
The construction, hospitality, and wholesale and retail trade sectors experienced the heaviest toll, the fund said, while inflation turned slightly negative, owing to less demand.
The IMF forecast a 2020 global contraction of 4.4 per cent in its last World Economic Outlook, an improvement over a 5.2 per cent contraction predicted in June 2020, but said it was still the worst economic crisis since the 1930s Great Depression.
Oman’s fiscal deficit widened to 17.3 per cent of gross domestic product (GDP) and was financed by external bond issuance, drawdown of deposits and sovereign funds, and privatization proceeds, the Fund said.
“As a result, central government debt rose to 81 per cent of GDP, from 60 per cent in 2019,” it said.
The IMF said a modest recovery of 1.8 per cent was anticipated for 2021, with more growth expected over the medium term, despite continuing uncertainty.
The vaccine roll-out campaign and the easing of social distancing restrictions meant a mild recovery of 1.5 per cent was projected for non-oil GDP growth in 2021, rising to 4 per cent by 2026.
The Fund said that a successful implementation of Oman’s fiscal adjustment plans “is key to reinforcing fiscal sustainability and alleviating financing pressures”.
Those plans include the introduction of a 5% value added tax this year and envisage a personal income tax on high-income earners, a first in the Gulf.
The Fund also recommended the development of a sovereign asset and liability management framework, given eroding financial buffers and rising contingent liabilities.
As public debt rises and foreign assets decline, “it will be important to manage potential mismatches in the financial characteristics of sovereign assets and liabilities to safeguard the sovereign balance sheet from risks of interest rate and exchange rate fluctuations,” the Fund said.