Oman needs to make “urgent” progress on cutting subsidies and raising taxes if it is to secure its fiscal future, the IMF mission chief to the country said in an interview.
“The urgency for implementing fiscal reforms has increased,” Ananthakrishnan Prasad told The National. “Previously there was a long-term fiscal sustainability issue. Now there’s the additional challenge of financing double-digit fiscal deficits as a share of GDP over the medium term.”
Oman is set to run a fiscal deficit of 15 per cent this year and 17 per cent in 2016 as the low oil price eats into export earnings and blows a hole in the country’s budget. The country also ran a narrow deficit last year.
The IMF concluded its annual Article IV consultation on Oman last week, a regular monitoring arrangement in which it provides an overview of the economic situations of member countries.
"While Oman should be able to absorb the losses from its foreign exchange reserves, a fiscal squeeze will be needed to adjust the economy to low oil prices," said Jason Tuvey, an emerging markets economist at London-based Capital Economics. "The government has taken some tentative steps in the direction of fiscal reform, but capital spending will be cut before social spending."
The good news for the Omani authorities, said Mr Prasad, is that “both on the expenditure and revenue side the Omani government can do a lot”.
He added: “On the expenditure side the obvious things are public sector wages and subsidies.”
Omani spending on total subsidies in the budget is equivalent to 7 per cent of GDP.
Oman boosted both public sector employment and public sector wages in the years between 2011 and 2014 as political jitters from the Arab Spring encouraged the government to create more economic security for Omanis.
“What we are also pointing out to the Omani authorities is that if they start increasing the number of nationals employed in the public sector, it’s counterproductive to efforts to diversify the economy,” Mr Prasad said.
“When you employ nationals in the public sector and lift their wages, you reduce the incentive for nationals to go to the private sector,” he said.
However, the Omani government is likely to postpone cuts to social spending until absolutely necessary, said Mr Tuvey.
“If economic adjustment is required, capital spending will be cut first,” he said. “But given the extent of the adjustment, it might be that cuts in social spending will come on to the agenda sooner than in other countries.”
The Omani government must push ahead with diversification if it is to weather the era of low oil prices, the IMF advises.
Mr Prasad said that Oman’s ministers are placing special emphasis on boosting the tourism, manufacturing, logistics, mining and fisheries industries.
But trade diversification remains an issue, with many GCC states attempting to become regional leaders in the same industries.
“Oman has some nice beaches, but it’s trying to compete with Dubai,” Mr Tuvey said. “A lot of the tourists who do go to Oman will be from the rest of the region, and since public sector workers aren’t getting large pay rises, they may decide to go to cheaper destinations.”
The IMF praised Oman's focus on recent reforms to improve the business climate for small and medium enterprises.
Mr Prasad said: “The government has been starting incubators and promoting venture capital through Al Rafd Fund – a fund designed to support entrepreneurship and SMEs – and now requires that 10 per cent of tenders for public projects go to SMEs, and 10 per cent of procurement by large contractors of government projects to be sourced from SMEs.
“As well as that, the Oman Development Bank is giving subsidised financing to Omani entrepreneurs.”
But long-term diversification isn’t enough – with a break-even price of $108 per barrel, the Omani government must get its fiscal accounts in order if it is to prosper in a low oil-price environment.
“Reforms are needed,” Mr Prasad said.
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