World Economy

Oman Told to Make Substantial Reforms

The economy as a whole contracted by 0.3%.The economy as a whole contracted by 0.3%.

The International Monetary Fund has delivered a blunt message to the Omani government, following its latest review of the economy. In a statement issued on Thursday, following a 13-day visit to Muscat, an IMF team led by Stephane Roudet advised Muscat that it needs to make “substantial” reforms if it is to get its economy onto the right track.

The non-hydrocarbon part of the Omani economy managed to post a slight improvement last year, with growth picking up to 2%, compared to 1.5% in 2016. However, the government–and the country as a whole–is heavily dependent on revenues from oil and natural gas sales and a slowdown in that sector meant the economy as a whole contracted by 0.3%, Forbes reported.

There was a fairly simple reason for that slowdown. Although Oman is not a member of the Opec oil organizaion, it joined an arrangement led by Opec members and Russia to cut their oil production in an effort to boost prices. Oil prices have indeed been rising, but not enough to offset the lower output.

Oman has long tried to steer an independent diplomatic course and, under its aging ruler Sultan Qaboos, strives to retain good ties with both Washington and Tehran – as well as with other squabbling neighbors such as Qatar and Saudi Arabia. However, any significant deterioration in the regional political landscape could easily damage Oman’s economy.

The Muscat government has been counting on higher oil prices to ease some of its fiscal pressures, but it has also been taking steps to cut spending. It managed to bring its deficit down to 12.8% of GDP last year–a significant improvement on the 21% figure for the year before. However, the IMF pointed out that there were both spending over-runs and tax revenue underperformance in 2017.

A plan to introduce new taxes could help to bring the deficit to below 4% of GDP within two years, but the IMF has warned that this may only be a temporary improvement if oil prices fall back and Oman’s interest payments for its debts continue to rise–both of which are anticipated.

“Notwithstanding commendable progress in advancing fiscal consolidation, the deficit is expected to pick up to about 7% of GDP by 2023,” said Roudet. “Substantial additional fiscal adjustment is therefore needed.” In practical terms, that means more taxation and lower spending.

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