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 19 April, following a 13-day visit to Muscat, an IMF team led by Stéphane 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%.
There was a fairly simple reason for that slowdown. Although Oman is not a member of the Opec oil cartel, 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 by enough to offset the lower output.
The tighter supply was not the only reason for prices rising though. The market has also been affected by geopolitical tensions, not least between the US administration of President Donald Trump and Iran, which could yet have a detrimental effect on Muscat’s economy.
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 neighbours such as Qatar and Saudi Arabia. However, any significant deterioration in the regional political landscape could easily damage Oman’s economy. An attempt to re-impose international sanctions on Iran could, for example, undermine the prospects for Omani ports and for a proposed maritime gas pipeline linking Iran, Oman and India.
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.
One of the main things slowing down such fiscal changes is a well-grounded fear that moving too fast could provoke public demonstrations. The most significant in recent years were in 2011, when locals took to the streets to complain about corruption, low wages and a lack of jobs. But there were also protests on the streets of Muscat, Salalah and Sur in January this year, again over the lack of employment opportunities.
The IMF recognises such risks, advising Muscat to undertake a social impact analysis and bring in measures to protect vulnerable households before it makes any big changes. But it is not an easy balance to strike.
The IMF’s views are echoed by other observers. Oman has been rated as non-investment grade – or junk – by Standard & Poor’s (S&P) and just above that level by the other two major ratings agencies, Fitch Ratings and Moody’s Investors Service. In the latter’s case, its rating on Oman also has a negative outlook. Alex Perjessy, a senior analyst at Moody’s, says that negative outlook is “driven by the risk of there continuing to be insufficient progress on fiscal reforms”.
Muscat has certainly been dragging its heels with the implementation of new taxes, at least compared to some of its neighbours. Saudi Arabia and the UAE both introduced a value-added tax (VAT) in January this year and those two countries along with Bahrain have also implemented an excise duty on tobacco and sugary drinks. Oman has yet to introduce either measure, although VAT may be implemented in late 2018.
On the plus side, Oman’s banking sector appears sound and the government does at least have some savings it can fall back on – although these are being depleted at a fairly rapid rate. “Gross reserves of the Central Bank of Oman decreased by about $4bn in 2017 to $16bn,” pointed out Roudet.
The government can also turn to its sovereign wealth fund, the State General Reserve Fund. Although it is not as well-endowed as many such funds in the region, there is still a reasonably substantial pool of savings to draw upon. Perjessy says “We estimate that those liquid foreign exchange reserves in the sovereign wealth fund might be close to $15bn.”
Oman’s hydrocarbons sector has also been given a boost, by the start of production at the giant Khazzan gas field in September last year.
Despite that positive development, Oman was one of the worst performing economies in the Middle East and North Africa (MENA) last year, being one of five countries to suffer an economic contraction, according to the IMF. The region as a whole is trailing behind the growth rate of advanced economies and many emerging market and developing economies too. According to the World Economic Outlook released by the IMF earlier this month, output in the MENA region grew by 2.2% last year, compared to a global average of 3.8%.
Given the pressures its economy is under, it seems unlikely that Oman will be leading the region towards faster economic growth any time soon.