IMF Wraps Up 2024 Article IV Talks With Oman

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation ^[1] with Oman on January 14 and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis. ^[2]

Supported by favorable hydrocarbon revenues and steadfast reform efforts, Oman's economy continues to expand amidst low inflation. Economic growth turned out at 1.2 percent in 2023 before accelerating to 1.9 percent (year on year) in the first half of 2024, boosted by stronger nonhydrocarbon growth, but weighed down by oil production cuts under OPEC+ agreements. The nonhydrocarbon economy grew by 1.8 percent in 2023 and 3.8 percent in the first half of 2024 on the back of expansions in construction, manufacturing, and services. Over the medium term, nonhydrocarbon activity is set to drive overall economic growth, as sizable committed private sector investments are executed. Inflation slowed down to 0.6 percent during January-October 2024 from 1.0 percent in 2023, reflecting continued contraction in transport prices and moderation in food inflation.

Fiscal and external surpluses continued in 2024 and are expected over the medium term. Prudent fiscal policy, high oil prices, and robust growth in nonhydrocarbon goods and services exports helped maintain the overall fiscal and current account balances at 6.2 percent of GDP and 2.4 percent of GDP, respectively, in 2024. The nonhydrocarbon primary deficit as a share of nonhydrocarbon GDP is estimated to be unchanged in 2024 relative to its 2023 level, notwithstanding higher budgeted social spending to implement the new social protection law, attesting to the authorities' commitment to fiscal discipline. Government debt as a share of GDP continued its declining path to reach to 35 percent in 2024. Reflecting the marked improvement in its fundamentals, Oman's sovereign credit rating has been upgraded recently to investment grade.

The banking sector remains sound. Profitability has recovered to pre-pandemic levels, capital and liquidity buffers are ample, while asset quality remains strong. Banks' net foreign assets turned positive by end of 2023 for the first time since 2014.

Risks to the economic outlook are broadly balanced amidst high uncertainty. On the downside, intensifying geopolitical tensions as well as a global slowdown, particularly in China, could adversely affect trade, tourism, and FDI, putting a drag on domestic growth and external and fiscal positions. These could also be adversely affected by lower-than-expected oil prices amid an expected oversupplied global energy market in 2025. A slowdown in Oman's reform implementation also represents a key risk to the outlook. Over the longer run, uncertainty over the speed of the global energy transition represents an additional risk, calling for sustained reforms to accelerate economic diversification. On the upside, growth and fiscal and external positions would strengthen from higher oil prices and acceleration in global growth—including due to faster-than-expected monetary easing—and reforms and investments under Oman Vision 2040.

Executive Board Assessment ^[3]

Supported by favorable hydrocarbon revenues and steadfast reform efforts, Oman's economic outlook remains favorable. Nonhydrocarbon growth is set to accelerate over the medium term supported by the execution of sizable committed private sector investments and higher demand from neighboring countries. Fiscal and current account balances are expected to remain in surplus over the medium term, albeit somewhat lower than their current levels, weighed down by softening oil prices, but supported by rising hydrocarbon production and continued fiscal discipline. The outlook is, nonetheless, subject to elevated uncertainty, including from oil price volatility, risks of a global economic slowdown, and intensifying geopolitical tensions.

The authorities continue pursuing prudent fiscal management, amidst the successful rollout of the social protection law. The 2025 budget is set to preserve fiscal discipline, further lowering the nonhydrocarbon primary deficit, while maintaining spending on social safety nets broadly unchanged relative to 2024. Accelerating the momentum of fiscal reforms will be key to entrench fiscal sustainability and ensure intergenerational equity, while creating additional space to pursue growth-enhancing investments to achieve Oman Vision 2024 objectives. Proceeding decisively with the tax administration reform, the implementation of the personal income tax law, and Pillar II of the global minimum tax are essential to reduce the tax gap and help re-balance the envisaged fiscal adjustment over the medium term. Sustaining reforms to reduce the cost of electricity generation, transmission, and distribution while adjusting tariffs, as needed, to ensure cost recovery by 2030, along with lifting the fuel price cap, will be key to minimize untargeted subsidies and free up resources for priority spending.

Strengthening fiscal institutions will be key to entrench fiscal sustainability and enhance transparency and credibility. The ongoing work to produce a new Medium-Term Fiscal Plan (MTFP) to underpin the 11th Five-Year Development Plan offers a window of opportunity to develop the MTFP into a full-fledged MTFF which, if endorsed at the highest level, would strengthen the budget process and enhance fiscal transparency and credibility. A carefully selected fiscal rule together with a well-crafted communication strategy to ensure broad consensus about the implications of adopting a rule will help decouple government spending from oil price volatility, strengthen fiscal discipline, and accumulate financial buffers while providing flexibility to manage severe shocks. Expediting the full implementation of the Treasury Single Account (TSA) will be key to enhance cash management and support a more effective monetary policy transmission. SOE reforms should continue advancing, further enhancing governance, transparency, risk management, and contingency planning while reducing the state footprint in the economy. Aligning the reporting of fiscal accounts with international standards and expanding their coverage, while developing a sovereign asset and liability management framework, would support transparency and sound fiscal management.

The exchange rate peg remains an appropriate and credible policy anchor for Oman. The peg has been instrumental in delivering low and stable inflation. Steadfast operationalization of the Monetary Policy Enhancement Project will ensure that monetary policy actions effectively transmit to the broader economy and help deepen money markets. Progress on developing Emergency Liquidity Assistance and collateral frameworks is welcome. Moving decisively with the ongoing actions to strengthen the liquidity management framework along with full implementation of the TSA and further efforts to deepen money and capital markets will support the conduct of monetary policy.

The banking sector is sound, amidst continued efforts to strengthen regulatory and supervisory frameworks. Progress on stepping up banking regulatory frameworks, including the improved D-SIB framework and restoration of the capital conservation buffer to its pre-pandemic level, supports banking sector resiliency. Lifting the interest rate cap on personal loans while upgrading the credit bureau would improve capital allocation, support better pricing of credit risk, enhance access to finance, and improve monetary policy transmission. Beefing up the macroprudential toolkit, including by introducing a positive countercyclical capital buffer if the credit gap turns positive, will help reduce risks going forward.

Progress on developing the financial sector will enhance access to finance and support diversification. Initiatives to open up the banking sector to new players and dynamize financial markets are welcome. Moving ahead with actions to invigorate money markets will help establish a reliable short-term yield curve, paving the way to the issuance of longer-dated government bonds and setting the stage for the development of the corporate debt market. Expanding the role of nonbank financial institutions, including by revamping the Social Protection Fund's investment policy and facilitating inflows from nonresident investors, would help deepen domestic capital markets. Pursuing efforts to upgrade Muscat Stock Exchange to emerging market status will support attracting larger foreign investments and increase domestic firms' access to finance. These developments should go hand in hand with Oman's continued AML/CFT reform to mitigate financial integrity risks, including those stemming from illicit financial flows and misuse of legal persons.

Sustained implementation of reforms under Oman Vision 2040 will be key to achieving sustainable, job rich, private sector-led nonhydrocarbon growth. The new social protection law has been successfully rolled out. Labor market reforms are ongoing, supported by the new labor law. Sustaining these reform efforts by tackling remaining bottlenecks, including the wage gap between the public and private sectors, enhancing mobility for expatriate workers, empowering women in the workforce, and reducing the skills' gap while scaling up support for job seekers is essential. Moving ahead decisively with initiatives to continue attracting investments, expanding trade opportunities, and empowering SMEs will accelerate job creation. Maintaining the momentum of reforms under the climate and digitalization agendas will be critical to build a sustainable, knowledge-based, and job-rich economy.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.