By Staff writer
International Monetary Fund says reforms are likely to have little impact on reducing deficit caused by low oil prices
Oman's economic growth is projected to slow further this year despite authorities taking "bold measures" to limit the impact of declining oil prices, according to the International Monetary Fund (IMF).
It applauded the government's action in cutting spending on wages and benefits, subsidies, defence, and capital investment, saying these measures are projected to reduce expenditures in 2016 by $4.5 billion, 8 percent of GDP.
However, the IMF added that these savings will be largely offset by the projected drop in hydrocarbon revenues, resulting in a deficit broadly unchanged at 17.1 percent of GDP.
“Despite the robust policy actions taken so far, the sustained decline in oil prices has adversely affected Oman’s economy. Non-hydrocarbon real GDP growth is estimated to have moderated to 4.0 percent in 2015, and is projected to slow further in 2016," the IMF said in a statement.
"However, it is expected to pick-up over the medium-term as fiscal consolidation provides space to maintain priority government capital spending and oil prices recover modestly. Continuing to build on current efforts to enhance the business climate could improve future growth prospects further," it added.
The IMF said the sustained impact of the cost-cutting measures, combined with the planned increase in corporate income tax from 2017 and the introduction of VAT in 2018, will narrow the fiscal deficit over the medium-term.
The current account deficit, estimated at 18.7 percent of GDP in 2015, is also expected to persist, though declining, through the medium-term.
“To maintain fiscal sustainability and support the exchange rate peg over the medium- to long-term, further gradual fiscal adjustment is needed starting 2017," the statement said.
It added that further fiscal reform would also reduce borrowing costs and support higher growth.
On Oman's banking sector, the IMF said it is “highly capitalized and profitabl" but added that liquidity conditions have tightened and banks’ funding costs are increasing.
“The decline in the oil price has underscored the need to accelerate economic diversification and to increase the role of the private sector. Enhancing the business environment, improving government efficiency, and passage of the Foreign Investment Law will facilitate increased private sector investment," the IMF said.