Oman's fiscal efforts and higher oil prices to drive growth, IMF says

Sultanate's economy is set to expand by about 4.5% this year as it benefits from increased hydrocarbon production and the continued recovery of the non-oil sector

Oman is expected to reduce its government debt this year on the back of the oil windfall. Pawan Singh / The National

Oman's fiscal reforms and higher oil prices are expected to boost economic growth and generate a budget surplus in the medium term, the International Monetary Fund has said.

The economy is projected to grow by about 4.5 per cent in 2022 while the government is expected to have a budget surplus of 5.5 per cent this year, the Washington-based lender said on Friday.

Central government debt will shrink to 45 per cent of the gross domestic product in 2022, from about 63 per cent of output in 2021.

“The economy is strengthening and inflation has been contained so far,” said Daniel Kanda, who led IMF staff during a visit to Muscat this month.

“The authorities undertook substantial vaccination efforts and policy actions to mitigate the fallout from the Covid-19 pandemic and foster the recovery.”

The fund discussed economic developments and the country's outlook and policies during the staff visit from June 5 to June 12.

Oman is not a member of Opec but is part of the 23-member Opec+ alliance. The sultanate plans to use the surplus arising from higher oil prices to reduce its fiscal deficit, minimise public debt and boost spending on development projects.

Oil prices have increased more than 65 per cent since last year and are hovering near or above $120 a barrel.

Oman's inflation rate is projected to increase to 3.7 per cent in 2022, up from 1.5 per cent in 2021, on rebounding economic activity and rising global inflationary pressures, according to the fund.

That is markedly lower than inflation in the US, which is at a 40-year high, or the UK and Europe, where it is at record highs.

Surging oil and gas prices, exacerbated by Russia’s war in Ukraine, have fed into already rising inflation.

However, Oman has “limited” direct trade or financial links to Russia and Ukraine, the IMF said.

The fund praised Oman's efforts to curb the spread of the Covid-19 virus and mitigate the economic fallout triggered by the global health crisis.

About 90 per cent of the population aged 12 years or older were fully vaccinated by the end of May 2022. Specific fiscal, monetary and financial measures provided relief to households, companies and banks, the fund said.

International reserves held at the Central Bank of Oman increased to $19.7 billion — equal to 5.2 months of imports — in 2021.

Oman's banking sector remains well capitalised and liquid, benefitting from strong buffers built up before the crisis and “prudent oversight” by the sultanate's central bank, the IMF said.

“The banking system has weathered the recent shocks relatively well, supported by substantial capital and liquidity buffers and the Central Bank of Oman’s continued efforts in strengthening regulatory and supervisory frameworks,” Mr Kanda said.

The economic outlook could improve with fiscal reforms and the windfall from favourable oil prices.

“Upside risks to the outlook could come from higher-than-expected hydrocarbon windfall and accelerated implementation of structural reforms under Vision 2040,” Mr Kanda said.

“In this context, the IMF team welcomes the authorities’ continued strong commitment to fiscal consolidation … and structural reforms to reinforce fiscal and external sustainability.”

However, uncertainty and downside risks continue to cloud the outlook. These are stemming particularly from the war in Ukraine and its impact on the global economy, a renewed flare-up of Covid-19 infections and tighter-than-expected global financial conditions, the fund said.

Mounting inflationary challenges in the form of higher global food and energy prices, as well as global supply disruptions and pressure to spend the hydrocarbon windfall are also among the risks.